Could the guaranty fund help TWIA policyholders?

We’ll know more in the coming days, but, if I am right in believing that the Texas Windstorm Insurance Association is about to be placed into receivership, there is a substantial chance that the claims of at least some TWIA policyholders and other TWIA creditors will not be paid in full.  The Texas Department of Insurance admits as much in paragraph 10 of its recently issued FAQ. Now, ordinarily when a Texas property insurer goes insolvent and is placed in receivership, the Texas Property and Casualty Guaranty Association comes in and pays at least part of the unpaid portion of legitimate policyholder claims. So, the question is, could TPCIGA help out TWIA policyholders? And thereon rests a complex statutory thriller.

We start with the statute creating and regulating TPCIGA, the exciting Chapter 462 of the Texas Insurance Code. Let’s take a look at what claims are protected by TPCIGA.  That’s found in section 462.201.  Here it is.

Sec. 462.201.  COVERED CLAIMS IN GENERAL. A claim is a covered claim if:

(1)  the claim is an unpaid claim;

(2)  the claim is made under an insurance policy to which this chapter applies that is:

(A)  issued by an insurer authorized to engage in business in this state; or

(B)  assumed by an insurer authorized to engage in business in this state that issues an assumption certificate to the insured;

(3)  the claim arises out of the policy and is within the coverage and applicable limits of the policy;

(4)  the insurer that issued the policy or assumed the policy under an assumption certificate issued to the insured is an impaired insurer; and

(5)  the claim:

(A)  is made by a liability claimant or insured who is a resident of this state at the time of the insured event; or

(B)  is a first-party claim for damage to property that is permanently located in this state.

Most of this statute should be easily satisfied by TWIA policyholders.  It will relate to property permanently located in Texas. It will be unpaid (or they wouldn’t be complaining). It has to actually be covered by and within the limits of the policy.  It’s not as if you get a better insurance policy from TPCIGA than you got from your impaired insurer. But there are two tricky bits that I’ve highlighted in orange: (1) it has to relate to an insurance policy to which this chapter (462) applies and (2) the insurer that issued the policy has to be an impaired insurer.  Let’s turn to each of those in turn.

Leaf to section 462.004 of the statute.  It reads, in excerpted form,

Sec. 462.004.  GENERAL DEFINITIONS. In this chapter:

(5)  ”Impaired insurer” means a member insurer that is:

(A)  placed in:

(i)  temporary or permanent receivership or liquidation under a court order, including a court order of another state, based on a finding of insolvency; or

(ii)  conservatorship after the commissioner determines that the insurer is insolvent; and

(B)  designated by the commissioner as an impaired insurer.

(6)  ”Member insurer” means an insurer, including a stock insurance company, a mutual insurance company, a Lloyd’s plan, a reciprocal or interinsurance exchange, and a county mutual insurance company, that:

(A)  writes any kind of insurance to which this chapter applies under Sections 462.007 and 462.008, including reciprocal or interinsurance exchange contracts; and

(B)  holds a certificate of authority to engage in the business of insurance in this state.

 

So, in order to be an impaired insurer you have to be a “member insurer” (and be in receivership).  But what’s a member insurer?  If you were a stock insurance company, a mutual insurance company, a Lloyd’s plan or some other things, the matter would be easy. You’d be in.  But TWIA isn’t one of those things.  It’s just TWIA. But that’s not the only way to qualify.  See the word “includes.”  That generally means that the items listed are not the exclusive way to qualify.  If TWIA meets the conditions in parts (A) and (B) it should qualify as a “member insurer,” which, you will recall, is what we need before TWIA policyholders can seek protection from TPCIGA.

Now we are deep into the plot. Does TWIA write “any kind of insurance to which this chapter [462] applies under Sections 462.007 and 462.008?

We’re going to skip section 462.008.  Trust me, it has absolutely no relevance.  So, let’s focus instead on section 462.007.  It reads:

Sec. 462.007.  APPLICABILITY IN GENERAL; EXCEPTIONS.

(a) Except as provided by Subsection (b), this chapter applies to each kind of direct insurance.

(b)  Except as provided by Subchapter F, this chapter does not apply to:

(1)  life, annuity, health, or disability insurance;

(2)  mortgage guaranty, financial guaranty, or other kinds of insurance offering protection against investment risks;

[stuff that clearly does not apply omitted]

(8)  a transaction or combination of transactions between a person, including an affiliate of the person, and an insurer, including an affiliate of the insurer, that involves the transfer of investment or credit risk unaccompanied by the transfer of insurance risk, including transactions, except for workers’ compensation insurance, involving captive insurers, policies in which deductible or self-insured retention is substantially equal in amount to the limit of the liability under the policy, and transactions in which the insured retains a substantial portion of the risk; or

(9)  insurance provided by or guaranteed by government.

Assume for the moment that TWIA policies are “direct insurance.” If so, then Chapter 462 applies unless there’s an exception in subsection (b) of 462.007.  It’s quite clear that exceptions (1)-(8) do not apply.  TWIA is not selling ocean marine insurance. But there is this exception 9.  It says that the chapter does not apply to “insurance provided by or guaranteed by government.” Is TWIA provided by or guaranteed by government? Protestations of some notwithstanding, it is abundantly clear that TWIA policies are not (except conceivably for TPCIGA itself!) guaranteed by government. But might TWIA policies be insurance provided by government?!

And we have now reached the crucial moment in our mystery thriller.  Is TWIA insurance government provided insurance?  If it is, TWIA is not a member insurer and, as such, is not an impaired insurer, and, as such, is not the sort of insurer with respect to which TPCIGA offers policyholders any protection.

I would not laugh at someone who suggested that TWIA was not a government insurer.  It is, to be sure, a government-chartered insurer. Unlike Allstate, State Farm and the rest of the gang, TWIA does business not by satisfying general incorporation and licensure statutes but as a result of a special act of the legislature. But is not the federal or state government itself acting as an insurer. Moreover, a court that recently confronted the issue as to whether TWIA was entitled to sovereign immunity appears to have left the issue open.

Unfortunately, this argument, though not frivolous, runs into several obstacles.  First, I believe TWIA has treated itself and TPCIGA has treated it as if TWIA were a government insurer.  That’s because being a member insurer creates many duties. Chief among those duties is to pay assessments when other insurers go insolvent and TPCIGA has to pay claims. (Check out section 462.151). Non-members don’t have to pay assessments. TPCIGA issued assessments to members in 2001, 2002, 2003 and 2006. (see here). My belief — and if I am wrong it is strong evidence that I am wrong — is that TWIA did not pay any of these assessments and was not asked to do so.  Here, for example is the TWIA financial statement for 2006/2007. I don’t see anywhere that it shows a TPCIGA assessment.

Second, I’m not aware of instances where Texas itself acts as an insurer other than on its own property. So if insurer just meant instances where the state itself is an insurer the exception in the statute would have no application.  There are canons of statutory interpretation that say you try not to construct statutory provisions so that they have no purpose. Instead, I suspect, the term “insurance provided by government” means insurance provided by government created entities such as TWIA, the Texas Fair Plan and entities such as TPCIGA itself.

At the end of the day, then, if you asked me, I would say TPCIGA is unlikely to come to the rescue of TWIA policyholders.  I would not say, however, that this is an open and shut case.  I do suspect, however, that the exclusive protection of TWIA policyholders is instead  the funding mechanism set up in Chapter 2210 of the insurance code and whatever amendments may come thereto.  Unfortunately, that’s not looking very good right now and, absent legislative rescue, is going to look abysmal in the event our Texas coast is socked with a significant storm this rapidly approaching hurricane season.