The TWIA Problem

If TWIA is allowed to continue operating the way it operates today and if a small group of 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— particularly a category 4 or 5 storm—could cost Texas citizens billions.

THE TWIA PROBLEM: WHY YOU SHOULD CARE

Read the Executive Summary Texas Windstorm Insurance Association (TWIA) was created by the State of Texas as the insurer of last resort for wind and hail damage for property owners on the Texas Gulf Coast. Prior to 2009, TWIA was funded by a combination of premiums from policyholders, assessments on property insurers who write policies in Texas, reinsurance, and ultimately state tax credits. The funding from premiums, assessments to insurers, and reinsurance were limited to predetermined levels. Any amounts that TWIA paid out above these levels were funded with tax credits that reduce the

general revenue of the State. Thus, the funding for TWIA for claims arising prior to 2009, if TWIA pays out more than it collects in premiums, assessments, and reinsurance, comes from the citizens of Texas. After 2009, the funding mechanism for TWIA for amounts beyond the amounts TWIA collects in premiums was changed to a system involving the sale of public securities in the form of bonds. If a large storm or hurricane hits the Texas coast, the theory is TWIA will sell bonds to meet its claim obligations. Any bonds to be sold by TWIA to fund its claim obligations are supported by assessments to member insurers and surcharges to policyholders. If sufficient post-event bonds cannot be sold, then the claims of TWIA policyholders will either go unpaid or will have to be paid in some form by the State—that is, by Texas taxpayers. TWIA is not properly funded and is not in a financial position to meet its obligations. In January, the general manager of TWIA told the Texas House of Representatives Insurance Committee that TWIA had 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—that is, on hand and available—to insure $75 billion in risk would be an amount on the order of $25 billion. TWIA is not remotely close to having such an amount available to meet its obligations. If a large storm were to hit the Texas coast requiring TWIA to pay several billion dollars in claims, TWIA would not have the funds to do so. Nor is there any evidence that TWIA would be in a position to sell bonds in an amount to cover its obligations without the State of Texas and all Texas citizens guaranteeing repayment of the bonds. TWIA is, in fact, paying out more than it collects in premiums, assessments, reinsurance, and every other source of funding it has available. One of the reasons is that TWIA is paying enormous sums to a small group of plaintiffs’ lawyers who are using the Texas judicial system to increase the value of claims against TWIA by increasing TWIA’s risk through litigation. The result is that this small group of lawyers is becoming extraordinarily wealthy at the expense of Texas insurance buyers and Texas taxpayers. If TWIA is allowed to continue operating the way it operates today and if a small group of 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—particularly a Category 4 or 5 storm— could cost Texas citizens billions.

Ike, Lawsuits, and TWIA’s Problems Revealed

In the wake of Hurricane Ike’s landfall on the Texas coast in September 2008, thousands of lawsuits were filed against TWIA by owners of property damaged by the hurricane. What happened is that a small group of plaintiffs’ contingency fee law-

In 2005, Hurricane Rita resulted in approximately 14,000 claims. Hurricane Dolly, in July 2008, produced just over 8,300 claims. In contrast, Hurricane Ike has produced over 92,000 claims to date, and the number continues to grow. Over 4,500 of these claims have resulted in lawsuits against TWIA seeking damages well beyond the amount of the insurance policy plus attorneys’ fees for the lawyers.

yers had discovered the potential for using the Texas legal system to generate lawsuits, inflate claims, and extract enormous attorneys’ fees from TWIA. These lawyers advertised for and recruited clients from the group of individuals and businesses that had suffered wind damage in the hurricane. This new strategy is reflected in the number of lawsuits received by TWIA. In an average year before the Ike strategy was developed, TWIA would receive no more than a few thousand claims. In 2005, Hurricane Rita resulted in approximately 14,000 claims, the largest number since Hurricane Alicia in 1983. Hurricane Dolly, in July 2008, produced just over 8,300 claims. In contrast, Hurricane Ike has produced over 92,000 claims to date, and the number continues to grow. Over 4,500 of these claims have resulted in lawsuits against TWIA seeking damages well beyond the amount of the insurance policy plus attorneys’ fees for the lawyers. Although TWIA had made payments on the claims involved in the lawsuits and was continuing to evaluate additional information with respect to those claims, the lawsuits alleged that TWIA had to pay more. The lawsuits with the largest claims were “slab claims,” i.e., claims in which nothing of the insured structure remained after the hurricane except some or all of the concrete slab and pilings. Of the 4,500 lawsuits, over 2,500 were for slab claims. Since the slab claims were the most valuable lawsuits, they became the focus of the plaintiffs’ lawyers’ attention. It is important to understand that TWIA does not insure against flood damage. It only insures for loss from wind damage. When a hurricane hits the Texas coast, TWIA does not insure against and does not have an obligation to pay for damage that is done by the storm surge or flooding. The plaintiffs with slab claims took the position that most of their loss was due to the wind rather than the storm surge. They sought a higher percentage of the loss of the structure than TWIA had estimated and paid, and they also sought recovery of attorneys’ fees for filing and pursuing the lawsuits. Through the coordinated efforts of the plaintiffs’ lawyers,

