Homeowners, Guaranty, Workers' Comp, and Surplus Lines

Texas homeowners insurance

Texas homeowners forms

Texas homeowners insurance must be written on policy forms TDI has approved. Before 2003, insurers had to use the Texas promulgated forms (HO-A, HO-B, HO-C) or the national ISO forms; since 2003 an insurer may file and use its own forms, though some still use the promulgated ones. TDI groups the forms in four types, and the HO-A/B/C terminology still appears on exam questions:

• HO-A — basic. Named-perils coverage on both the dwelling and contents, for a basic list of perils. (Comparable to ISO HO 1.)
• HO-A Plus — broad. Named-perils coverage on both, with added perils such as falling objects, weight of ice, sleet, or snow, and freezing pipes. (Comparable to ISO HO 2.)
• HO-B — broader. Open-perils coverage on the dwelling, named-perils on contents. (Comparable to a national HO-3.)
• HO-C — comprehensive. Open-perils coverage on both the dwelling and contents. (Comparable to a national HO-5.)

Every form excludes some causes of loss; flood, earthquake, wear and tear, and mold are typical exclusions. National ISO forms — HO-3, HO-4 (renters), HO-5, HO-6 (condo), HO-8 (modified coverage, for older homes whose replacement cost far exceeds their market value) — are also used by Texas insurers and tested on the General Lines exam.

Cancellation, nonrenewal, and declination (TIC Chapter 551)

• Cancellation within first 60 days: the insurer may cancel only if it identifies a condition that increases the risk of hazard, was not disclosed in the application, and was not the subject of a prior claim, or if it did not accept a required inspection report before the policy took effect (TIC 551.104(g)).
• Cancellation after 60 days: limited grounds — nonpayment, a fraudulent claim, an increase in hazard within the insured’s control that would raise the premium rate, or a department finding that continuing the policy would violate the law, each on 10 days’ notice.
• Nonrenewal: written notice mailed at least 60 days before the policy expires, with the reason for nonrenewal stated.
• Three-claims rule. A Texas insurer may refuse to renew a homeowners policy because of claims only if the insured has filed three or more claims in a three-year period and the insurer warned the insured after the second claim; claims from natural causes and claims not paid do not count (TIC 551.107).

Loss settlement and prompt pay (TIC 542.051–.061, .151–.154)

Texas’s prompt-pay statute, which applies to first-party claims under most kinds of insurance (workers’ compensation, title, and fidelity and surety bonds are among the exceptions), requires the insurer to:

• Acknowledge receipt of the claim within 15 days, and in the same period begin any investigation and request the items it will need from the claimant (an eligible surplus lines insurer has 30 business days).
• Accept or reject the claim in writing within 15 business days after receiving all requested information (extendable up to 45 days with notice to the insured).
• Pay the claim within 5 business days after accepting it.
• Statutory interest and attorney’s fees if an insurer that is liable for the claim does not comply — 18% a year, or, in an action on a real-property claim caused by forces of nature (Chapter 542A), simple interest at a rate set at judgment by adding 5% to the Finance Code judgment rate (TIC 542.060).
• Notice of a liability settlement. Under a casualty policy, unless the policy requires the insured’s consent to settle, the insurer must notify the named insured in writing of an initial offer to settle a claim against the insured within 10 days after the offer is made, and of the settlement within 30 days after the claim is settled (TIC 542.151–.153).

Liquidated demand (TIC § 862.053)

Texas’s Liquidated Demand statute applies to fire insurance policies on real property: in case of a total loss by fire of the insured property, the policy is a liquidated demand against the insurer for the full amount of the policy, and the insurer must pay that amount regardless of the actual cash value at the time of loss. The rule does not apply to personal property, and every fire policy on real property in Texas must carry it word for word. The rule shifts the risk of over-insurance to the insurer.

Texas FAIR Plan Association (TIC 2211.051–.059)

The Texas Fair Access to Insurance Requirements (FAIR) Plan provides residential property coverage in areas the Commissioner designates as underserved, for property that cannot obtain insurance in the voluntary market (TIC 2211.151). Every insurer that writes residential property insurance in Texas must participate in the FAIR Plan Association, and the association assesses its participating insurers, in proportion to their residential property premiums, to meet its expenses and liabilities (TIC 2211.101, 2211.102). The property must meet the plan’s underwriting standards. Applicants must show they have been declined by at least two voluntary-market insurers (TIC 2211.151).

Texas Windstorm Insurance Association — TWIA (TIC 2210.001–.084)

TWIA is a separate residual market for wind and hail coverage on properties in designated coastal counties along the Texas Gulf Coast — the area historically subject to hurricane risk and where many voluntary carriers will not write wind coverage. TWIA insures windstorm and hail damage only; the policyholder still must have a separate homeowners or DP policy to cover non-wind perils.

• Losses are paid from TWIA’s premiums; losses beyond its premiums and other revenue are paid from its reserves and the Catastrophe Reserve Trust Fund, then from financing arrangements with the state, and then from assessments on its members (the insurers authorized to write property insurance in Texas) (TIC 2210.051, 2210.082–.083).
• Coverage subject to a separate windstorm deductible. For a residential risk, TWIA’s options include $100, $250, or 1%, with optional larger deductibles from 1.5% to 5%.
• A structure built, altered, remodeled, enlarged, or repaired on or after January 1, 1988, must meet the windstorm building code to be eligible, shown by a TDI certificate of compliance (WPI-8 or WPI-8-E) (TIC 2210.251).

