1. (a) Powers of the association. The association is created by the Act and shall be governed by the provisions of the Act, as amended, and this subchapter. Pursuant to the Act and this subchapter, with respect to medical liability insurance, the association shall have the power on behalf of its members:

   1. (1) to issue or cause to be issued policies of insurance to applicants including primary, excess, and incidental coverages; provided that no individual or organization may be insured by policies issued by the association for an amount exceeding a total of $1 million per occurrence (for all coverages combined) and $3 million aggregate per annum (for all coverages combined);
   2. (2) to underwrite such insurance and to adjust and pay losses with respect thereto, or to appoint service companies to perform these functions;
   3. (3) to either or both accept and refuse the assumption of reinsurance from its members; and
   4. (4) to cede and purchase reinsurance.

2. (b) Collection and investment of funds.

   1. (1) Collection. The treasurer shall, on behalf of the association, be responsible for the collection of all the premiums received by the association from the sale of medical liability insurance and incidental coverages, all assessments levied against the members, all assessments and charges levied against policyholders (including contributions to the policyholder's stabilization reserve fund), and all proceeds from the investment of funds.
   2. (2) Investment. All funds collected by the association shall be retained in a checking account or accounts in any bank or banks doing business in the State of Texas and/or may be invested only in the following: in interest-bearing time deposits or certificates of deposit in any bank or banks doing business in the State of Texas which are members of the Federal Deposit Insurance Corporation; or in treasury bills, notes, or bonds of the government of the United States of America; or in such other investments as may be proposed by the board of directors and approved by the board. The board of directors shall determine what portion of such funds shall be retained in a checking account or accounts and what portion of such funds shall be invested in the investments previously listed, as well as which specific investments, if any, shall be made.

3. (c) Policyholder's stabilization reserve fund. The Act, §4A, creates the policyholder's stabilization reserve fund and provides that this fund shall be administered as provided in the Act and these sections and that the advisory directors shall be chosen as provided in these sections.

   1. (1) General provisions.

      1. (A) In accordance with the Act, §3A, the board shall establish by rule the categories of physicians and other health care providers who are eligible to obtain coverage from the association. Such rule may be revised from time to time to include or exclude from eligibility particular categories of such health care providers and physicians.

      2. (B) The following provisions also govern.

