Perry announces special session, but windstorm insurance not on the agenda

Texas Governor Rick Perry announced this evening that he would immediately call the Texas legislature back into special session.  The only item placed on the agenda at this time, however, is legislative districting.  Thus, the 83rd Legislature has now closed with essentially nothing being done to reform the thinly capitalized insurer of 62% of the property on the Texas coast. The Governor could add windstorm insurance to the agenda (along with other items) at a later time.

As we will discuss in greater length this week, the failure of Governor Perry, at least for now, to call the legislature back into special session on this issue, means that insureds of the Texas Windstorm Insurance Association are at serious risk of not having claims paid fully in the event of a significant storm.  And, with potentially vigorous hurricane season upon us, such a risk could materialize sooner rather than later.

The end of the legislative session also apparently means that Eleanor Kitzman is no longer Texas Insurance Commissioner.  We will need to see what the Governor does with that post and how the new appointee will tackle the persistent problems of TWIA and the issue of whether to place it in receivership.

 

Texas Insurance Commissioner Eleanor Kitzman Confirmation in Doubt

Eleanor Kitzman

Eleanor Kitzman

Serious doubt exists today as to whether Texas Insurance Commissioner Eleanor Kitzman will be confirmed by the Texas Senate.  Her name does not appear on the list of nominees set for confirmation today and today appears to be the last day on which this committee will meet.  If so, and if, as I suspect, this is a response to her actions regarding windstorm insurance in Texas, this is a major loss for Texas. I would urge the legislature to reverse course. I would urge Governor Rick Perry and other leaders to speak up and support their choice.

But before voting to confirm someone with years of experience in insurance regulation and regarded highly enough nationally to head the critical Financial Regulations Standards and Accreditation Committee of the National Association of Insurance Commissioners (NAIC), legislators should at least examine the alleged marks against her.

The Rap Sheet

Count 1: Aggravated truth Telling

On or about June of 2012, Commissioner Eleanor Kitzman responded to a request from state Rep. John Smithee, R-Amarillo, by stating that the Texas Windstorm Insurance Association would be unable to pay claims fully if some Category 4 or higher hurricanes hit. This utterance challenged the prevailing wisdom that everything was fine with TWIA. It challenged the cultivated illusion that investors could regard collateral or property insured by TWIA as having the same degree of security as property and collateral insured by other Texas insurers. It threatened growth on the coast.

For this heresy, Commissioner Kitzman was welcomed back to Texas by Representative J.M. Lozano, R-Kingsville, with a request that she be investigated byTexas Attorney General Greg Abbott for breaking Texas law. And what law might it be that criminalizes speaking the truth? Lozano said her letter may have made a “misleading representation regarding the financial condition of an insurer” or somehow violated a state pledge not to impair collection of assessments on bonds that TWIA might issue following a major hurricane. Needless to say, the investigation requested by Representative Lozano, if one was ever done by our more level headed attorney general, went absolutely nowhere because Kitzman’s speech had violated no law and done no wrong.

Commissioner Kitzman compounded this alleged wrongdoing by then saying in her response to Chairman Smithee that, if TWIA did become insolvent, the state of Texas was under no legal obligation to make up for the resulting unpaid claims of TWIA policyholders.  Never mind the fact that absolutely no one has cited any legal authority saying that Texas has an obligation to pay such debts any more than obligations to guarantee other unpaid obligations throughout the state.  Never mind the fact that the Texas Property and Casualty Insurance Guaranty Association statute makes clear that it does not provide protection — at all — for government-created insurers. Never mind that Commissioner Kitzman is an experienced attorney and expert in insurance regulation who can read as well as anyone else and find no law creating such an obligation on the part of the State of Texas. Never mind, even, when I tell you as a professor of insurance law at a respected university that there is no such legal obligation. Commissioner Kitzman again disrupted the illusion that it was no more risky to invest on the coast of Texas than it might be to invest in El Paso or Dallas or San Antonio. And that, in certain parts of Texas, is apparently a crime or, if not, the basis for refusing to confirm an otherwise eminently qualified individual for a critical regulatory post.

But, of course, it goes beyond daring to question the assumption of security along the Texas coast or doing so just one time.

Count 2: Threatening A Trial Lawyer with reduction of fees

On or about March of 2013, Commissioner Kitzman asked the TWIA board to consider placing TWIA in receivership, the Texas equivalent of bankruptcy, following its filing of an annual report that showed that it was insolvent. Let us make clear what the consequences of such an act might be.