The Texas Supreme Court has ruled that calculating an attorney’s fee in the manner used by the plaintiffs’ lawyers in the TWIA settlements results in a 66.66% fee.

TWIA found itself defending approximately 2,5001 slab claim lawsuits from policyholders who had been paid by TWIA, but then hired an attorney, or who had been paid and were named as potential class members of a class action lawsuit. Most of these lawsuits were consolidated in a single state district court in Galveston selected by the plaintiffs’ lawyers who had filed the lawsuits. The Galveston court ordered TWIA to mediate all of the lawsuits as a group in a single mediation. This mediation was coordinated by a small group of plaintiffs’ lawyers who represented the largest number of individual claimants with lawsuits and served as counsel for the class in the class action lawsuit. In mid-2010, TWIA and the plaintiffs’ lawyers mediated the entire group of slab claims and settled all of the individual lawsuits as well as the class action in a single global settlement. TWIA settled all of these claims based on a formula that was applied to every slab claim regardless of where the structure had been located—i.e., near the water and plainly subject to storm surge and flooding, or away from the shoreline—and regardless of where the structure was located in the storm’s path. The terms of and facts behind this global settlement became a secret that the plaintiffs’ lawyers went to extraordinary lengths to guard. Despite the fact that TWIA is a governmental body subject to the Texas Public Information Act and the fact that the plaintiffs’ lawyers had themselves used the Public Information Act to obtain information from TWIA, the primary plaintiffs’ lawyers involved in the settlement obtained a restraining order from the Galveston judge preventing the disclosure of public information about the settlement. This order prevented the public from gaining access to information about the settlement until the Texas Attorney General’s office reviewed the situation and ruled that the information was public information that had to be disclosed. The information that has been disclosed reveals shocking facts regarding the amount of additional funds paid out by TWIA simply because lawsuits were filed, the extraordinary amount of attorneys’ fees paid to the plaintiffs’ lawyers, and the process TWIA employed in agreeing to the settlement amounts.

The Settlements

Roughly half of the more than 2,500 slab claims settled were lawsuits filed by individual claimants represented by a lawyer. The other half were included in the settlement of a class action lawsuit in which a small group of the same lawyers represented the class.
At the time the lawsuits were filed, TWIA had already made payments with respect to all of these claims. These initial payments made were 10% of the value of the dwelling and 5% of the value of the contents. The significance of these percentages is tied to the amount that can reasonably be attributed to the damage done to a completely destroyed dwelling by wind alone in a storm like Hurricane Ike. As noted, TWIA does not insure against flood damage. Thus, TWIA is not responsible for any damage caused by flooding or a storm surge. As a consequence, TWIA had to evaluate each slab claim to make a determination regarding what percentage of the damage to a structure that was completely destroyed was due to wind and what percentage was due to flooding. In addition to the evaluations of its adjusters and engineers, TWIA commissioned two experts to prepare studies with respect to the upper and lower limits for wind damage to a completely destroyed structure in the wake of Hurricane Ike. These studies accounted for location of the structure, construction and design, wind speed in different portions of the storm, as well as a variety of other factors. The results predicted a range of 7% on the low end, to 18% on the high end for structures of the lowest quality construction subjected to the most severe gusts. TWIA’s initial advance of 10% across the board with additional supplemental review for specific cases was, therefore, reasonable given the range of potential damage.
The plaintiffs in the lawsuits alleged wind damage exceeding 60% for structures entirely destroyed and washed away in the storm. However, no plain- tiffs’ experts were deposed on these allegations.
Despite the fact that the only experts deposed in any of the cases were the two experts for TWIA who, according to TWIA, put the range of wind damage between 7% and 18% depending on a variety of factors including location of the structure, TWIA settled all of the slab claims—regardless of the structure’s location, proximity to flooding, proximity to the highest sustained winds, construction quality, or any other factor that would affect the amount of

