All Hail Breaks Loose
By: Mark Pulliam
Mother Nature can be tempestuous. Florida faces the risk of hurricanes; Oklahoma bears the brunt of tornadoes; states bordering the Mississippi River endure flooding; California is prone to earthquakes. In Texas, the most common peril is hail, sometimes the size of golf balls (or even larger). Hail storms are rarely deadly, but they can inflict substantial property damage, especially to roofs and other exposed surfaces. Increasingly, hail storms in Texas are accompanied by another form of disaster, too, albeit one that is man-made: mass litigation.
Opportunistic trial lawyers in the Lone Star State, alert to flaws in the legal system, have rocked the insurance industry with an inundation of storm-related lawsuits. Not surprisingly, some insurers have responded by hiking rates. Others have withdrawn from the market or curtailed hail coverage. Absent reform, homeowners’ insurance rates in Texas, already 50 percent higher than the national average, will skyrocket. Many Texas homeowners are already finding that insurance is unavailable or unaffordable.
What’s going on? Some Texas plaintiffs’ lawyers found enormous success suing insurers after Hurricane Ike in 2008. A cottage industry has since developed whereby storm-chasing trial lawyers target insurers who allegedly don’t pay hail claims quickly—or richly—enough. In a typical year, Texas sees several serious hail storms. Enterprising lawyers then swoop into the affected community and actively solicit lawsuits via billboards, television ads, door hangers, and booths in front of grocery stores. From 2010 to 2012, Texas generated 320,000 hail-insurance claims, more than double the number in any other state. The number of storm-related property-insurance lawsuits filed in Texas exploded from 392 in 2007 to 10,901 in 2014, a 28-fold increase.
In many cases the solicitation is done through intermediaries, such as “public adjusters” who are entitled to a share of the recovery, or unscrupulous roofing contractors working in conjunction with plaintiffs’ lawyers. While advertising by lawyers is legally permitted, over-eager lawyers occasionally cross the ethical line and solicit clients directly or through so-called “case runners.” In Texas, this is a crime known as “barratry.” Some storm chasers have been disciplined by the state bar or threatened with criminal prosecution. Sadly, when these miscreants are suspended, other lawyers—drawn by the prospect of lucrative fees—quickly take their place.
Though Texas has the most comprehensive scheme of tort-reform legislation in the country, it also has among the most policyholder-friendly (and therefore insurer-unfriendly) insurance laws. If an insurer doesn’t promptly and adequately pay a claim, the insurer can be sued pursuant to the Texas insurance code, which imposes severe consequences, including an 18-percent per-year interest penalty, pre-judgment interest, and liability for the claimant’s attorneys’ fees. The flawed premise of the insurance code is that all property claims are cut and dried—like fixing the fender in an auto accident. Storm-related claims, however, often involve coverage issues (for example, wind damage may be covered but water damage excluded), deductibles, and, in homeowners’ policies, terms that provide for partial payment for (rather than complete replacement of) a damaged roof, depending on its age. Unlike in an auto accident, even the existence of roof damage following a storm is often subject to dispute. And the draconian interest penalty, enacted in 1991 when Democrat Ann Richards was governor, is an anachronism from an era when the prime rate was several times higher than it currently is.
Most homeowners correctly assume that as long as their roof doesn’t leak and isn’t visibly compromised, it is undamaged, and decline to make a claim following a hail storm. Or sometimes homeowners submit a claim and receive payment for a roof repair. But when a solicitor knocks on the door weeks or months following a storm and promises to obtain a brand new roof (and possibly also a new fence, patio, and exterior windows), at the insurer’s expense, many policyholders are tempted by the potential windfall—even if they have already submitted a claim that has been paid. Texas law doesn’t permit insurers to obtain a release when a claim is settled.
Using the “mass tort” model developed during the 1980s and 1990s in litigation involving asbestos, pharmaceuticals, and silicone breast implants, plaintiffs’ lawyers aggressively recruit clients and file thousands of storm-related lawsuits seeking grossly inflated damages, sometimes exceeding the value of the home. The highest volume lawyers personally file as many as 700 lawsuits each. To maximize the potential interest recovery, the lawsuits are often filed long after the storm event. Then—knowing that it will cost the insurers at least $150,000 to defend a single case through trial—the plaintiffs’ lawyers offer to settle the lawsuits at a “discount” far in excess of the actual damages. The punitive 18-percent interest rate and potential liability for attorneys’ fees create significant “leverage” in the plaintiffs’ favor. Risk-averse insurance companies, overwhelmed by the volume of lawsuits, typically seek the most cost-effective business solution, which is to settle the claims out of court, regardless of their merit. The trial lawyers reap an undeserved windfall, and insurers simply raise premiums to recover their losses.
This has been a bonanza for shady roofers, “public adjusters,” and the contingent-fee lawyers who pocket 33 percent to 40 percent of the recovery for filing a cookie-cutter lawsuit and performing little work. Texas attorneys have earned an estimated $800 million in fees from property-damage lawsuits in recent years. This scam works best in areas of the state, such as the Rio Grande Valley (labeled a “judicial hellhole” by the American Tort Reform Association), where residents are poor, uneducated, and inclined to rule against corporate defendants in a jury trial. In fact, a severe hail storm in McAllen in 2012 led to a deluge of lawsuits in Hidalgo County—11,000 to date. In 2014 and 2015, a total of 2,616 hail damage lawsuits were filed in Webb County (encompassing Laredo); just 124 hail lawsuits were filed there between 2006 and 2013. A hail storm in sparsely populated Amarillo in 2013 has resulted in more than 1,300 lawsuits in Potter County. Wherever it hails in Texas, thousands of lawsuits are now certain to follow.
The Texas insurance code must be revised to eliminate the economic incentives for mass storm-related litigation. Texas lieutenant governor Dan Patrick has made reform one of his top priorities for the upcoming legislative session. Texans for Lawsuit Reform, the state’s most influential legal watchdog, is sponsoring legislation to require that insurance policyholders make a specific demand prior to filing a lawsuit, and to reduce the recovery of attorneys’ fees to prevailing plaintiffs if the pre-litigation claim is greater than the damages recovered at trial. Both of these reforms are salutary and reasonable modifications of the dysfunctional status quo.
To preserve the Texas Model that has made state prosperous and vibrant, legislators need to rein in the legal havoc caused by storm chasers. Lawmakers can’t change the weather, but they can curb the unnatural disaster that follows in its wake.
Mark Pulliam is a contributing editor at the Library of Law and Liberty. He writes from Austin, Texas.