Insurance News

After Troubles, a Storm Insurer Is Remade, but Vocal Critics Remain

Posted on: August 25, 2011

The Texas Windstorm Insurance Association, a quasi-public insurer of last resort for Texas coastal residents, has been at the center of a political disaster zone since Hurricane Ike hit in 2008.

Accusations of institutional fraud and mishandled claims led to a turnover of the association’s upper ranks, $380 million in legal settlements and a political battle pitting tort reformers and Gov. Rick Perry against lawyers for damage seekers and their Democratic allies in the Legislature’s special session in June. Lawmakers made major changes to the association to cut costs of lawsuits after storms and to crack down on corruption.

As the association prepares to roll out the changes in late September, the middle of hurricane season, The Texas Tribune examined data from Hurricanes Rita (2005), Dolly (2008) and Ike (2008) to assess the political claims made in the Legislature. The analysis reveals that both sides – the claimants’ lawyers and the tort reformers – were right: The insurance association mishandled claims after Hurricane Ike and paid millions of dollars to defend its fraudulent behavior, and claimants’ lawyers did profit from huge settlements and legal fees. [The Texas Trial Lawyers Association is a corporate sponsor of The Texas Tribune.]

Hurricane Ike wreaked havoc all the way to Pennsylvania, causing damage second in total cost only to Hurricane Katrina. Texas coastal policyholders received a record $1.7 billion from the windstorm association on the more than 92,800 claims filed.

But the storm’s size does not account for the jump in the association’s spending on legal defense. The group spent an additional $48 million on 18 law firms to defend itself against angry policyholders after the hurricane, more than $500 per claim. By comparison, it spent $155 and $200 for legal defense per claim related to Hurricanes Rita and Dolly, respectively. The price tag rose with the litigation rate: 6 percent of Hurricane Ike claimants filed suits, compared with less than 1 percent of Hurricane Rita claimants and 2 percent of Hurricane Dolly claimants.

State Senator John J. Carona, Republican of Dallas and the mediator between the tort reformers and plaintiff lawyers during the drafting of the legislation, said on the Senate floor that a normal litigation rate for insurers was 1.5 percent.

“Change had to happen,” Mr. Carona told lawmakers, because the number of suits against the association had rapidly depleted its coffer.

The new law makes a claimant’s route to the courthouse trickier and requires a higher evidentiary standard to receive double or consequential damages from a lawsuit. The plaintiffs’ lawyers claim it will be practically impossible to bring a court case against the windstorm association, but Mr. Carona and tort reformers say claimants will be able to do so if association employees intentionally commit fraud or fail to meet deadlines.

Mr. Carona told lawmakers that if claimants wanted to dispute the amount of money they received from the association for damages, the new appraisal process was “a whole lot cheaper than a lawsuit.” And if claimants want to dispute the cause of the damage, he said, they are “free to go through the entire other route, which allows for mediation and ultimately a full-blown jury trial.”

But Democrats and plaintiff lawyers argue that the new law, which exempts the windstorm association from state insurance laws to lower the amount of damages that policyholders can receive from filing suit, weakens the accountability of an insurance agency that has been proved to have acted in bad faith.

Association employees’ internal e-mail that was discussed on the Senate floor revealed many examples of fraud after Hurricane Ike. The Texas Department of Insurance was given administrative oversight of the association and forced out its management.

John Giovannini, whose Galveston home was destroyed by Hurricane Ike, initially thought he would not receive enough money from the association to rebuild. An inspector’s first damage estimate was lower than Mr. Giovannini’s $4,000 deductible, and because the family had received $1,500 for daily living expenses after evacuating for the storm, he said, the association told him “they didn’t owe us any more money and, in fact, we owed them.”

Ten months later, Mr. Giovannini saw a television commercial and contacted the Mostyn Law Firm. His case was settled out of court for an undisclosed sum, but, Mr. Giovannini said, if the windstorm association “had offered me at the start what I ended up settling for, I never would have sued them.”

Steve Mostyn, owner and lead lawyer of the Mostyn firm – which handled a third of Ike claimants’ lawsuits against the association – is also the major Democratic donor who made headlines during the 2010 race for governor after his political action committee took out newspaper ads calling Mr. Perry a “coward.”

The Mostyn firm won $179 million in settlements from the association for Hurricane Ike claimants and $9 million for clients from Hurricanes Rita and Dolly. Mr. Mostyn estimates that his firm made about $30 million in fees on cases against the insurer. He became the primary target of Mr. Perry in the legislative battle earlier this year. [Mr. Mostyn and his wife, Amber Anderson Mostyn, are major donors to The Texas Tribune.]

“I think there was a political score to settle,” Mr. Mostyn said. “And unfortunately I was the face that they wanted to settle it with.”

The Tribune’s analysis found that, on average, Hurricane Ike claimants who filed a lawsuit received six times as much as claimants who did not, or $89,500 compared with $14,000. Those who did not sue received, on average, 6 percent of their policy limit, while those who sued received 38 percent.

Mr. Mostyn still has 800 pending cases against the association, but he said that once the changes took effect, he would probably not be taking any more.

Another of Mr. Mostyn’s former clients, Monte Osburn of Port Arthur, said the new law took away “the tools we had to fight back.” More coastal residents did not sue the windstorm association after Hurricane Ike, Mr. Osburn said, because they lacked resources and “the stomach for the fight and just accepted this pittance as a settlement.”

The association may be under new management, he said, but it continues to be a “running joke” down by the coast because “everyone was treated this way.”

The association’s interim director, John Polak, said, “We continue to be defined by an event and by actions of individuals from three years ago.”

Mr. Polak, who worked for National Interstate Insurance in Ohio when Hurricane Ike hit, points to the high percentage of policyholders who did not sue the association as evidence that most were happy with their insurance settlements.

“We are trying to do a better job of managing expectations,” he said, “because there’s a difference between improperly handling a claim and an undesirable outcome from the standpoint of the insured.”

Mr. Polak said his agency had “learned from things that didn’t go so well” and was instituting a new process for selecting and managing adjuster firms, reinforcing ethics, setting up more controls to prevent fraud and starting a call center to “maintain that connection” with policyholders in the event of a natural disaster.

“It’s our sincere hope that over time we become defined by what we do from now into the future,” he said, “as opposed to people continuing to define us by things that happened in the past.”

© 2011 The New York Times Company

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