Lawsuit filed against TWIA for failure to assess fully for Ike

A policyholder of the Texas Windstorm Insurance Association has filed a lawsuit against that state-created entity and its current board of directors as a result of the failure of TWIA following Hurricane Ike to assess Texas insurers more fully under the law as it existed at the time. The lawsuit, filed in a state district court in Travis County (copy of lawsuit here), seeks a court order directing the current directors to assess TWIA member insurers for up to $600 million and to pay damages to the policyholder, Ramiro “Gamby” Gamboa of Corpus Christi, Texas. It is very unlikely, however, that the case will succeed in making any more money available for current policyholders of the deeply troubled largest insurer of windstorm risk on the Texas coast.

Mark Kincaid

Mark Kincaid

The plaintiff is represented in the action by Texas “Super-Lawyer” Mark Kincaid, a former head of the office of Public Insurance Counsel in Texas. The lawsuit is the latest in a series of steps by coastal interests, most visibly led by Corpus Christi State Representative Todd Hunter to find ways of buttressing the desperate finances of the Texas coast’s largest windstorm insurer. TWIA will likely respond to the lawsuit in the next three weeks or so. The members of the board of directors who have been sued will likely be notifying their Directors and Offices Liability Insurer of the suit, assuming TWIA procured such coverage for the current year, and requesting that they provide a legal defense to the claims. Whether or how Texas insurers who would be liable for the assessment in the event the lawsuit succeeds will intervene in the proceedings is not yet clear.

The major issue this lawsuit will face is that the statute that would have authorized TWIA to make the assessment was unquestionably repealed by the legislature in 2009. This blog has analyzed this issue extensively (see here and here) and concluded that the problem is likely insuperable. The short version is that in section 44(2) of H.B. 4409, the legislature in 2009, with knowledge that claims for Ike were still pending repealed sections 2210.058 and 2210.059, the provisions of the former law that would have authorized an assessment. That repeal without saving the right to assess for prior storms may have been foolish or it may have been part of some political deal involving insurers and coastal interests.  It may simply have been prophetic drafting by legislators who place a high value on the interests of Texas insurers. Unless some argument can be made that the repeal, if interpreted in the fashion I believe is required by section 311.031 of the Government Code, violates policyholder rights under the United States or Texas Constitution, or unless attorney Kincaid has some extremely clever argument up his sleeve, would appear to end the matter. I guess we shall see. In a formal opinion, the Texas Attorney General, Gregg Abbott, has rejected the argument made in the Gamboa complaint that there was anything unlawful about TWIA using premiums from years after Hurricane Ike to pay for claims arising out of that storm.

Conceivably, some lawsuit might have been filed against the then-directors of TWIA at the time it failed to assess for Ike fully but that claim does not appear to exist in this lawsuit nor have the right individuals been sued.  Moreover, such a lawsuit based on actions in 2008 and 2009 would now run into statute of limitations issues since the claims are based on alleged failures that took place more than four years ago. The absence of such a claim is, in some sense a pity for TWIA historians, since those directors had at least constructive knowledge that the time for an assessment was about to expire and might possibly have known that the $430 million assessment they did issue was going to prove woefully low to pay for Ike claims and would thus burden current and future policyholders. If the Gamboa lawsuit survives motions to dismiss and discovery proceeds, however, the just-filed lawsuit  may bring some of those issues to light. The Texas Attorney General has previously declined to respond to a request from State Representative Todd Hunter that the failure to assess was negligent.



Waiting for Godot: TWIA style

Sometimes, watching a TWIA board meeting is like watching an absurdist French play. In Waiting for Godot, Samuel Becket presents a two hour play in which the two characters Vladimir and Estragon waste away their existence waiting endlessly for “Godot,” who is clearly never coming. Substitute an Attorney General opinion authorizing an assessment against Texas insurers for Godot and at least some TWIA board members for Vladimir and Estragon and you get an almost perfect re-interpretation of the 1950s French existentialist classic.

Offering a carrot in Waiting for Godot

To be less high-falutin’, however, when the TWIA board spend hours saying they want to “delay” consideration of an assessment in 2013 of Texas Insurers for 2008’s Hurricane Ike until the Texas Attorney General opines that they have the power to do so, they are wasting time on something that will never happen.  To begin with, contrary to a myth that seems to have received its genesis at yesterday’s board meeting, the Texas Attorney General has not been directly asked (yet) whether TWIA currently now has authority to assess insurers for Ike. Of course, the TWIA board can wile away its time on whatever diversion it chooses; we all probably do that.  But when TWIA sees its exposure growing at 4% per year, acknowledges that it is barely solvent if one counts a paltry catastrophe reserve trust fund, acknowledges that its rates are not actuarially sound, and realizes that not a single of its legislative recommendations got any traction, a focus on this pipe dream rather than a relentless look at reality looks — and is — absurd.

