The TWIA Problem: Why You Should Care – Executive Summary
EXECUTIVE SUMMARY
Trial Lawyers and Hurricane Ike
The Texas Windstorm Insurance Association (TWIA) was created by the State of Texas as an insurer of last resort for wind and hail damage for property owners on the Texas Gulf Coast. TWIA does not insure against water damage, including floods, tidal action or storm surges.
In the wake of Hurricane Ike’s landfall on the Texas coast in September 2008, a small group of plaintiff’s contingency fee lawyers advertised for and recruited thousands of clients that had suffered wind damage in the hurricane. They consolidated most of the lawsuits in Galveston before a hand-picked judge.
Prior to Hurricane Ike, TWIA would receive no more than a few thousand claims after a hurricane. For example, Hurricane Dolly in July 2008 produced about 8,300 claims. So far, Hurricane Ike has produced over 92,000 claims.
Plaintiffs with slab claims (where only the structure’s foundation remained after the storm) argued that most of their loss was due to wind rather than the storm surge. They alleged wind damage exceeding 60% for structures entirely destroyed and washed away in the storm, even though expert studies put the range of wind damage between 7% and 18%. Yet TWIA settled all of the slab claims—regardless of the structure’s location, age or structural soundness – for the extraordinary figure of 37% of the value of the structure.
TWIA’s former general manager acknowledged that the settlements were not justifiable on the facts, the science, the insurance policies, or the law. Rather, he said, the excessive settlements were necessary due to the cost and risk of defending and litigating all of the claims in the plaintiffs’ lawyers’ chosen venue. Litigation risk drove the large slab settlements, not the merits of the claims.
The Questionable and Extraordinary Attorneys’ Fees
The plaintiffs’ lawyers demanded—and TWIA paid—an amount calculated by dividing the policyholder’s settlement amount by .6 and then subtracting the policyholder’s settlement amount from the total. The result of this formula is that on a $150,000 claim, the attorney’s fee would be $100,000, or 66.66%.
TWIA paid over $114.6 million to settle the individual slab claims. $70.1 million went to 1,306 policyholders and $44.5 million went to about sixty plain- tiffs’ lawyers.
These payouts to lawyers are far greater than the attorneys would have recovered if they had gone through a full trial and earned a conventional contingency fee on the plaintiff’s recovery. On a $150,000 recovery, a contingency fee of 40% fee would be $60,000, not $100,000, as calculated in the Ike settlements.
Also noteworthy is the minimal work done by the plaintiffs’ lawyers in the cases. Only two depositions were taken, no plaintiffs were deposed, no plaintiff experts were deposed, very little written discovery was undertaken, and there is evidence that TWIA did not even serve discovery requests on the plaintiffs in 75% of the lawsuits. TWIA’s defense attorneys, charging for their time on all of the cases, billed $5.2 million.
In addition to the individual lawsuits, TWIA settled a class action that included all of the policyholders with slab claims who had not yet filed lawsuits. TWIA paid $68.7 million in the class action settlement, including $57.2 million designated as “policyholder compensation” to the 1,255 policyholders and $11.5 million in attorneys’ fees. The attorneys’ fees for the class action were lower than for the settlement of the individual cases because Texas statutory law places reasonable limits on attorneys’ fees in class actions (this was one of TLR’s reforms enacted in 2003).
There are many urgent and necessary legislative fixes to TWIA, including preventing litigation that produces huge transactional costs which impact TWIA policyholders and other property insurance buyers, and which also threaten to impose a massive drain on State revenues to deal with future hurricanes. Since TWIA is a creation of the State of Texas, it is appropriate that claims on its insurance policies be handled in ways that are consistent with other government agencies and programs, with safeguards against the added burden of high transactional costs imposed by entrepreneurial plaintiff lawyers using intimidating litigation tactics to extort oversized settlements and outrageous legal fees.
Texas Taxpayers and TWIA Going Forward
If TWIA is allowed to continue to operate the way it has been operating, and if a small group of trial lawyers is allowed to continue to unduly inflate claim amounts and extract tens or hundreds of millions of dollars from the process for their personal benefit, future hurricanes that hit the Texas coast will likely cost Texas taxpayers billions of dollars.
The Ike settlements were hugely inflated by the litigation costs imposed by the lawyers who advertised for Ike-related claims. Therefore, the viability of TWIA is greatly compromised. This has profound consequences for all Texans who pay premiums on property casualty insurance policies and, ultimately, for all Texas taxpayers.
For all claims arising prior to 2009, TWIA’s funding comes from premiums from policyholders, assessments on property insurers who write policies in Texas and reinsurance. If TWIA pays out more than it collects in premiums, assessments, and reinsurance, the funds come from tax credits that reduce the general revenue of the State.
TWIA has exceeded its pre-2009 funding threshold and more claims are still coming in. TWIA is expected to pay over $2.3 billion for Hurricane Ike claims.
TWIA has over $75 billion in insured risk and less than $80 million in available funds to cover these risks. If TWIA were a private insurer, the amount TWIA would need to have in reserves would be approximately $25 billion. Should a large storm hit the Texas coast requiring TWIA to pay several billion dollars in claims, TWIA would not have the funds to do so.
The funding mechanism for TWIA was changed in 2009 to a system involving the sale of public securities in the form of bonds. If a large hurricane hits the Texas coast, TWIA’s ability to sell bonds to meet its claim obligations will depend on the market’s willingness to purchase bonds based on TWIA’s capacity to repay the bonds. In light of TWIA’s depletion of reserves caused by the scope of Hurricane Ike and the unprecedented additional costs imposed by entrepreneurial plaintiff lawyers, it appears that the bond market would expect the State of Texas itself (i.e., Texas taxpayers) to back any TWIA bonds that would be offered after a major hurricane.
The 82nd Legislature is considering many bills concerning TWIA. Every Texan should take notice.