The former general manager of TWIA has acknowledged that the payouts on the settlement of these claims were unprecedented and not justifiable based on the facts, the science, the insurance policies, or the law. However, TWIA’s former general manager took the position that the excessive settle- ments were necessary due to the cost and risk of defending and litigating all of the claims in the plaintiffs’ lawyers’ chosen venue.

wind damage—for the extraordinary figure of 37% of the value of the struc- ture. In addition, the number used to calculate the value of the structure—the number to which the 37% formula would be applied—was the highest value in TWIA’s claim file regardless of the source.2 TWIA also agreed to pay 25% of the value of all of the contents of the destroyed structures, as well as 35% of the Additional Living Expense policy limits. This resulted in unprecedented payouts by TWIA for every slab claim involved in these settlements.

The former general manager of TWIA has acknowledged that the payouts on the settlement of these claims were unprecedented and not justifiable based on the facts, the science, the insurance policies, or the law. However, TWIA’s former general manager took the position that 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. This is despite the fact that TWIA never took any action to seek to consolidate the lawsuits in a state-wide multi-district litigation proceeding outside of the plaintiffs’ chosen venue—a procedural measure available to TWIA and designed for situations such as this. In any event, whether appropriate steps were taken to defend TWIA or not, litigation risk drove these settlements, not the merits of the claims.
As extraordinary as the settlement figure was for the percentage of damage attributable to wind, it is dwarfed by the amount of attorneys’ fees paid to the plaintiffs’ lawyers as part of the settlements. During the mediation, TWIA and the lead plaintiffs’ lawyers first arrived at the figures to be paid to the actual policyholders. They then turned their attention to the amount of 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. For example, if the policyholder was to receive $15,000, the formula for attorneys’ fees was: $15,000 ÷ .6 = $25,000; $25,000 – $15,000 = $10,000. Thus, the attorneys’ fee paid by TWIA on a $15,000 claim was $10,000. The attorneys’ fee paid on a $150,000 claim was $100,000, etc. This formula was applied across the board to the individual lawsuits regardless of the amount of work done by the lawyers, the time spent, or any other criteria that governs the amount of fees under the Texas Rules of Disciplinary Conduct for lawyers.
The Texas Supreme Court has ruled that calculating an attorney’s fee in the manner used by the plaintiffs’ lawyers in the TWIA settlement results in a 66.66% fee.3 The public documents do not reveal exactly what the fee arrangement was between the plaintiffs’ lawyers and their clients, but the typical fee range for such cases is 33% to 40%. A 66.66% contingency fee is universally regarded as an unconscionable fee, and would normally be a violation of the Texas Rules of Disciplinary Conduct. If the plaintiffs’ lawyers actually charged and collected the amounts they demanded and repre- sented to TWIA that they were collecting for attorneys’ fees, the amount is subject to serious question. If the plaintiffs’ lawyers did not actually charge their clients the fees they demanded and represented to TWIA that they were collecting, the unjustified fee claim would appear to have been used to effectively increase the already grossly inflated formula for the policyholders’ claims on their property loss. Under the circumstances, further investigation of what fees were actually charged to the policyholders and what amounts the plaintiffs’ lawyers actually took in fees is warranted.
Attorneys’ fees in the range provided by the individual lawsuit settlements (as opposed to the class action settlement) are even more startling when the full settlement amounts are considered. TWIA paid over $114.6 million to settle the individual slab claims in which individual policyholders had filed suit. The settlement amount includes $70.1 million designated as “policyholder compensation” to the 1,306 participating individual policyholders,4 at an average of approximately $53,700 per policyholder. The remaining $44.5 million went to 63 plaintiffs’ lawyers/firms. Over one-half of this amount went to just 4 of these firms—$6.1 million to Bettison, Doyle, Apffel & Guarino, $6.2 million to the Merlin Law Group, $5.2 million to the Mostyn Law Firm, and $5.8 million to Weller, Green, Toups & Terrell.
These payouts are also noteworthy in light of the minimal work done by the plaintiffs’ lawyers in the cases:
- A total of two depositions were taken—not in each case—two depositions in total for all of the slab cases both individual and class action combined.
- Some written discovery was served, but not in every case, and the majority of it went unanswered.
- No plaintiffs were deposed.
- No plaintiffs’ experts were deposed.
- In most of these cases, form pleadings were filed by the plaintiffs and adjuster’s reports were prepared. That is all that happened on the litigation front in most of the lawsuits.
- In fact, a document produced by TWIA indicates that at the time of settlement, TWIA had not even served discovery requests on the plaintiffs in 75% of the lawsuits.

