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; firstname.lastname@example.org.