Senator Taylor blasts TWIA board for not enforcing the law

On Monday, at a special meeting of the House Insurance Committee, State Senator Larry Taylor blasted the decision of the board of the Texas Windstorm Insurance Association not to enforce laws requiring policyholders repairing their property to follow applicable building codes.  Senator Taylor complained vociferously that the continued disregard of the Texas Insurance Code, particularly in favor of policyholders that TWIA had paid off in litigation involving Hurricane Ike in 2008, represented a failure of TWIA to mitigate further damages to the Association. That criticism was heeded only partly Tuesday by the the TWIA board when it voted not to cancel policies that had been issued without legal authority but only to decline to renew them. The TWIA board further decided not to begin non-renewals as soon as possible but to wait instead until January of 2014 — after the 2013 storm season — before even beginning the to decline renewals.

TWIA’s position is difficult to understand. Based on comments both at the hearing Monday and the Board meeting Tuesday, TWIA officials appear to acknowledge that they have issued policies — apparently several thousand — they are not authorized to issue.  Their excuse has been compassion — that it may have been difficult in the aftermath of Hurricane Ike to bring properties up to the higher code.  But, as with the insurable interest doctrine, insurers who issue policies in violation of the law generally have a right not to pay on claims brought under them and thus, presumably, to cancel them. Cruel as it may seem, that’s the traditional way of vindicating many public policy concerns. The TWIA board did not receive any public legal advice saying it would violate any laws by simply canceling the policies forthwith. Property insurance, unlike life insurance, is not burdened with incontestability laws.

The problem with the compassion excuse is that the TWIA board is being “compassionate” spending other people’s money. Adherence to building codes greatly reduces losses.  So when TWIA’s losses are heightened due to the failure of some policyholders to make repairs up to code (for years), it ends up burdening all those who have to pay for TWIA’s losses.  This group includes other TWIA policyholders who do comply with the law, sometimes at considerable expense. These policyholders have responsibility for paying off any Class 1 bonds that are issued.   It also includes coastal residents who do not have TWIA policies but who will be surcharged following the issuance of some Class 2 Bonds, and insureds throughout Texas who will likely see rate increases when insurers are assessed to pay for Class 2 and Class 3 bonds.

The decision of TWIA’s board may also give rise to legal disputes down the road. Presumably the reason the legislature insisted on compliance with building codes was to reduce future losses to TWIA and to reduce thereby the risk that non-TWIA policyholders would have to pay post-event bonds. So, when the TWIA board declines for a lengthy period to enforce that law, they unlawfully expand the potential exposure of these third parties.  Might not some of the better advised third parties, such as large insurance companies, seize upon clear violations of state underwriting laws as a basis for declining to pay at least part of any assessment made against them? Might they not plausibly argue that some percentage of their assessment liability should be withheld due to violations of law?  Alternatively, might they not bring a cause of action against the TWIA board for breach of duty? And might even the threat of these legal challenges make it yet more difficult to market the post-event bonds in the first place. TWIA has handed those responsible for repaying these bonds an excuse not to do so.

Perhaps only the Texas Department of Insurance is entitled to compel TWIA to follow the law and some future court will find that no private rights of action exist. Perhaps some future court will hold that the statutory restrictions on underwriting were not intended to benefit third parties such as member insurers.  But, I would not be so sure. It strikes me that there is a pretty strong argument to the contrary. I remain mystified as to why TWIA would create yet more problems for itself by continuing “compassion” for people who have, for years, declined to bring their properties up to code, particularly when they were given money to do so in Ike settlements. I likewise wonder if the Texas Department of Insurance, which has significant operating authority over TWIA, might urge it act far more promptly and with far less “compassion” in shedding itself of exposure the legislature prohibited it from assuming.

 

 

Texas House, Senate agree on minor windstorm reform bill

Texas Governor Rick Perry

Texas Governor Rick Perry

A bill that modestly affects future eligibility for insurance sold by the Texas Windstorm Insurance Association has now passed the Texas Senate and the Texas House and should be heading to Texas Governor Rick Perry for signature.  S.B. 1702 extends until 2015 the time by which owners of some property that does not comply fully with usual TWIA building standards must obtain “alternative certification.”  Property that has non-compliant roofing, exterior openings and exterior wall coverings may thus gain a reprieve. It also appears to provide, however, that after 2015 property worth more than $250,000 must meet regular certification requirements rather than alternative certification.

