Texas House Passes Reforms for State’s Windstorm Insurance Assoc., On the Way to Senate

The Texas House, in an effort to reform the state's widely criticized windstorm insurance association, approved legislation creating better oversight, but also limiting the ability of unhappy customers to seek redress at the courthouse.

Published on June 17, 2011

Rep. John Smithee, R-Amarillo, said his bill overhauling the Texas Windstorm Insurance Association - a nonprofit group that covers some $70 billion in property as an insurer of last resort to coastal communities - will protect policy holders by requiring the Texas Department of Insurance to audit claims processes while allowing lawsuits under restricted circumstances.

He also argued that limits on lawsuits will improve TWIA's reputation in the bond market, which he called essential to returning it to strong financial footing.

In the aftermath of Hurricane Ike, TWIA became the subject of thousands of lawsuits and legislative and criminal investigations after delaying or denying claims with no explanation. Lawmakers have expressed dismay that TWIA's poor practices turned into a lucrative business for trial attorneys.

"We are going to have to change our tort system," Smithee said, arguing that attorney's fees drive up the cost of insurance. "We turned a $1.5 billion storm into more than a $2 billion storm because of the tort system."

Accusations after Ike

TWIA is backed partly by assessments on insurance policies throughout Texas, he reminded lawmakers.

"This affects all of us," he said. "If TWIA can't pay its claims, they will assess policy holders around the state."

Critics said the legislation will curtail the rights of coastal residents and business owners who now will not have the threat of punitive damages to force TWIA to promptly and fairly pay claims - at a time when the insurer has been accused of egregious treatment of policy holders.

According to an email obtained by trial attorneys suing TWIA, the insurer routinely denied Ike claims without cause: "We are basically refusing to pay a claim without conducting a reasonable investigation," an employee wrote. "This is a class action lawsuit in the making."

Such behavior justifies keeping the threat of extra damages, argued State Rep. Pete Gallego, D-Alpine, who offered an amendment permitting judges to award up the three times a claims' value for egregious conduct.

"Rather than making them atone for their sins, you are giving them a blessing to continue what they are doing," he argued.

The House rejected his amendment.

Under the legislation, a committee of state judges would assign judges to hear lawsuits - an attempt to prevent overly sympathetic jurists from presiding over lawsuits on local natural disasters.

Headed to the Senate

In urging a vote against the bill, State Rep. Craig Eiland, D-Galveston, called that provision offensive to elected judges.

"If they can decide which parents should have a child after a divorce, they can decide whether someone has to pay for a roof after a storm," he argued.

Smithee, noting that TWIA is a not-for-profit organization, said the association needed special protection because policy owners ultimately pay the cost of any damages assessed against it. He also said the current law's threat of triple damages had opened the door to lawsuits, but had not curtailed slipshod management.

"It was a poorly run organization," Smithee said. "There was no reason for this to happen. The question is, what do you do about this - you had triple damages in the current law."

The House approved an amendment offered by State Rep. Larry Taylor, R-Friendswood, that allows the Texas Department of Insurance to develop policies to encourage more insurance companies to write policies on the Gulf Coast. Specifically, the amendment would allow a one-year limit on a company's response to a claim and a two-year limit on when a policy owner can appeal.

Gov. Rick Perry added the legislation to the agenda of the Legislature's special session after it failed in the regular session. The issue has strong political overtones as one of the lead attorneys in TWIA lawsuits, Steve Mostyn, now head of the Texas Trial Lawyers Association, spent millions of dollars on television ads to defeat Perry last November.

The bill still must be approved by the Texas Senate, which has scheduled a committee hearing for Monday.