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

 

Senator Taylor calls for special session to address windstorm risk

Larry Taylor

Texas State Senator Larry Taylor

In the wake of the death of his bill that would have substantially reformed windstorm insurance along the Texas Gulf Coast, Texas State Senator Larry Taylor is calling on Texas Governor Rick Perry to put windstorm insurance on the agenda for a special session of the Texas legislature this summer.  Since there are indications that Governor Perry may call a special session to address other issues such as redistricting, guns on college campuses, and, possibly, the little matter of the budget, the question is whether Governor Perry would add windstorm reform to the agenda.

Here’s why a special session matters.  In a special session, there is no “blocker bill.”  This is a provision in the Texas Senate that makes it difficult/impossible for a bill to get to the floor during a regular session unless it has 2/3 support. Thus, the votes that apparently were sufficient to block Senator Taylor from getting his S.B. 1700 before the legislature during this session, will likely not be enough to prevent it from making it to a vote in a special session.  It is still the case, however, that to take effect immediately — as opposed to sometime late in the 2013 hurricane season — whatever legislation is approved will need a 2/3 vote from both chambers.

I agree with Senator Taylor that Governor Perry should place the issue of windstorm reform before a special session of the Texas legislature.

Having applauded Senator Taylor for recognizing a serious threat to his constituents from existing law, let me make clear that Senator Taylor and I do not agree on the merits of his particular bill, S.B. 1700.  Although I acknowledge that the status quo is so bad that even a bad bill might be an improvement, there is much to dislike in S.B. 1700. And so, if he gets his way, I am likely to continue to urge that S.B. 1700 be scrapped in favor of better ideas or substantially modified.

Senator Taylor and I also do not agree, I think, on the magnitude of the financial problems facing TWIA.  He ended his press release with the breezy assurance that he felt confident that losses from future storms will be covered. That is kind of a strange statement from someone simultaneously saying we need a special session of the legislature to deal with an urgent problem.  If losses will be paid, what is the rush? And so, while I understand fully the importance of a prominent elected official not generated unwarranted panic in policyholders, there is a countervailing interest in being truthful about the risks that exist here.  There’s an even stronger interest in reducing those risks if possible.

For the reasons I have set forth on this blog over the past few months, I believe the TWIA situation, is far worse than Senator Taylor asserts in his press release, closer to what would justify Senator Taylor in calling for a special session of the legislature and, actually, far worse than he and many others may realize. The legal structure on which TWIA would rely to recapitalize itself following a major storm and which would be needed to pay claims even somewhat promptly is, as TWIA itself acknowledged in a plea for reform legislation, extremely fragile.

There is a substantial risk that TWIA would not be able to raise more than $1 billion in post-event bonds and cash on hand to pay claims in a storm this summer; and the risk of a $1 billion in losses this summer is between 5 and 7%.  If we take three summers as the relevant time period — because that’s when a bill from the 84th legislature might well take effect — we are talking about a risk of 14-19% of having blue roofs on the coast and no money to do repairs. One way to think about this is that we are, quite literally, playing Russian Roulette with the Texas economy for the next few years.  The odds are about the same: 1 in 6.

The status quo creates too high a risk of a human-engineered disaster along the Texas coast and, derivatively, for the Texas economy.

Bottom Line

There are, as I have pointed out, modifications of S.B. 1700 that could make it a bandaid for Texas for the next two years.  That would be an OK idea.  There are, as I have noted, alternative schemes such as an assigned risk plan that provided adequate returns to insurers that would be a more promising structural solution for the long run. What Governor  Perry I hope becomes immediately educated about by legislators up and down the State of Texas, however, is the disaster looming if a major storm hits before the next legislative session and the insurer that covers 62% of all property there doesn’t even have close to enough money to pay for windstorm losses.  Governor Perry should be motivated to take those lessons seriously if he wants to remain a popular figure in Texas or elsewhere in the United States.  And those legislators should be mighty motivated to plea because voters will otherwise look to them as the people that failed to act and left the Texas coastal economy in shambles when they knew of a clear and present danger.

 

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.