         1. (i) Within 15 days after the effective date of any board order establishing eligibility, the board of directors shall extend invitations to the appropriate Texas organizations representing eligible health care providers and physicians to each designate an advisory director to represent each eligible category of health care provider and physician and advise the association of its choice of director.
         2. (ii) Each designated advisory director shall have a vote on any matter coming before any meeting of the entire body of advisory directors and that vote shall be weighted in the proportion that the net written premium collected during the most recently completed calendar year from policies issued to each category of health care provider and physician bears to the total net written premiums collected from all categories of health care providers and physicians during the same calendar year. The proportion of weighting of the advisory directors' votes shall be determined annually by the association, not later than August 31.
         3. (iii) The designated advisory directors shall meet not later than October 15, 1977, and not later than September 15 annually thereafter at a place in Texas to be stipulated by the board of directors to consider the amount of funds available and the status of the policyholder's stabilization reserve fund and shall inform the board of directors of the percentage to be charged to all policyholders of all policies issued or renewed by the association during the next calendar year. This percentage shall be communicated to the board of directors no later than November 1, 1977, and not later than September 20, annually thereafter.
         4. (iv) If any organization described in clause (i) of this subparagraph fails to designate an advisory director, the directors designated by the remaining organizations shall constitute the entire body of advisory directors and their establishment of the policyholder's stabilization reserve fund charge shall be accepted as valid by the association and imposed pursuant to the operational procedures of the association, upon approval of the board.
         5. (v) In the event that the advisory directors fail to establish a specific percentage charge for the policyholder's stabilization reserve fund to be collected for the coming calendar year before the applicable deadline, the board of directors shall immediately submit for approval by the board a charge to be collected from policyholders of each new and renewal policy during the forthcoming calendar year in accordance with the provisions of the Insurance Code.
         6. (vi) The advisory directors shall serve without salary or other fee, and shall not be reimbursed for any expenses. The advisory directors, in the performance of their duties, shall be afforded the protection of §5.2002(h) of this title (relating to Operation of the Texas Medical Liability Insurance Underwriting Association).
      3. (C) The policyholder's stabilization reserve fund charge shall be collected from each policyholder annually, as may be appropriate, and shall be stated as a percentage of the annual premium due for all coverages on all policies issued or renewed on or after the effective date of the charge. Such percentage charge shall remain in effect until changed in accordance with subparagraph (B) of this paragraph.
      4. (D) The policyholder's stabilization reserve fund charge shall be separately stated in the policy, but shall not constitute a part of premium or be subject to premium taxation, servicing fees, acquisition costs, commissions, or any other such charges. Further, the policyholder's stabilization reserve fund charge shall not be considered premiums for the purpose of any assessments levied under subsection (d) of this section.
      5. (E) The policyholder's stabilization reserve fund charges shall be collected and administered by the association and shall be treated as a liability of the association along with and in the same manner as premium and loss reserves. The fund shall be valued annually by the board of directors within 90 days of the close of the last preceding calendar year.
      6. (F) Collections of the policyholder's stabilization reserve fund charge shall continue throughout each calendar year for which established; provided however, that no charge will be made during the next succeeding calendar year if the net balance in the fund after recoupment of any prior year's deficit equals or exceeds the association's estimate of the projected sum of premiums to be written in the calendar year following the valuation date of the fund.
   2. (2) Policyholder's stabilization reserve fund charge. The proportionate policyholder's stabilization reserve fund charge shall be based on the total annual written premium for all coverages provided by the association to the policyholder. The policyholder's stabilization reserve fund charges shall not be refundable if the policy is cancelled after the 90th day of the coverage. If cancelled within the 90th day of coverage, the earned charge will be based on the same earned percentage charged for the insurance premium. The policyholder's stabilization reserve fund charge shall apply to all new and renewal policies effective on and after January 1, 1978.
   3. (3) Disbursements from the policyholder's stabilization reserve fund. Disbursements from the policyholder's stabilization reserve fund shall not be made for any purpose other than to recoup a deficit from operations as defined in subsection (d) of this section. Upon suspension of the association, pursuant to the suspension promulgated by the board, any funds remaining in the policyholder's stabilization reserve fund shall be added to the special fund created by the board appointed statutory liquidator. Any investment income earned on the funds of the policyholder's stabilization reserve fund shall be added to that fund.

4. (d) Participation by members and policyholders of the association.

   1. (1) Deficit and remedy of a deficit.

      1. (A) The association shall have sustained a deficit from operations whenever the aggregate of the incurred losses (reported and unreported), plus all loss adjustment expenses incurred, plus commissions and plus other administrative expenses (including servicing carrier fees) incurred by the association in a given calendar year exceed the aggregate of the net premiums earned and other net income (including investment income earned) realized by the association in the same calendar year.

      2. (B) Any deficits sustained by the association in any one calendar year shall be recouped, pursuant to these sections and the rating plan in effect, by one or more of the following procedures in this sequence:

         1. (i) first, a contribution from the policyholder's stabilization reserve fund until the same is exhausted;
         2. (ii) second, an assessment upon the policyholders pursuant to paragraph (3) of this subsection and the Act, §5(a);
         3. (iii) third, an assessment upon the members of the association pursuant to paragraph (4) of this subsection and the Act, §5(b).

   2. (2) Surplus and disposition of a surplus.

      1. (A) The association shall have sustained a surplus from operations whenever the aggregate of the incurred losses (reported and unreported), plus all loss adjustment expenses incurred, plus commissions and plus other administrative expenses (including servicing carrier fees) incurred by the association in a given calendar year do not exceed the aggregate of the net premiums earned and other net income (including investment income earned) realized by the association in the same calendar year.
      2. (B) Upon approval by the board of directors, surplus from operations shall be ratably distributed as reimbursements to members who have been assessed pursuant to paragraph (4) of this subsection and have paid such assessments, but have not been previously reimbursed therefor and have not been allowed the premium tax credit (offset) pursuant to subsection (e) of this section.
      3. (C) Any balance remaining in the funds of the association at the close of its fiscal year, meaning its then excess of revenue over expenditures after approved reimbursement of members' contributions, shall be added to the reserves of the association.