The TWIA board considers an assessment

The TWIA board considers an assessment

One reason the Texas Attorney General will not provide what some TWIA board members claim to await is that no one asked the Attorney General to do so. The only pending attorney general request for an opinion that relates to TWIA comes from Corpus Christi Texas House Representative Todd Hunter in RQ-1134-GA filed in July of 2013.  But that request does not ask whether TWIA has the authority to issue an assessment today under a statute that was repealed in 2009. Rather, it asks whether it would be “negligence and/or a failure of authority or responsibility of duties” for TWIA not to assess today. But, as anyone with a background in law knows, it is quite possible for TWIA to have the authority to do something and yet, in the exercise of its business judgment, not to be “negligent” or in breach of its duties not to do so. Unless, therefore, Attorney General Abbott, a current gubernatorial candidate, is eager to step into this highly politicized thicket and lose votes on the Texas coast, he can answer the questions posed without addressing the core issue of whether TWIA has authority to assess. Only if the Attorney General wants to go out of his way to find that TWIA is negligent in assessing today would he have an obligation to resolve the predicate question of whether TWIA has authority to do so.

Moreover, to pretend that there might really be an affirmative answer to the authority question or that, really, the matter is quite unclear is, I fear, at best an exercise in undue politeness. For reasons I have set forth before here, here and here, this is, on reflection, not a particularly close question. The statute that gave TWIA authority to make the kind of half billion dollar assessment it came within one vote of making yesterday was repealed in 2009. It was repealed — by at least one of the legislators who yesterday urged an assessment — in favor of a system that provided a different system for financing losses after a tropical storm. It was repealed in part precisely because under the old system the Texas fisc was directly jeopardized by a TWIA assessment: insurers got to credit payments of the assessment against otherwise owing premium taxes.

It is just preposterous to think that the Texas legislature, if it wanted to prevent assessments for new storms but leave assessment authority in place for old storms would have chosen simply to repeal the old law rather than place a temporal limitation on the authority to assess. It is bizarre to think that if Texas was willing to place its continuing fisc in jeopardy for old storms but not for new, it would not have done something a little more nuanced that simply repealing the old law. It is even more peculiar to suggest, as may have been done yesterday, that Texas magically preserved the ability to assess for Ike but repealed the premium tax credit so as to preserve its fisc.  If it did so, that provision of the statute must have been written in invisible ink.  If TWIA’s lawyers are, as is claimed, actually telling board members, some of whom may not want to hear it, that the matter is ambiguous, that is a failure of courage or competence over reason.

But, actually, it was not so much parallels to Samuel Beckett that troubled me most in watching the TWIA board meeting yesterday.  It was the parallel to Franz Kafka and other writers who focus on tyranny. Here’s the most troubling quote: “I would have to support this assessment because it would be good for the policyholders and that’s who we represent and that’s basically who I’d have to be in support of.”  (1:42 to 1:43 of this recording) Sorry, but at best that is a hopelessly shallow analysis.  It might be equally “good” for the policyholder if Texas insurance agents had their homes confiscated and sold to pay for Ike losses or if Michael Dell was told he had to personally recapitalize TWIA.  Although Texas insurers may have a good deal of money and it takes a little imagination to see State Farm or Allstate as the victims of tyranny, the fact that a government-sponsored entity may “need” money for some public good is not authority to reach into the bank account of anyone — insurer, wealthy person or poor person — and simply take their money without legislative authorization. That is true even if the insurance industry “got away” with paying too low an assessment back in 2008. And, since Texas courts are likely to agree with this point, it is in fact not good for policyholders to have their money wasted paying lawyers defending an indefensible position.

Footnote 1: This is not to say that asking whether TWIA was negligent in not assessing more heavily back in 2009 is a bad question or an easy question. I adhere to my view that this is a reasonable question.  I am just saying that an answer to this question will not provide guidance on whether TWIA can legally assess today.



Todd Hunter asks a good question

Todd Hunter at a recent town hall meeting on windstorm insurance

Todd Hunter at a recent town hall meeting on windstorm insurance

There is at least one thing Representative Todd Hunter (Corpus Christi, Texas) and I agree on: I am not a member of his fan club.  This blog has frequently criticized Representative Hunter for what I regard as his misguided views on windstorm insurance.  Frankly, neither he nor I appear to appreciate each other’s “style.” But, give credit where credit is due.  He has now actually asked a very good question.

In a letter last Friday to Texas Attorney General Greg Abbott, Representative Hunter asked for an opinion stating whether a failure by the Texas Windstorm Insurance Association to assess private insurance companies fees to shore up its ability to pay claims amounts to negligence.  I raised the same issue several months ago in a prior blog post. Were the Attorney General to opine positively, it could open the door to legal action against the board of directors of TWIA or its officers during the critical 2008-2009 time period after Hurricane Ike and before HB 4409 repealed a statute under which TWIA might have issued further assessments against member insurers to shore up its finances. If it were to turn out either that any of the board members or officers has significant funds or if anyone responsible for any of their misdeeds either by operation of law or through an insurance contract has money, it could ultimately help bring some desperately needed additional funds into the largest windstorm on the Texas coast.