In addition to the individual lawsuits, TWIA settled a class action that included all of the policyholders with slab claims that had not yet filed lawsuits. TWIA paid $68.7 million in the class action settlement. The settlement amount includes $57.2 million designated as “policyholder compensation” to the 1,255 policyholders in the class, at an average of approximately $45,600 per policyholder. TWIA also paid $11.5 million in attorneys’ fees to class counsel. The class lawyers were 7 of the lawyers/firms who also had a large percentage of the individual lawsuits. There is no indication in any records produced by TWIA that any significant legal work was done in connection with the class action—that is to say, the only work that appears to have been done by the plaintiffs’ lawyers is the filing of initial pleadings.
A point worth noting is that the settlement of the individual lawsuits constituted roughly 50% of the total slab claims settled and slightly more than 50% of the total amount paid in settlement of policyholders’ slab claims. However, the attorneys’ fees paid in the individual lawsuit settlements were 4 times the amount paid in the class action settlement. The reason for this disparity is that Texas law expressly prohibits such large legal fees in class actions and provides a statutory mechanism to keep class action fees within a reasonable range. There is not a similar statutory mechanism for individ- ual lawsuit claims. It is a legitimate question to ask: “When the legal work is the same, by the same lawyers, for both individual and class claimants, what justifies paying these same lawyers 4 times more for fees in individual cases than they were paid in the class action?”
The total defense cost incurred by TWIA in connection with all of the Ike slab claims was $5.2 million. TWIA hired its lawyers on an hourly basis and paid them for work actually done on all of the cases. The $5.2 million also includes amounts spent by TWIA to study and ascertain appropriate percent- ages for wind damage—which, ultimately, were not used—for the insured properties involved as well as obtain adjusters’ and engineers’ reports on the insured properties. On the other hand, the total amount paid to the plaintiffs’ lawyers designated as attorneys’ fees was $56 million for slab claims, both individual lawsuit claims and class action claims. There is no justifiable reason for such a disparity based on the work done by the lawyers. The simple reality is that the plaintiffs’ lawyers demanded exorbitant fees and TWIA agreed to pay them.

Example of a Typical Slab Claim Lawsuit

TWIA has produced a copy of one of the individual slab claim files as an example of what a typical file might look like and contain. This individual slab claim involved a policyholder with dwelling coverage in the amount of $80,000. The policy excluded damage caused by storm surge and other floodwater (as do all TWIA policies), and the policyholder did not have flood insurance. TWIA used an independent adjuster, who valued the claim by two different methods—a statistical analysis and an engineering analysis. Both analyses were based on the construction details of the policyholder’s house, with the statistical analysis relying primarily on damage observed on the structures that were not completely destroyed and the engineering analysis relying primarily on the existing meteorological data on the hurricane. The analyses were in agreement that any damage to the house caused by the wind was minimal compared to that caused by the storm surge, which had reached 19.1 feet. The amounts determined via the two methods were, respectively, $13,580.30 and $12,883.25, and the higher amount was paid to the policyholder, less the $800 deductible. The policyholder, after receiving the amounts stated above, sued TWIA. After suit was filed, TWIA obtained an updated engineering analysis from its original source, which again concluded that the primary cause of the loss was the flood surge. TWIA then obtained a report from a second engineering company, which reached results consistent with the earlier findings. Finally, TWIA obtained the elevation certificate for the property, which showed a first-floor elevation of 15.2 feet above sea level rather than 17.6 feet as originally estimated, indicating that, if anything, TWIA may have overpaid. There is nothing in the file showing that the policyholder or her attorney had independently obtained any expert analyses or other research that would contradict the findings by TWIA’s experts. Although a notation in TWIA’s file made prior to the filing of the lawsuit stated that it was believed the policyholder’s attorney had obtained an engineering analysis, the plaintiff’s initial responses to discovery in April 2010 identified no expert and produced no competing expert analysis. Despite the apparent strength of TWIA’s case, this lawsuit was included in the global settlement for Hurricane Ike slab claims. Under the settlement, the policyholder received an additional $29,780.43 pursuant to the dwelling coverage, as well as an additional 66.66% of that amount for attorneys’ fees, resulting in a total amount paid of $62,414.35. This is only $17,585.65 below the total policy limit of $80,000 even though water rather than wind was responsible for the majority, if not all, of the damage. In short, with no evidence in the file indicating an amount due for wind damage to the dwelling greater than 16% of the $80,000 policy limit (or 11.1% of the property value), TWIA settled the claim so as to pay a total of 78% of the $80,000 policy limit.