   3. (3) Participation by policyholders of the association.

      1. (A) Assessment of policyholders; contingent liability therefor. Each policyholder of the association shall have contingent liability for a proportionate share of any assessment of policyholders made by the association. Whenever a deficit, as calculated pursuant to paragraph (1)(A) of this subsection, is sustained by the association in any one calendar year and the deficit has not been recouped in its entirety from the policyholder's stabilization reserve fund, its directors shall levy an assessment only upon those policyholders who held policies in force at any time within the two most recently completed calendar years in which the association was issuing policies preceding the date on which the assessment was levied. The aggregate amount of the assessment shall be equal to that part of the deficit not recouped from the stabilization reserve fund. The maximum aggregate assessment per policyholder shall not exceed the earned premium on policies in force for the calendar year in which the deficit was sustained. Subject to such maximum limitation, each policyholder shall be assessed for that portion of the deficit reflecting the proportion which the earned premium on policies issued during the two most recently completed calendar years of such policyholder bears to the total earned premium for all the policies issued by the association for the same period.

      2. (B) Procedure for assessment of policyholders. Assessment of policyholders shall be made in accordance with the following.

         1. (i) Notice of assessment shall be sent by certified mail, return receipt requested, to each policyholder being assessed within 30 days of the meeting of the board of directors at which such assessment was levied. Such notice shall be forwarded to the address of such policyholder as it appears on the books of the association. Such notices shall state the policyholder's allocated amount of assessment and shall inform each policyholder of the sanctions imposed by clause (ii) of this subparagraph for the failure to pay such assessment within the time prescribed by this section.
         2. (ii) Each policyholder shall remit to the association payment in full of an assessment within 30 days of receipt of notice of assessment; provided, however, that a policyholder not delinquent on any prior assessments, policyholder stabilization reserve fund charge, or premium may remit payment of an assessment levied for a deficit incurred in calendar year 1986 and thereafter in two installments with at least one-half of the assessment due to be paid within 30 days after receipt of notice of assessment and the remaining balance due 30 days thereafter. If the association has not received payment of the policyholder's assessment or any installment payment within 10 days after such payment is due, then the association shall promptly cancel any policy of insurance which the policyholder shall at that time have in force with the association, and the association shall be entitled to offset any unearned premium otherwise refundable on such policy against the amount of that policyholder's unpaid assessment. Such cancellation of current insurance coverage shall in no way affect the right of the association to proceed against such policyholder in any court of law or equity in the United States for any remedy provided by law or contract to the association, including, but not limited to, the right to collect such policyholder's assessment.

   4. (4) Participation by members of the association.

      1. (A) Assessment of members. The Act provides that in the event that sufficient funds are not available for the sound financial operation of the association, in addition to assessments of policyholders paid pursuant to these sections in accordance with paragraph (3) of this subsection and contributions from the policyholder's stabilization reserve fund, all members shall, on a basis authorized by the board, as long as the board deems it necessary, contribute to the financial requirements of the association in the manner provided for in this section and the Act, §5. Any assessment or contribution shall be reimbursed to the members with interest at a rate to be approved by the board. Pending recoupment or reimbursement of assessments or contributions paid to the association by a member, the unrepaid balance of such assessments and contributions may be reflected in the books and records of the insurer as an admitted asset of the insurer for all purposes, including exhibition in annual statements pursuant to the Insurance Code, Article 6.12.

      2. (B) Procedure for assessment of members.