TWIA has been a boon to trial lawyers along the Gulf Coast.  In part because of extremely dubious adjusting practices by the Windstorm Association and, perhaps in part for other reasons, attorneys along the Texas coast have made hundreds of millions of dollars on contingency fees arising out of breach of contract, bad faith and statutory claims  against TWIA.  I am not, please note, saying there is anything wrong with this. Insurers do on occasion misbehave, perhaps particularly so, when they have not been properly capitalized. There need to be deterrents against exploitation of policyholders and there is nothing wrong with lawyers advocating zealously on behalf of their clients. And, in the interests of full disclosure, I worked at one time as an expert on behalf of one of those very plaintiffs firms evaluating what appeared to me to be inappropriate use of statistical evidence by TWIA in adjusting claims.

The key point, however, is that there are still a number of Ike claims pending.  In receivership, those claims might not be paid in full. They would have to be treated with at least some regard to future claims against an insolvent insurer. But, if those claims were not paid in full, not only would the claimants perhaps not receive perfect justice but the attorneys representing those claimants would likely suffer a commensurate reduction in their percentage interests (contingency fees) in the lawsuits. Both of those possibilities — a threat to people one has come to care about and a loss to one’s own pocketbook in the process — can make good people mad. And when those people also make hefty contributions to political campaigns, that’s almost a crime in Texas.

Moreover, consider the threat to the illusion of security compounded by going public with the idea that TWIA was insolvent, that future claimants might need to be treated fairly, and that TWIA might need to be placed into receivership.  Other Commissioners might have swept that issue under the rug or concocted ways to extract more money out of inland Texans to pay for future claims.  But not Commissioner Kitzman. By even uttering the word “receivership,” she compounded her earlier threat to the cultivated illusion of security that has fueled the addiction to continued development along the vulnerable Texas coast. Never mind that receivership might actually help TWIA recapitalize itself — indeed that is a major purpose of receivership — the public confirmation of TWIA’s desperate straits might make other lenders reluctant to lend and developers reluctant to develop on the strength of a TWIA policy.

Plea for Relief

There are, of course, other issues with Commissioner Kitzman’s tenure. Her views on balance billing rules in health insurance have stirred up controversy. And, because to my knowledge no public hearings were ever held on her appointment, we don’t know if there are issues pertaining to managerial competence or other matters. This is not a full accounting of her pros and cons.

From what I can see, however, Commissioner Kitzman has been an open and fair individual — yes one with a free market bent that one would have thought might have sold well in Texas.  She participated in creative efforts that did not constitute toadying to powerful private insurers to deconcentrate the risk now held in TWIA and get those insurers to start shouldering some of the windstorm risk but at fair prices. She’s presided over the growth in an outstanding web site that provides excellent information to consumers. She has been generous with her time to me, appearing in my insurance law class this fall to speak forthrightly with students. She’s been a leading figure nationally in insurance regulation.

I hope the Texas Senate somehow changes course and confirms her.  If not, I hope Governor Rick Perry figures out a way the State of Texas can continue to benefit from her expertise.  And, above all, I hope that legislators realize that shooting the messenger does nothing to protect the Texas coast or attract talent to critical fields in our state.

 

S.B. 1700 dead; Texas coast in grave danger

Senator Larry Taylor, sponsor of S.B. 1700, the only significant bill on windstorm reform to get through a legislative committee and at least have the chance of being approved, announced this evening that his efforts to get his bill passed have been frustrated by the Texas Trial Lawyers’ Association and the attorney with the largest share of the Ike cases, Steve Mostyn. I did not agree with much in S.B. 1700. It had many problems. But if this means that there will be no reform this legislative session of dysfunctional Texas insurance against tropical cyclones, I agree very much with Senator Taylor that this is a sad day indeed.

Here’s a copy of his press release.

Larry Taylor press release conceding defeat

Larry Taylor press release

There will be time in the next few days to discuss why certain trial lawyers may have objected to the bill but, from my perspective, the important is not whether the trial lawyers have a legitimate concern or whether, indeed, their objections are the only cause of the bill’s defeat.  Why, for example, did Steve Mostyn oppose it if the offensive provision had been removed? In some sense, however, this really doesn’t matter. The important issue is what on earth is Texas going to do about hurricane insurance until the 84th legislature two hurricane seasons from now.

Miracles?

There is, I suppose, a remote chance that the House could pass some minimalist bill that fixed the worst parts of the current scheme and try to ram it through the Senate.  I sure hope that happens. But I am not certain that there is the requisite level of support for such a scheme nor am I sure that there is time.  I do recall Representative John Smithee, chair of the House Insurance Committee, saying at a hearing that he did have a bill filed that had little content but that could be used as kind of an all purpose vehicle for TWIA reform.  But, again, I have doubts that there is the will or the time to get something passed before the end of the regular session.