Summing Up

TWIA has paid $320 million for Hurricane Dolly claims and will pay over $2.3 billion for Hurricane Ike claims. Hundreds of millions of dollars of this cost will be borne by Texas taxpayers as well as all Texas property insurance policyholders through higher premiums. All of these funds have been spent at the discretion of a single person—the general manager of TWIA—without any effective oversight or guidance.5 The decision to pay an inflated percentage for wind damage, as well as exorbitant attorneys’ fees demanded in the Ike slab claim settlement without any compromise or bargaining, was the decision of a single person who does not answer to the voters, the Legislature, the Department of Insurance, his own board, or market forces. TWIA today continues to pay extraordinary amounts in settlement of claims in which lawsuits have been filed. TWIA recently adjusted a non-slab claim at approximately $1,200 in wind damage. The claimants hired one of the small group of plaintiffs’ lawyers advertising for TWIA business. A lawsuit was filed. TWIA hired an independent adjuster to re-adjust the claim. The new adjustment came in at approximately $3,200 in wind damage with photos plainly detailing clear and substantial water damage to the home with water marks on the walls and water-carried debris covering household items. Without conducting any discovery or litigatingwith the plaintiff at all, TWIA received a demand for $75,000 from the plaintiffs’ lawyer and paid it. How is it fair and reasonable to turn a claim objectively valued, at the most, at $3,200 into a payment by TWIA of $75,000? Although the Legislature has a Committee dedicated to the task of overseeing TWIA, legislative oversight is difficult. Plaintiff lawyers, including some who have a direct interest in hurricane damage lawsuits brought against TWIA, have sometimes taken an active role in TWIA-related legislation in the House and one of the single largest and most active political donors in the State, Steve Mostyn, is the lead plaintiffs’ lawyer against TWIA. The settlement of the Hurricane Ike claims demonstrates that the expenditure of sums of this magnitude, which implicates the general revenue of the State of Texas as well as the financial well-being of Texas taxpayers and insurance purchasers, requires more oversight than is currently in place for TWIA as well as new mechanisms for funding and managing TWIA. At a minimum, Texas citizens need answers to certain questions in order to understand how to craft structural changes in the process to prevent exorbitant lawyer fees and litigation costs from happening again:

Have the plaintiffs’ lawyers involved charged unconscionable fees? Did these lawyers charge their clients the fees that the TWIA settlement documents show that they were paid?
Did TWIA over-pay for coverage claims in the slab lawsuits and class action? Was it justifiable to pay for wind damage of 37% of the value of a structure that was washed away by the storm surge? If not, why were these payments made voluntarily? If so, what justifies this percentage?
Did TWIA over-pay for attorneys’ fees claims? Why did TWIA pay an amount for attorneys’ fees that was more than the attorneys could have recovered if they went through a full trial and received a typical percentage fee based on the judgment?
How is TWIA going to be funded in a way that is cost-effective for Texas citizens, yet sufficient to cover the risk of the next major storm?

_{As of January 2011, TWIA had settled approximately 1,306 individual slab lawsuits as well as some 1,255 slab claims that were included in a class action.}
_{According to TWIA’s former general manager, if TWIA had an adjuster’s report, appraisal, or other documented valuation in its files—even if from the claimant or the claimant’s attorney—TWIA agreed to use the highest value contained in its files regardless of the source of the information and regardless of its credibility.}
_{Great Am. Ins. Co. v. N. Austin Mun. Util. Dist. No. 1, 908 S.W.2d 415, 428 (Tex. 1995).}
_{Of the approximately 2,560 known slab claimants, 1,306 filed individual lawsuits and settled individually. The remainder were included as part of the class action settlement.}
_{TWIA’s general manager testified to the Texas House of Representatives Insurance Committee that he did not consult TWIA’s Board regarding the settlements despite the enormous amounts to be paid out because he did not want to expose the Board members to being sued.}