Hurricane forecasters predict a rough time ahead with five large storms this season. This would be bad news – and not just for those on the Texas coast.
With the recent spate of lawsuits against the state’s windstorm insurance pool, the Texas Legislature is trying to create an environment where coastal property is adequately covered and paid, quickly and fully, without Texas taxpayers being required to pay for needless lawsuits and inexplicably large attorneys’ fees.
Almost 30 years ago, Texas created the Texas Windstorm Insurance Association (TWIA) as the insurer of last resort for homeowners that couldn’t buy a windstorm policy in the marketplace. When Hurricane Ike came ashore in 2008, TWIA was funded through a combination of policyholder premiums, insurance companies, reinsurance, and Texas taxpayers and insurance customers across the state.
The problem was that TWIA was massively underfunded. One report found that TWIA has around $75 billion in insured risk – or exposure – and only $80 million to cover those risks where an actuarially sound program would have $25 billion on hand. That’s right, TWIA is underfunded by $24.92 billion-an exposure that Texas’ taxpayers may have to ultimately cover.
Hurricane Ike brought about 95,000 TWIA claims and thousands of lawsuits against TWIA. As a result, TWIA has paid out almost $3.2 billion in covered losses and to settle lawsuits even though TWIA had nowhere near that much in reserves. Through the complex funding scheme, the funds now being paid to cover insured losses, lawsuit payouts, and attorneys’ fees – about $500 million so far – are coming from taxpayers. Each additional dollar paid on Ike TWIA claims are essentially on the back of Texas’ taxpayers.
But it gets worse. It was discovered that TWIA-contracted adjusters were not properly adjusting claims. Sometimes, an insured claim was valued without the adjuster ever viewing the property. No one has determined a reason for the sloppy work.
Not surprisingly, that work resulted in many lawsuits – double the normal number of suits usually anticipated from a major claims event. This became a plaintiff-lawyer rich environment. About 4,500 individual suits were filed and a class action including thousands of other claimants was certified. The resulting settlements announced last year could reach more than $180 million.
Compounding the problem, TWIA agreed to a settlement scheme in which the individual suits were all settled with a formula that calculated attorneys’ fees as the insured’s share divided by 0.6 minus the insured’s share. The Texas Supreme Court has determined these formula results in a two-thirds attorneys’ fee.
If an insured received $90,000 in settlement of his claim, the settlement included an additional $60,000 as an attorneys’ fee, for a total amount of $150,000. Why would a cash strapped quasi-governmental agency agree to pay out, in addition to the insured’s portion, such a large attorneys’ fee?
Let’s review: a poor funding scheme, inconsistent claims adjustment, and an inexplicable settlement calculation have combined to hit the Texas taxpayers hard in the pocketbook. What’s to be done? Well, the Texas Department of Insurance has now placed TWIA into a sort of conservatorship and the Legislature is working on addressing these issues.
While that’s a good start, the bigger problem is that Texas is the primary windstorm insurer along the Texas coast. In fact, everything that has happened is exactly the kind of thing we should expect to see when government takes over a function that belongs in the private sector.
While the Legislature is at work reducing the amount of attorney’s fees taxpayers are paying, it should also reduce the amount of windstorm claims that taxpayers are responsible for. If we really want to solve this problem, we need to get Texas out of the windstorm business altogether. Let’s hope the Legislature acts before the next storm blows in.
The Honorable Joseph M. Nixon is a Senior Fellow with the Texas Public Policy Foundation and of counsel with the Houston law firm Beirne, Maynard & Parsons, LLP. He served six terms in the Texas House of Representatives and chaired the House Committee on Civil Practices during his last two terms.