There is also, I suppose, the possibility that Governor Rick Perry would add windstorm finance to a special legislative session.  But I have heard no rumor that such is contemplated.  And there is, I suppose, the possibility, that Texas is just counting on using its rainy day fund to pay for what could be a very rainy day on the coast of Texas this summer or next.  But I do not know whether such a use would be countenanced by the political powers or, since this is partly a self-inflicted wound, whether it should be used in that fashion.

What now?

And so, to my amazement, Texas is apparently choosing to to face the 2013 hurricane season — and perhaps the 2014 hurricane season too – with 62% of the property on the coast insured against tropical cyclones by an insurer that has been called insolvent by the Texas Insurance Commissioner, Eleanor Kitzman. The insurer has at in its Catastrophe Reserve Trust Fund at best 1/20th of the amount it should have if it wants to self-fund claims and has very doubtful ability to recapitalize itself in a significant way using post-event bonds.

As I told Fox TV today in a part that didn’t make the air this means two things for people on the coast. (1) People with insurance from the Texas Windstorm Insurance Association need to shop very aggressively for alternative forms of windstorm insurance.  They can’t just go to Allstate and State Farm and the usual suspects There are many insurers in Texas.  Many won’t write on the coast.  But maybe some of them will.  Even if it costs more, it may well be worth the peace of mind if and when a storm brews in the Gulf of Mexico this summer.  (2) People and businesses with TWIA policies should behave as if their policies have upwards of 30% coinsurance. That means taking every imaginable step both now to get their properties as resistant to hurricane damage as possible and to take every last minute precaution to reduce loss if a storm comes.

For my part, I’m going to keep watch on the extent to which TWIA succeeds in increasing its capitalization through a Bond Anticipation Note and through reinsurance.  I’ll try to dig further into the ability of TWIA to sell post-event bonds. And I’ll keep watch to see if any legislative cavalry is coming over the hill.  Right now, however, all is very silent in this calm before the storm.

An assigned risk solution?

The Corpus Christi Caller and its intrepid reporter Rick Spruill report as follows this morning (this is an edited version of the article):

A plan to effectively abolish the Texas Windstorm Insurance Association in favor of placing coastal homeowners in an assigned risk pool, managed by a third party and overseen by the Texas Department of Insurance, is working its way around the Capitol in Austin.

 

The plan to abolish the association was offered by the four public members of a joint legislative committee established in 2011 to study windstorm insurance issues. It favors requiring private insurers to again write wind and hailstorm policies in coastal counties and follows closely the recommendations made by key insurance experts, including Texas Insurance Commissioner Eleanor Kitzman.

While coastal windstorm insurance experts welcome any plan calling for stronger building codes, the assigned risk scenario may struggle to gain traction in the halls of the state Capitol, said one member of the Coastal Windstorm Task Force.

 

Task force member Greg Smith said attracting private industry back to the coast through assigned risk would lead to exponential increases in coastal windstorm policy rates in the coming decade.

 

Smith said while assigned risk has worked well for workman’s compensation and health insurance lines of business, it is a poor fit for residential policies in a catastrophe zone.

 

He said insurance executives have told him placing residential homes into an assigned risk pool would be “beyond destructive” to the Texas homeowner’s insurance market.

 

For large companies that write billions in homeowner’s business in Texas, being forced into an assigned scenario in proportion to the amount of business they write in the rest of the state could mean multiple billions in additional exposure.

 

That would, in turn, put pressure on those companies to keep enough cash on hand — a central requirement under Texas insurance law — to cover those claims.

Instead of dumping residential properties that private insurance companies will not insure into the Texas Windstorm Insurance Association pool, the plan would allow a property for which the homeowner or the homeowner’s agent cannot obtain a reasonable quote to be temporarily assigned to a private carrier, for 30 days.

During that time the policy would be placed in an online exchange in which all carriers operating in Texas can bid. If the policy is not picked up through the competitive bid process, the assigned carrier becomes the permanent underwriter.

 

The process would be managed by a third-party clearinghouse working under contract with the Texas Department of Insurance.

 

Rates would be allowed to adjust, most likely upward, over a three- to eight-year period to get more in line with the private market.

 

Carriers that post losses because of assigned polices would be eligible for reimbursements from the state.

 

I’ll be discussing this idea more fully in the days ahead, but this is a major development.

The scary Austin American Statesman article

The Austin-American Statesman has published an article based on a July email written by Texas Insurance Commissioner Eleanor Kitzman that the newspaper obtained through a public records request.  I’ve requested a copy of the email in question but I have not received a response yet.  Here’s a link to the article.

There are at least two assertions in the article that will create concerns for many.

1. According to the Statesman, Ms. Kitzman emailed members of her senior staff that she wanted “to schedule some time next week to discuss options for funding a 3-5 year transition to market rates” for coastal counties.  The Statesman then offers two interpretations of this remark: (1) the commissioner might consider trying to force private companies to write risky coastal polices and allowing them to raise rates over the next three to five years; and (2) TWIA might need to substantially raise its own rates on customers — possibly by 45 percent or more.