The problem with the preceding paragraph, however, is the number of “ifs” it contains.  First, the Texas Attorney General would need to opine positively.  I’m not saying it couldn’t happen. But he might well opine that this was a factual question on which he had no legal opinion.  He might opine that he lacked the facts on which to render an opinion.  He might remind Representative Hunter (who obviously knows this point) that negligence is not the same thing as strict liability. A realization in hindsight that the assessments were too low is not the same thing as a failure to make assessments that were plainly reasonable at the time such a decision would have been made.  Defendants in such a lawsuit would surely argue that making such an assessment and increasing the size of the Ike pie would just have made TWIA a stronger lawsuit magnet and left no more money for future claims. None of these responses would be particularly helpful to Representative Hunter.

Second, to make such a lawsuit more than a show trial or truth commission, someone needs to have actual money.  I don’t know for sure, but it would strike me as unlikely that any of the board members or officers have $400 million in assets upon which execution is practical. And while some of the large corporate entities affiliated with the board members would likely have that kind of cash, tagging the corporation for any sins of these board members will be a challenge. TWIA probably has some form of liability insurance to protect its board of directors, but until we see the policy it is hard to know what it covers or how much protection it would offer. In any event, no defendant is likely to write a check right away to the plaintiff in such a lawsuit . In any money ever comes in, it will likely be years from now — a long time for claimants against an insolvent TWIA to wait for payment that repairs their hurricane-damaged roof.

Third, one should expect to see defenses of statutory immunity and the statute of limitations raised.  Under section 2210.106 of the Texas Insurance Code, officers and directors have at least some immunity from damage lawsuits for many forms of ordinary negligence. And the statute of limitations for breach of fiduciary duty in Texas is four years. If that statute runs from the time of the original assessment, a lawsuit now is too late.  If it runs from the date that section 44 of HB 3 was signed into law and eliminated TWIA’s former ability to assess, the deadline would appear to be July 19, 2013, leaving precious little time in which to file such suit. (Hint, hint?)

It will be interesting to see how Attorney General Abbott responds to this request.  As I have suggested, the matter is not an open and shut case and bad decisions in hindsight does not negligence make. Still, there has always been something troubling about the process and chronology here.  TWIA, over which insurers have had substantial control, making assessments against insurers that are lower than that requested by its managers and that turned out to be low all the while watching or, more troublingly yet, possibly participating in, a statute that cuts off the ability of TWIA to assess for Ike. Representative Hunter deserves credit for asking the Attorney General to take a look at the legality of actions that are in part responsible for the predicament in which TWIA and its policyholders now find themselves.

Here’s a link to the letter from Representative Hunter. AG Opinion Request

Attorney General: Texas not obliged to pay for excess TWIA losses

You heard it here first.  As I wrote back in July of 2012, if the Texas Windstorm Insurance Association does not have enough money to pay its claims, the State of Texas has no obligation to pay its unpaid claims to policyholders. This was confirmed this week by Texas Attorney General Greg Abbott in an opinion letter written to Texas State Representative (and Chair of the House Insurance Committee John Smithee).  The bottom line of the letter  providing the formal opinion of the Texas Attorney General is reprinted below. Here is a link to the full opinion.

The bottom line of Attorney General Abbott's opinion

The bottom line of Attorney General Abbott’s opinion

The Attorney General’s opinion should hardly have been necessary given the obviousness of the proposition. It is, as I suggested, not a matter over which people — particularly lawyers who can read a statute — could reasonably disagree. Perhaps the weight of the Texas Attorney General behind the proposition will, however, put to rest claims by some coastal legislators that the matter was debatable.  The AG opinion likewise vindicates Texas Insurance Commissioner Eleanor Kitzman who made the same assertion last year and who, for thereby calling into question the financial stability of TWIA, was threatened with a criminal investigation by Texas State Representative J.M. Lozano. Perhaps Representative Lozano will now issue an apology?

So, TWIA policyholders take note.  As it stands, there is no cavalry coming over the hill when a tropical cyclone empties TWIA.  Your insurer will not have money to pay your claim in full.  The State of Texas will not pay your claim. The Texas Property and Casualty Insurance Guarantee Association will not pay your claim. No one with money will have legal responsibility to pay your claim under your TWIA policy. You are very likely to be under a blue tarp and coping with a ruined house for a long time. Unless and until the legislature acts, whether in a special session or a regular session two years hence, the restoration of your property and your life may well depend on the kindness of strangers.

Photo of Katrina survivors in the Houston Astrodome

The kindness of strangers the last time a major hurricane left many people homeless

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;