Drawbacks of Obtaining Coverage Through Risk Pools

What is a risk pool?

A risk pool is a method of risk management typically practiced by businesses or governmental entities that come together to create a “pool” to provide financial protection against major catastrophes such as hurricanes, wind and hail damage, or fires. The purpose behind a risk pool is to spread these risks among a large number of contributors to the program in order to ease the financial burden of such unexpected disasters. The risk pool’s coverage document operates like insurance, but it is technically not an insurance “policy.” Since most risk pools are not for profit, they may offer lower pricing, specialized coverages and reduced risk. Risk pools usually rely on national or international reinsurers to protect them from losses above a certain level, typically in the $250,000 to $500,000 range.

What are the drawbacks?

Risk pools can provide less expensive coverage, but they have their drawbacks. For example, many risk pools serve members within a limited geographic area, and when a catastrophic event hits that area, risk pool funds may be inadequate to cover all claims. Additionally, when claims or other costs exceed the projections of a risk pool, members of the pool are often charged an unexpected assessment.

In Texas, popular risk pools among school districts include the Texas Association of School Boards (TASB), Texas Rural Education Association Risk Management Cooperative (TREA-RMC), and Property Casualty Alliance of Texas (PCAT). Risk pools serving school districts are often managed by former school administrators who have no experience in the insurance industry. Also, in Texas, many risk pools are created through interlocal agreements that are protected by sovereign immunity, so if a member’s claim is wrongfully denied or underpaid, the member school district has limited options to challenge the risk pool’s claim determination. Members can pursue a claim for breach of contract against their risk pool, but sovereign immunity protects the risk pools from claims under the Texas Insurance Code.

School districts need to be aware of these limited rights when they evaluate purchasing insurance or participating in a risk pool.

Case in point.

In October 2017, a risk pool named the Texas Association of Public Schools (TAPS) sought bankruptcy protection in San Antonio, with more than 175 school districts from around the state listed as creditors. “The claims experience exceeded our estimates,” said TAPS’ bankruptcy lawyer at the time.[1] He attributed it to “acts of God.”[2] “Who would have anticipated the number of claims?” he queried.[3] There were almost $50 million in claims pending at the time TAPS filed for bankruptcy, and over four years later, some TAPS members are still waiting for their pro rata share of the bankruptcy assets.

Matthew Pearson, founding partner of Pearson Legal, P.C. commented, “After a catastrophic loss, when the need for insurance coverage is most urgent, members of risk pools are often forced to seek legal assistance to recover their coverage benefits. They need to be aware that their rights are limited if they have coverage under a risk pool.”

Pearson Legal, P.C. has helped several school districts and public and private entities recover from risk pools. Pearson Legal, P.C. represents property owners on contingency in insurance recovery and construction defects litigation, as well as commercial litigation, throughout Texas, and the country. The firm represents commercial property owners, school districts and other public and private entities. According to Texas Lawyer, Matthew R. Pearson is responsible for some of the largest insurance verdicts in the State of Texas in recent years.

[1] Danner, P. (2017, October 10). San Antonio Insurer for Schools Goes Bankrupt. San Antonio Express-News. https://www.expressnews.com/business/local/article/San-Antonio-insurer-for-schools-goes-bankrupt-12291948.php

[2] Id.

[3] Id.