2. The article purports to illustrate some perils of moving to a private market system.

“… according to a tool on the Texas Department of Insurance’s website, a TWIA policy for a $200,000 house in Nueces County costs about $1,700, while a policy on the same value house would be as much as $8,400 with a private insurer.”

Continue reading

The Op Ed on TWIA run by the Austin American Statesman

This op ed was run by the Austin American Statesman on July 10.  I am reprinting it here.

Leaving denser coastal counties out to dry if major windstorms strike

Seth J.Chandler, Special Contributor

Published: 7:11 p.m. Tuesday, July 10, 2012

 

The biggest windstorm in Texas so far this summer has been generated not by the warm waters of the tropics but by the courage of Texas Insurance Commissioner Eleanor Kitzman.

In June, Kitzman responded to a request from state Rep. John Smithee, R-Amarillo, by stating that the Texas Windstorm Insurance Association would be unable to pay claims fully if some Category 4 or higher hurricanes hit.

The state-created operation provides insurance against tropical storms and hurricanes on $72 billion worth of property owned by 259,000 people living on the Texas coast.

Kitzman further said the law did not require the State of Texas to rescue either an insolvent TWIA or Texas homeowners and businesses left with incompletely paid claims.

For this statement, Kitzman has been vilified by some coastal media outlets and by some coastal politicians, culminating in a call this week by state Rep. J.M. Lozano, R-Kingsville, for Texas Attorney General Greg Abbott to investigate her for breaking Texas law.

What was Kitzman’s possible crime? Lozano says her letter may have made a “misleading representation regarding the financial condition of an insurer” or somehow violated a state pledge not to impair collection of assessments on bonds that TWIA might issue following a major hurricane.

Kitzman’s real crime was daring to tell the truth to people who do not want to be confronted, now that hurricane season has started again, with the consequences of an irresponsible decision. In summer 2009, the Texas Legislature, to much praise, did fix a flaw in the old system of insulating Texas coastal residents from the cruelties of the private insurance market.

The Legislature saved Texas insurers, even ones not writing insurance near the coast, from the potential of unlimited assessments to pay for a major hurricane. But in doing so, it deliberately chose to reject a competing plan that would have forced TWIA to use actuarially sound rates and that took modern science on global warming into account.

The state Legislature instead used two sleights of hand in 2009 to make the tough medicine go down.The first was to keep current premiums lower by running insurance in reverse. Rather than forcing TWIA to collect enough premiums now to have cash on hand in the event of a major hurricane, the legislators chose to rely on “post-event bonding” vehicles called Class 1, 2 and 3 Securities.

Texas insurers will raise premiums and not just on windstorm insurance and not just on the coast after a hurricane, when people would already be hurting, to pay for these classes of securities that it assumes it will be able to sell following a major storm.

Texas’ second trick was to choose not to insure fully against the costliest hurricanes, such as a Category 4 or 5 hitting Galveston County. As TWIA itself puts the matter, “currently, there is no funding for TWIA losses in excess of Class 3 public securities” or about $3.6 billion.

The Texas Legislature saved money the same way you could if you insured your $8,000 or your $32,000 car for a maximum of $8,000 loss with the thought that fender-benders are frequent, but really catastrophic events seldom happen.

Such a system would indeed lower your premiums, and it might fully protect the less expensive car. And, if all went well, such a policy might even protect the more expensive car. But it still places your expensive car at risk.

Whether consciously or not, in 2009 the less-propertied Texas coastal counties, such as Kleberg and San Patricio, from which Lozano hails, hornswoggled the rest of the state into accepting a system that probably can pay even their major claims fully (like totaling the $8,000 car) but left the more propertied coastal counties, Galveston and Brazoria, at risk for major claims or totals.

So, if we’re shooting messenger, Kitzman, for telling Texas the truth about its underfunded public windstorm insurance system or, possibly worse, for promoting its restructuring, shoot me, too.

I declare again, as a law professor who has studied TWIA’s statutes and its finances for many years: The Texas Windstorm Insurance Association does not have the financial capacity to pay claims fully in the event a major hurricane strikes a property-rich Texas county and neither the state nor anyone else is under any current legal obligation to make up the difference.

Perhaps you should shoot me first because, unburdened by whatever political constraints may keep Commissioner Kitzman more polite, I further declare that the coastal counties, having deliberately chosen to underinsure and reap the benefits of lower premiums, have no moral claims on Texas, either.

Chandler is Foundation Professor of Law at the University of Houston Law Center and director of its Program on Law and Computation; schandler@uh.edu.