Does Texas have to pay hurricane claims that TWIA can't cover?

Plain-English summary

Representative John Smithee, chair of the House Committee on Insurance, asked the Attorney General whether the State of Texas has a legal obligation to pay windstorm and hail losses that exceed what the Texas Windstorm Insurance Association (TWIA) is able to pay. TWIA is the residual insurer of last resort for windstorm and hail coverage along the Texas coast; the Legislature created it to cover property owners who cannot get that coverage in the private market, and it is funded by the property insurers doing business in the state.

The Attorney General read the question as being about future, not-yet-accrued losses, and concluded that the Legislature chose not to put the State on the hook. Chapter 2210 of the Insurance Code lays out the exclusive ways TWIA's excess losses get paid: first from the association's available reserves and the catastrophe reserve trust fund, and then from the proceeds of public securities, which the Legislature authorized up to $2.5 billion per catastrophe year. Critically, the statute says those public securities are not a debt of the state and do not pledge the state's faith and credit; they are payable solely from TWIA revenue. Nothing in the statute provides for the State or its general revenue to make up a shortfall.

The opinion also explained that structuring the securities this way keeps the program consistent with article III, section 49 of the Texas Constitution, which bars the creation of state debt without voter approval except in limited situations. Because the answer to the first question was no, the second question (which assumed a yes) was not reached.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later Attorney General opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

What the opinion meant for those who asked

The House Committee on Insurance (as the opinion described it): The opinion answered that the State had no legal obligation to pay TWIA's unfunded future losses. It located the exclusive payment methods in chapter 2210 (reserves, the catastrophe reserve trust fund, and public securities) and pointed to the statutory text declaring that the securities are not state debt and do not pledge the state's credit. The committee's follow-up question, premised on a different answer, was left unanswered.

Coastal policyholders and the public (as the opinion described it): The opinion described a closed funding system. If TWIA's reserves, trust fund, and authorized public securities are exhausted, chapter 2210 does not direct the State or its general revenue to cover the remaining losses, because the Legislature elected not to create that obligation.

Insurers and bond purchasers (as the opinion described it): The opinion treated the public securities as payable solely from TWIA revenue, not backed by the full faith and credit of Texas, consistent with the constitutional limit on state debt and the analysis in Tex. Pub. Bldg. Auth. v. Mattox.

Common questions

If a hurricane wipes out TWIA's money, does the State of Texas pay the rest?
According to the opinion, no. The Legislature chose not to obligate the State to pay losses TWIA cannot cover through its reserves, the catastrophe reserve trust fund, and authorized public securities.

How does TWIA pay large storm losses?
The opinion described the order set by chapter 2210: available reserves and the catastrophe reserve trust fund first, then proceeds from public securities, which the Legislature authorized up to $2.5 billion per catastrophe year.

Are TWIA's bonds backed by the State?
No. The opinion quoted section 2210.615 to the effect that the public securities are not a debt of the state and do not pledge the state's faith and credit; they are payable solely from TWIA revenue.

Why does it matter whether the bonds are state debt?
The opinion explained that article III, section 49 of the Texas Constitution prohibits creating state debt without voter approval except in limited circumstances. Structuring the securities as TWIA-revenue obligations avoids that constitutional conflict.

Background and statutory framework

The opinion worked through chapter 2210 of the Insurance Code. It cited section 2210.001 (TWIA as residual insurer of last resort) and section 2210.001(2) (coverage for those shut out of the private market), and sections 2210.051(a) and 2210.052(a) (membership and participation by property insurers). Subchapter B-1 (sections 2210.071-.075) governs payment of losses: section 2210.071(a)-(b) directs excess losses to reserves and the catastrophe reserve trust fund, section 2210.452(c) funds that trust fund from TWIA's net gain from operations, and section 2210.071(c) sends remaining losses to public securities. The opinion cited sections 2210.072-.074 (the $2.5 billion authorization) and section 2210.003(3-b) (defining "catastrophe year").

The conclusion rested on sections 2210.615(a) and (b), which make the securities payable solely from TWIA revenue and declare they are not state debt. The opinion connected that structure to article III, section 49 of the Texas Constitution and to Tex. Pub. Bldg. Auth. v. Mattox, where the Texas Supreme Court applied the same analysis to bonds funding state office buildings.