The bill, my reconstruction of which is contained in this earlier post, appears to trade somewhat greater TWIA losses in the short run against the possibility of loss reduction in the future.  This is so because under existing law alternative certification would have been required as early as August 30, 2013. By relaxing the time in which non-compliant property must at least obtain alternative certification, the bill would appear to increase slightly TWIA’s exposure to tropical cyclone losses over the next few years at a time when, by all accounts, TWIA’s finances are in very poor condition. If TWIA survives until 2015, however, its exposure to losses thereafter may be somewhat limited since property valued at $250,000 or greater will need to come into full compliance. Either way, however, the effect of S.B. 1702 is likely to be small and should not be confused by anyone with significant reform of this very troubled insurance program.  With the regular session of the 83rd Legislature coming to a close on Monday, however, S.B. 1702 appears to be all that has been accomplished.

We await seeing if Governor Rick Perry adds windstorm insurance reform to the agenda for a special session as his Lieutenant Governor, David Dewhurst, has, in addition to others, now suggested.

Lieutenant Governor David Dewhurst

Lieutenant Governor David Dewhurst

 

Minor TWIA Bill Might Make It Through This Session

A bill making minor changes to the exposure of the Texas Windstorm Insurance Association passed the Texas House yesterday 134-11.  Before S.B. 1702 can become law, however, it will need to be reconciled in the closing days of the session with the substantially different version that passed the Senate last month.  Following amendments from Representatives Craig Eiland (Galveston) and John Smithee (Amarillo), the House version of the bill takes two actions with respect to Texas coastal building codes and insurance.  One of the provisions might increase TWIA’s claims in a tropical cyclone. The other might reduce it.

S.B. 1702 as amended in the House on motion of outgoing Galveston Representative Craig Eiland extends the time some coastal property owners with property that does not comply fully with building code standards a reprieve from somewhat tougher building standards until 2015.  Thus, for two more years during which TWIA’s reserves, even measured in the most optimistic way, are inadequate to pay for large storms, the House has apparently voted to actually increase TWIA’s exposure to risk.  This increase in exposure occurs because the premium surcharges on the these high risk properties are limited by the combinations of sections 2210.260(f) and 2210.259(a) of the Texas Insurance Code to 15%.  This value is likely insufficient to match the additional risk posed by these non-compliant properties.

A second provision of S.B. 1702 as amended in the House, however, one added by House Insurance Committee Chair John Smithee of Amarillo, might have a counterbalancing effect on TWIA exposure. It would condition eligibility for TWIA insurance after 2015 for homes and other property with values over $250,000 on compliance with stricter TWIA building standards. “Alternative certification” would not be available. There is no estimate that I have seen of the number or value of such properties that are currently insured by TWIA but out of compliance.

Based on my reading of the House Journal (pp. 3830-31), here’s the House version of the statute.

SECTION____.  Section 2210.260(d), Insurance Code, is amended to read as follows: (d)  Except as provided by Sections 2210.251(d), (e), and (f), a person who has an insurable interest in a residential structure that is insured by the association as of August 31, 2012, but for which the person has not obtained a certificate of compliance under Section 2210.251(g), must obtain an alternative certification under this section before the association, on or after August 31,  2015, may renew coverage for the structure.

 

SECTION ____. Subchapter F, Chapter 2210, Insurance Code, is amendedby adding Section 2210.2581 to read as follows:   Sec. 2210.2581. MANDATORY COMPLIANCE WITH BUILDING STANDARDS; CERTAIN STRUCTURES. Notwithstanding Section 2210.251, Section 2210.258, or any other provision of this chapter, after December 31, 2015, the association may not issue or renew insurance coverage under this chapter for a structure with an insurable value of $250,000 or more unless the structure complies with the applicable building code standards, as set forth in the plan of operation.

Although this bill may have some effect on individual TWIA policyholders, it is unlikely to have any significant effect on the ability of TWIA to pay claims following a major storm.  Absent a special session of the Texas legislature, it now looks as if that issue will need to await the 84th legislature two years hence in order to be addressed.  And whether S.B. 1702 passes or not, coastal Texas property holders will be at serious risk in the interim.