Gone With the Wind?

State lawmakers today begin considering how to fix the Texas Windstorm Insurance Association (TWIA), a publicly run private pool of insurance money that’s still paying out millions of dollars in claims to victims of Hurricane Ike. A joint House-Senate panel created by a 2009 bill will look at ways to restructure the quasi-governmental insurer of last resort, but the chairman of the House Insurance Committee, state Rep. John Smithee, R-Amarillo, has already suggested that TWIA should be abolished if it can’t be fixed.

For residents along the coast, TWIA is the only choice for insurance protection against catastrophic storms. Private insurers unwilling to take losses from selling wind policies pay into the state-run pool, but some lawmakers say too much money is currently going to pay claims as well as settlements after homeowners file suit when they believe they’re not getting what they deserve. The joint panel’s chairman, state Rep. Larry Taylor, R-Friendswood, is still in a bitter legal dispute, involving no fewer than six court actions, to find out just how much homeowners’ attorneys profited from TWIA-related lawsuits.

The panel will ultimately draft a report that will provide a framework for legislative fixes to TWIA next session. Taylor says the report, which is already one month past due, will likely suggest ways to restrict the kinds of policies TWIA can write in the future. “It’s going to have limitations to it, and people are just going to have to be thankful they can get [windstorm coverage] anywhere,” Taylor says. “It may not be a luxury policy. It will be a stripped down, bare-bones policy.”

If lawmakers do limit TWIA policies next session, it will be a direct result of the financial hit the pool took after Ike. “We’ve got some issues on the slab claims. We spent gobs of money settling them," Taylor says. "We are paying some people's claims that have already been fully reimbursed by their flood policy.”

Part of the problem is distinguishing flood damage from wind damage after only a home's slab is left. And in some instances, homeowners don’t buy enough flood coverage, if they buy it at all. “A lot of homes had from 2 inches to 6 feet of water and didn’t have flood or had flood with differences in coverage, and they’re not covered a lot of times [for damages]," TWIA General Manager Jim Oliver said at a legislative hearing Oct. 28. "We go out, evaluate the best we can, try to pay for the wind damage and later on, a person is short a certain amount of money. They are going to try and get it, to be honest with you. We have to hold the door shut on those, but we’ve also made some mistakes.”

Certain times, homeowners are out for the full coverage of their flood insurance but still able to recover more than replacement value of their structure by suing TWIA and receiving additional money for their aggravation. Other times, homeowners file claims that are paid and then find new damage, but instead of contacting TWIA, they contact an attorney and file suit. After Ike, more than 2,400 homeowners filed suit.

Oliver says these multiple claims — and lawsuits that TWIA must defend or settle — drive up the agency’s costs. He argues for limiting the time period in which a homeowner can report a loss or a file a lawsuit because it’s difficult to assess the source of damages several years after a storm. “One of the things I’m going to suggest to the Legislature is that someone has to come back to us and get a denial [for a claim] and then once we say, 'We’re not going to pay you anymore,' have at it. It seems to me [that] until we say we’re not going to pay you anymore, people ought not be getting a lawyer. It’s time-consuming, and it delays their process of getting paid, and it’s a lot more expensive [for TWIA]."

Coastal lawmakers say they’re fairly confident they can convince lawmakers from other parts of the state to support the continuation of a trimmed-back TWIA, one that statutorily takes the trial lawyers out of the process. For example, one solution could be to spell out two different policies TWIA that can offer: a cheaper one, for people who are willing to pledge they will submit to arbitration if there’s a dispute instead of suing and a higher-priced policy for people who want to keep their option to file suit. “We’re trying to make this less of an impact on the rest of the state,” Taylor says. 

The attorneys representing homeowners say this will ultimately hurt the folks who live along the coast. “What [private insurers] have done is pass their obligation and their liability off to TWIA. Now they want to claim TWIA is a state [agency], and now they want to give them immunity so you can treat the people of the Gulf Coast any way you want and the carriers who make all the profits don’t have any risk,” says Steve Mostyn, whose law firm helped handle the claims for thousands of homeowners who sued TWIA after Ike.

There’s also a long-range concern. Lawmakers in non-coastal parts of the state have suggested abolishing TWIA so the state wouldn’t be on the hook for future losses. Smithee believes all Texans have been subsidizing coastal homeowners through higher rates. He argues that because government-run TWIA charges lower-than-market rates, the private insurers who pay into the pool charge higher rates for other policies to account for their risk along the coast.

Previously, TWIA also cost the state in terms of general revenue. A pre-2009 funding structure gave insurance companies tax breaks if they helped pay out massive claims, and those tax breaks meant Texas was bringing in less cash for its coffers. A bill passed in 2009 changed TWIA’s funding structure to stop the tax credits, allowing TWIA to sell bonds to cover losses up to $2.5 billion. But what if Ike claims (which are still ongoing) or a future storm cost more than that? If another Category 4 storm hits the Texas coast, insurance companies worry about how the Legislature would cover the losses.

“Is the Legislature just going to come in and say we’re just gonna take your money? Are they going to loan money from the Rainy Day Fund or issue more bonds? No one knows,” says Jay Thompson, an attorney who represents the insurance industry.