Texas Lawmakers Roll Out Plans to Reform Wind Pool

Two lawmakers have introduced separate but similar bills aimed at reforming the troubled state-backed wind risk insurer for property along the Texas coast.

At a packed hearing on Mar. 15, Texas House of Representaives Insurance Committee Chairman Rep. John Smithee and committee member Rep. Larry Taylor described highlights of their legislation, which seeks to ameliorate a mix of serious problems at the Texas Windstorm Insurance Association.

Smithee, from Amarillo, and Taylor, an insurance agent and coastal legislator representing District 24 in Galveston County, both noted that their bills are works in progress and invited constituents and TWIA policyholders to share their experiences with claims following Hurricane Ike.

TWIA was inundated by claims from Hurricanes Ike and Dolly in 2008, wiping out the association’s Catastrophe Reserve Trust Fund, which had around $370 million before the storms. In order to pay the $1.85 billion in claims from Ike and the $100 million from Dolly, TWIA assessed property insurance companies operating in the state $430 million. Carriers are able to seek reimbursement for more than half of that assessment through premium tax credits, which comes out of the state’s General Revenue fund.

The association’s payout for Ike is expected to continue to climb as claims are still coming in and lawsuits are still being filed two-and-a-half years after the storm.

The wind pool’s reserve fund is now back up to around $150 million, Taylor said during the hearing, nowhere near enough to cover a possible $8 billion to $10 billion worst-case scenario loss based on TWIA’s exposure in the counties for which it provides coverage along the coast.

As Smithee put it, “TWIA is basically sitting there with virtually nothing. And they’re getting ready to write about $80 billion worth of insurance, with a very possible or even probable maximum loss somewhere in the $8-$10 billion range. They don’t have any money. They don’t have any way to pay those claims.”

TWIA’s Troubles

The wind pool’s lack of money to pay claims is only the beginning of its problems. The organization’s claims handling processes, overall management and HR practices have all been questioned.

In late February, the Texas Department of Insurance said it had lost faith in TWIA management’s ability to effectively operate the organization and put the agency under TDI administrative oversight.

In mid-2010 Rep. Taylor submitted a request for information from TWIA for information concerning a large class action lawsuit over slab, or wind-versus-water, claims stemming from Hurricane Ike. That began a “three-and-a-half month legal battle as to whether or not I could ask those questions,” Taylor said.

Ultimately, “it was determined those are public records. I was able to get the information. … It brought a lot of scrutiny of TWIA management. We have since found out a about things at TWIA that are not right,” he said.

Now, not only is TDI investigating, the Travis County District Attorney’s Office and the Texas Attorney General’s Office are also looking into the wind pool’s practices, Taylor said.

The Bills

Taylor has introduced House Bill 2818 and Smithee’s measure is House Bill 272.

Taylor’s bill would tweak the current funding formula for TWIA, allow for increased oversight and enforcement by the Texas Department of Insurance, address problems with property inspections, and clarify that association’s board meetings are open to both the public and the press.

HB 2818 would also allow for premium discounts for buildings that are built to higher-than-code standards, require territorial rating, mandate that properties in a flood zone or those that are subject to wave action — beach properties — to purchase flood insurance, and reduce the maximum limit on windstorm for homes and policies that are subject to wave action to $500,000.

“Eighty percent of the claims we had, for example, on Bolivar [Peninsula] either had no flood insurance or too little flood insurance. That’s an issue. We’re asking the rest of the state to help us in this program; they want to make sure we’re doing everything we can to make sure those exposures are covered,” Taylor said.

Taylor’s bill also restricts the filing of claims-related lawsuits to no later than one year after the date of loss. In conflicts over properties subject to wave action it requires binding arbitration. In other parts of the territory covered by TWIA — 14 coastal counties and parts of Harris County — policyholders “can choose to go the arbitration route when they purchase their policy and they will get a discount, a premium discount on their policy,” Taylor said.

He added that other issues, such as direct billing, the proposed use of pre-event bonds for building up reserves and a clarification on the time frame for assessments to insurance companies would be addressed in a substitute bill that remains to be filed.

House Bill 272 addresses many of the same problems as HB 2818, according to Smithee, who noted that TWIA’s problems could basically be broken down into three separate areas: governance and management; financial condition and claims processes. He and Taylor are working together to craft the legislation to tackle the problems, Smithee said.

He noted that HB 272 would eliminate the extra damage provisions in the insurance code, which allow up to treble damages in lawsuits against TWIA.

“They’re designed to punish … bad insurers who don’t treat their policyholders fairly,” Smithee said. “There certainly is a place for that. Insurers that don’t behave need to have some incentive to behave. But the problem is when you’re dealing with a normal, private insurance company, when you assess these damages, you’re assessing the people that did the bad deed. They have to pay the money.

“In the case of TWIA if you assess punitive or treble damages it’s not the TWIA people that pay it. … It’s the policyholders, primarily people who live on the coast … who pay this money in your premiums the next few years. Ultimately, it’s the people I represent all the way up into the Panhandle who have to pay this money.”

His bill would streamline the application and policy issuance processes to reduce the burden on agents who sell TWIA polices, and allow the insurance commissioner to control the rate of agent commissions.

HB 272 would also mandate arbitration in certain claims cases, require flood insurance in flood and wave action zones, and reduce limits for properties in flood zones.

It also addresses the dispute resolution process. “To me it’s absolutely inexcusable when you have several hundred or maybe even a thousand policyholders who are in court trying to resolve a claim. That’s not good for anybody. … It’s draining a lot of assets out of the system by paying lawyers,” Smithee said.

He added that he’s open to suggestions for a better way to resolve claims disputes, including required arbitration or use of a review panel in advance of court action.

Topics Carriers Texas Legislation Claims Flood