Texas P&C Insurance Guaranty Association (TIC Chapter 462; TAC § 29.1)

The Texas P&C Guaranty Association pays covered claims when an admitted P&C insurer becomes insolvent:

• Membership. All admitted P&C insurers writing in Texas are members.
• Funding. Member assessments after insolvency, not pre-funded reserves.
• Coverage caps. Generally up to $300,000 per claim for most claims, with a separate $25,000 cap on return of unearned premium. Workers’ compensation claims have no dollar cap.
• Eligibility. A claim is covered if the liability claimant or insured was a Texas resident at the time of the insured event, or if it is a first-party claim for damage to property permanently located in Texas (TIC 462.201). Surplus lines coverage and reinsurance are not covered.

Texas Medical Liability Insurance Underwriting Association — JUA (TIC Chapter 2203)

Texas operates a Joint Underwriting Association for medical liability insurance, created to ensure availability of medical professional liability coverage for physicians, dentists, hospitals, and other health-care providers. The JUA writes coverage at actuarially sound rates, subject to TDI oversight, and functions as a market of last resort when voluntary carriers will not write the risk.

Texas workers’ compensation — coverage is elective

Except for public employers and as other law provides, a Texas employer may choose whether to obtain workers’ compensation insurance coverage (Labor Code § 406.002).

The subscriber / non-subscriber distinction (Labor Code § 406.002)

• Subscriber. A Texas employer who carries workers’ comp coverage — through a licensed insurance company, such as Texas Mutual, or through self-insurance as the Labor Code allows (Labor Code § 406.003). Subscribers receive the exclusive remedy benefit: an injured worker’s sole recovery from the employer is the statutory workers’ comp benefit; the worker generally cannot sue in tort.
• Non-subscriber. A Texas employer who does NOT carry workers’ comp. The non-subscriber loses exclusive remedy protection and, when an employee sues for a work injury, loses three traditional defenses: contributory negligence, assumption of risk, and the negligence of a fellow employee (the fellow-servant rule) (Labor Code § 406.033).
• Notification requirement. Every employer must tell each new employee, and post notice, whether it has workers’ compensation coverage (Labor Code § 406.005). An employer that does not obtain coverage must also notify TDI-DWC in writing (Labor Code § 406.004).

Texas workers’ compensation benefits (Labor Code 408.021–.187)

Medical benefits (Labor Code § 408.021). All health care reasonably required by the nature of the compensable injury, as and when needed, payable from the date of the injury.

Income benefits compensate the worker for lost earning capacity in four sequential types:

• Temporary Income Benefits (TIBs) — Labor Code § 408.101–.105. Begin after a 7-day waiting period (retroactive if disability lasts 14+ days). Replace 70% of the difference between the pre-injury average weekly wage (AWW) and post-injury earnings, up to the statutory maximum (75% for the first 26 weeks for a worker who earns less than $10 an hour).
• Impairment Income Benefits (IIBs) — Labor Code § 408.121. Paid after Maximum Medical Improvement (MMI) and assignment of an impairment rating. Replace 70% of the AWW for 3 weeks per percentage point of impairment.
• Supplemental Income Benefits (SIBs) — Labor Code § 408.142. For workers with impairment ratings of 15% or higher who have not returned to work or earn less than 80% of their AWW because of the impairment. Calculated quarterly and paid monthly, with a quarterly statement of earnings from the worker.
• Lifetime Income Benefits (LIBs) — Labor Code § 408.161. Paid for life in cases of catastrophic injury — total and permanent loss of sight in both eyes; loss of both feet, both hands, or one foot and one hand; paralysis of both arms, both legs, or one arm and one leg from a spinal injury; certain traumatic brain injuries; and third-degree burns covering at least 40% of the body that require grafting, or covering most of both hands, or of one hand and one foot, or of one hand or foot and the face.

Death and burial benefits (Labor Code § 408.181–.187). Surviving eligible beneficiaries receive 75% of the deceased worker’s AWW. Burial benefits are also payable: the actual reasonable burial costs, up to $10,000.

Texas Mutual Insurance Company

Texas Mutual Insurance Company is the workers’ compensation insurer of last resort in Texas. The law that once referred to the Texas Workers’ Compensation Insurance Fund now refers to Texas Mutual, which operates as a domestic mutual insurance company and is not a state agency (TIC 2054.002, 2054.003). It may not refuse to insure a risk that tenders the required premium and any accident prevention service fee, except as its chapter allows; a risk its underwriting standards would reject is insured at a higher premium (TIC 2054.351).

Surplus lines in Texas (TIC Chapter 981, TAC Chapter 15)

When admitted-market carriers will not write a particular Texas risk, the surplus lines market provides a regulated alternative through non-admitted insurers:

• Diligent effort. Before placing a risk with a non-admitted insurer, the surplus lines agent must make a diligent effort to obtain the full amount of coverage from authorized insurers writing that kind of insurance in Texas (TIC 981.004).
• Surplus lines agent license (TIC 981.202). A separate license is required.
• Eligible surplus lines insurers (TIC 981.004, 981.051). The insurer must be authorized by its home state or country for the kind of insurance written and meet Chapter 981’s eligibility requirements.
• Premium taxes. The surplus lines agent collects the surplus lines premium tax (4.85% of gross premiums) from the insured and pays it to the state (TIC 225.004, 225.006).
• Surplus Lines Stamping Office (TIC 981.105, 981.151–.160). The agent files each policy or confirmation of coverage with the stamping office within 60 days. The office records and reviews each contract and evaluates its eligibility for the Commissioner, but it has no enforcement authority.
• No guaranty fund protection. Surplus lines coverage is NOT backed by the Texas P&C Guaranty Association. The insured accepts the credit risk of the non-admitted insurer in exchange for getting coverage at all.