Texas Windstorm Insurance Litigation Costs Too High, Lawmaker Says

The amount the Texas Windstorm Insurance Association (TWIA) has paid out in litigation costs as a result of lawsuits stemming from Hurricane Ike claims is far too high, says one Texas lawmaker who’s working on legislation aimed at curbing such costs in the future.

State Rep. Larry Taylor, an independent agent from Friendswood who is co-chairman of the Joint Windstorm Insurance Legislative Oversight Board, a member of the House Insurance Committee and the the Select Committee on Emergency Preparedness, and the State Representative for House District 24 in Galveston County, said work-in-progress legislation would rein in defense costs by, among other things, limiting the window of time that TWIA insureds have to file lawsuits over claims.

“This is property insurance with a tail,” Taylor said of claims that are still being filed with TWIA from Hurricane Ike, which hit the Texas coast near Galveston in September 2008. Not only are claims still coming in, claims that were previously thought to be long-settled are being resurrected by creative plaintiff attorneys who are opening them up and filing new lawsuits, Taylor said.

TWIA, the state-backed insurer of last resort for wind and hail along the Texas coast, as of December 2010 had paid insured losses of $1.85 billion from Ike claims, but losses may reach $2.3 billion, the Insurance Council of Texas reported. The number of TWIA claims from Ike had risen to 92,800 and 4,800 lawsuits had been filed. More than half of those lawsuits have been settled.

Open Records Request

In an effort to investigate TWIA’s costs and payouts connected with Hurricane Ike, Taylor filed an open records request in September 2010 to find out the details of a $189 million settlement between TWIA and a group of homeowners over slab claims — cases in which the only thing left of the houses following Hurricane Ike were the slabs they were built on.

J. Steven Mostyn, the lead attorney for plaintiffs in the class action, fought the request, asserting the settlement information was confidential and suggesting that Taylor was over-stepping his authority as a state representative in requesting information about a confidential settlement.

Though Taylor ultimately was successful in obtaining the information, it was not without persevering through months of court proceedings and being harassed “personally and professionally and legislatively,” he said.

Other independent agents who sell TWIA policies were brought into the fray as a result of open records requests, including one filed in January 2011 by KHOU-TV in Houston, seeking information about commissions paid to agents by TWIA. The KHOU-TV letter to TWIA included a request for information about specific agencies and agency/owners that earned commissions selling TWIA policies. TWIA agents were advised by the insurer to file an argument with the AG’s office stating why their information should be kept private.

Taylor doesn’t think the request regarding agent information was really about wanting to know how much other agents make from TWIA commissions. “It was really more about going after me,” he said.

The consumer advocacy group Texas Watch also filed an open records request for information about agent commissions but Alex Winslow, executive director of Texas Watch, clarified that his group’s request was not made in order to uncover “information about commissions paid to Rep. Larry Taylor or any particular insurance agent.”

Instead, Texas Watch was interested in “the aggregate amount paid by TWIA to insurance agents,” he stated in an e-mail to Insurance Journal. “We were interested in determining whether policyholders could reap any savings by reducing TWIA agent commissions to 10 percent.” Agent commissions for selling TWIA policies are currently set at 16 percent.

Winslow also noted that Texas Watch’s request was not subject to attorney general approval “and agents were not sent an advisory regarding our request. … We asked for and received aggregate information about how much TWIA spends on agent commissions. We were not interested in obtaining information about particular agents.”

Appalled by the Numbers

Taylor said he was “appalled” by the particular numbers — especially the amounts paid to attorneys — in the class action.

“For 1,300 claims, the attorneys received 67 percent over and above what claimants got,” he said. “In other words if there was a $100,000 claim, they would inflate the claim to $167,000.” The claimant would get the $100,000 but the lead attorneys would walk away with $67,000.

Another “1,250 claimants that didn’t have attorneys were brought into the class,” he said. “They had seven law firms represent that group. In that part of the settlement [the attorneys] received a legal fee of 20 percent, which is more in line with the norm in class actions.”

TWIA has also paid more than $39 million in defense fees since 2008, according to the Lone Star Report, published by the nonprofit Lone Star Foundation, which tracks news and events in Texas politics.

Taylor said that much of the more than $95 million paid to attorneys — both plaintiff and defense — as a result the Ike wind-versus-water lawsuits should have gone into the Catastrophe Reserve Trust Fund and not into attorneys’ pockets.

The $1.85 billion in Ike claims, plus another $100 million in losses stemming from Hurricane Dolly in July the same year, wiped out the fund. To pay claims, TWIA assessed property insurance companies $430 million. By state law insurance companies have been able to seek reimbursement through premium tax credits for $230 million, money that comes out of the state’s General Revenue fund and is ultimately paid by Texas taxpayers.

More than two years after Ike, TWIA has around $75 million in reserve and expects to add another $75 million this year. During the 2009 legislative session, lawmakers approved a measure allowing the state to sell post-event bonds should a future storm once again wipe out whatever reserves TWIA builds up.

Agent Commissions

As an insurance agent who sells TWIA policies and a lawmaker who sits on a legislative committee that oversees the insurer, Taylor has been criticized in some media reports over the 16 percent commission TWIA pays to its representative agents.

What the critics don’t mention, Taylor said, is that the legislature has nothing to do with setting the commission rate paid by the insurer. The organization’s board of directors established the rate after analyzing the operations of similarly situated insurers and factoring in agents’ costs of doing business with TWIA.

“The bottom line is the board sets the commission,” Taylor said. “The legislature does not set the commission.”

The 16 percent paid to agents is not out of line with rates paid by other insurers, including the National Flood Insurance Program, he added, especially when you take into account the amount of work agents have to do in order to sell TWIA policies.

“The potential exposure for an errors and omissions claim when you’re dealing with a company like TWIA, which is totally different from anybody else you deal with … is much higher,” Taylor said.

In addition to limiting TWIA’s exposure to litigation costs, other legislative proposals aim to improve lower the organization’s cost of doing business and make it more efficient. Suggested changes include developing a direct bill system and allowing policy applications to be submitted online.

While Winslow, of Texas Watch, believes reducing agent commissions would be beneficial for policyholders and taxpayers, he said such a reduction should be coupled “with proposals that address inefficiencies at TWIA in order to streamline the process and ease the burden on agents.”

Editor’s note: Rep. Taylor posted has posted a video on YouTube discussing his TWIA settlement open records request and the aftermath of that request.