Citations

Cases:

• Tex. Pub. Bldg. Auth. v. Mattox, 686 S.W.2d 924, 928 (Tex. 1985)

Statutes:

• Tex. Ins. Code Ann. § 2210.001 (West Supp. 2012); § 2210.001(2); §§ 2210.051(a) (West 2009), 2210.052(a); §§ 2210.001-.654; §§ 2210.071-.075; § 2210.071(a)-(b); § 2210.071(c); § 2210.452(c); §§ 2210.072-.074; § 2210.003(3-b); § 2210.615(a)-(b)
• Tex. Const. art. III, § 49

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-1012
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2013/ga1012.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS
GREG ABBOTT

July 1, 2013

The Honorable John Smithee Opinion No. GA-1012
Chair, Committee on Insurance
Texas House of Representatives Re: Whether the State of Texas has a legal
Post Office Box 2910 obligation to pay unfunded losses that exceed
Austin, Texas 78768-2910 the Texas Windstorm Insurance
Association's ability to pay (RQ-1112-GA)

Dear Representative Smithee:

You ask whether the State of Texas has "a legal obligation to pay unfunded losses that exceed" the Texas Windstorm Insurance Association's ("TWIA") ability to pay.[1] We construe your request to ask about future losses that have yet to accrue and answer your question accordingly.

The Legislature created TWIA "to serve as a residual insurer of last resort for windstorm and hail insurance in the seacoast territory." TEX. INS. CODE ANN. § 2210.001 (West Supp. 2012). In furtherance of that purpose, the Legislature required TWIA to "provide windstorm and hail insurance coverage to those who are unable to obtain that coverage in the private market." Id. § 2210.001(2). TWIA "is composed of all property insurers authorized to engage in the business of property insurance" in Texas, and "[e]ach member of the association shall participate in insured losses and operating expenses of the association" in a manner determined by the Department of Insurance. Id. §§ 2210.051(a) (West 2009), 2210.052(a) (West Supp. 2012).

Chapter 2210 of the Insurance Code provides a legislatively mandated framework for the operation of TWIA. Id. §§ 2210.001-.654 (West 2009 & Supp. 2012). Relevant to your questions, subchapter B-1 of chapter 2210 governs TWIA's payment of losses. Id. §§ 2210.071-.075 (West Supp. 2012). Pursuant to section 2210.071, if the insured losses and operating expenses of TWIA are "in excess of premium and other revenue of the association, the excess losses and operating expenses shall be paid" from "available reserves of the association and available amounts in the catastrophe reserve trust fund." Id. § 2210.071(a)-(b). The catastrophe reserve trust fund is financed through TWIA payments from any "net gain from operations" of TWIA at the end of each year. Id. § 2210.452(c).

The Legislature has provided that any losses not paid from TWIA's available reserves or the catastrophe reserve trust fund "shall be paid from the proceeds from public securities issued in accordance with" chapter 2210. Id. § 2210.071(c). To that end, the Legislature has authorized the issuance of up to $2.5 billion in public securities per catastrophe year. Id. §§ 2210.072-.074; see id. § 2210.003(3-b) (defining "catastrophe year"). The Legislature has decided, however, that a public security issued under chapter 2210 "is not a debt of this state or any state agency or political subdivision of this state, and does not constitute a pledge of the faith and credit of this state." Id. § 2210.615(b) (emphasis added). Instead, the Legislature has chosen to structure TWIA such that public securities issued under chapter 2210 are "payable solely from revenue as provided by" the TWIA public securities program. Id. § 2210.615(a).

With the enactment of chapter 2210 of the Insurance Code, the Legislature established the exclusive methods through which excess losses shall be paid by TWIA. The Legislature chose to foreclose all other possible methods of payment by clearly providing that "excess losses and operating expenses shall be paid as provided by this subchapter." Id. § 2210.071(a). Nothing in the subchapter provides for funding by the State or through the State's general revenue. Thus, the Legislature has elected not to create a legal obligation on behalf of the State to pay unfunded losses that cannot be paid through the methods described in chapter 2210.

In addition to the Insurance Code provisions related to TWIA, article III, section 49 of the Texas Constitution prohibits the creation of state debt without voter approval except in limited circumstances. TEX. CONST. art. III, § 49. The Legislature's authorization of the issuance of public securities to fund insured losses and operating expenses of TWIA avoids conflict with this constitutional provision by expressly providing in subsections 2210.615(a) and (b) that the public securities do not create a debt of the state and that they are to be paid solely from revenue generated by TWIA. See Tex. Pub. Bldg. Auth. v. Mattox, 686 S.W.2d 924, 928 (Tex. 1985) (applying the same analysis to the issuance of bonds to fund state office buildings).

Your second question assumes an affirmative answer to your first. Request Letter at 1. Because the Legislature elected not to obligate the state to pay for TWIA's unfunded losses, we need not answer your second question.

SUMMARY

The Legislature has chosen not to obligate the State to pay unfunded losses that the Texas Windstorm Insurance Association is unable to pay.

Very truly yours,

GREG ABBOTT
Attorney General of Texas

DANIEL T. HODGE
First Assistant Attorney General

JAMES D. BLACKLOCK
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

Virginia K. Hoelscher
Assistant Attorney General, Opinion Committee

[1] Letter from Honorable John Smithee, Chair, House Comm. on Ins., to Honorable Greg Abbott, Tex. Att'y Gen. at 1 (Feb. 14, 2013), http://www.texasattorneygeneral.gov/opin ("Request Letter").