         1. (i) All insurers which are members of the association shall participate in its writings, expenses, and losses in the proportion that the net direct premiums, as defined herein, of each such member, excluding that portion of premiums attributable to the operation of the association, written in this state during the preceding calendar year bears to the aggregate net direct premiums written in this state by all members of the association during the same calendar year. Each insurer's participation in the association shall be determined annually on the basis of such net direct premiums written during the preceding calendar year as reported in the annual statements and other reports filed by that insurer that may be required by the board. No member shall be obligated in any one year to reimburse the association on account of its proportionate share in the unrecouped deficit from operations of the association in that year in excess of 1.0% of its surplus to policyholders and the aggregate amount not so reimbursed shall be reallocated among the remaining members in accordance with the method of determining participation prescribed in this subsection, after excluding from the computation the total net direct premiums of all members not sharing in such excess deficit. In the event that the deficit from operations allocated to all members of the association in any calendar year shall exceed 1.0% of their respective surplus to policyholders, the amount of such deficit shall be allocated to each member in accordance with the method of determining participation prescribed in this subsection.
         2. (ii) Notice of assessment shall be sent by certified mail, return receipt requested, to each member within 30 days of the meeting of the board of directors at which such assessment was levied. Such notice shall be forwarded to the office address of such member as it appears on the books of the association. Such notice shall state the member's allocated amount of assessment and shall inform each member of the sanctions imposed by clause (iii) of this subparagraph for the failure to pay such assessment within the time prescribed by these sections.
         3. (iii) Each member shall remit to the association payment in full of its assessed amount of any assessments levied by the board of directors within 30 days of receipt of notice of assessment. If the association has not received payment in full of a member's allocated amount of assessment within 40 days of notice of the receipt by the member of the notice of assessment, then the association shall report to the commissioner of insurance the fact that such assessment has not been paid and the commissioner of insurance may take such actions as are permitted under the Insurance Code, including, but not limited to, calling a public hearing pursuant to the Insurance Code, Article 1.10, §7, to consider revocation of the certificate of authority of the delinquent member. Any action by the commissioner of insurance shall in no way affect the right of the association to proceed against such member in any court of law or equity in the United States for any remedy provided by law or contract to the association, including, but not limited to, the right to collect such member's assessment. A member, by mailing payment of its allocated amount of assessment as provided herein, shall not thereby waive any right it may have to contest the computation of its allocated amount of assessment. Such contest shall not, however, toll the time in which assessment shall be paid, or the report is to be made to the commissioner of insurance, or the commissioner, upon receipt of such report, is to take action, all as set out in this paragraph.
   5. (5) Basis of computation of deficit, surplus, and assessments. The computation of the deficit or surplus in operations of the association and the computation of assessment of members and policyholders shall be computed on a calendar year basis in accordance with the reporting requirements of the annual statement filed with the board.
5. (e) Premium tax credit (offset) for members assessments. To the extent that a member has been assessed and has paid one or more assessments as contemplated by these sections and has not received reimbursement from the association for such assessments, that member, as provided for in the Act, §4(b)(3), shall be allowed a credit against its premium taxes under the Insurance Code, Article 4.10, for all lines of insurance which the member is writing in the State of Texas, which are subject to a premium tax under Article 4.10. The tax credit, in the aggregate amount of such assessments plus interest at a rate to be approved by the board shall be allowed at a rate of 20% per year for five successive years following the year in which such deficit was sustained and at the option of the member may be taken over an additional number of years. For purposes of this premium tax offset, expense fees paid pursuant to §5.2002(b)(1) and (2) of this title (relating to Operation of the Texas Medical Liability Insurance Underwriting Association) are deemed to be assessments.

6. (f) Appeals.

   1. (1) Appeal to board of directors. Any person insured or applying for insurance pursuant to the Act or his duly authorized representative or any affected insurer who may be aggrieved by an act, ruling, or decision of the association, may, within 30 days after such act, ruling, or decision, appeal to the board of directors of the association. The board of directors of the association shall hear said appeal in 30 days after receipt of such requests or appeal and shall give not less than 10 days' written notice of the time and place of hearing to the person making such requests or his duly authorized representative. Within 10 days after such hearing, the board of directors of the association shall affirm, reverse, or modify its previous action or the act, ruling, or decision appealed to the board of directors of the association.
   2. (2) Appeal to board. In the event any person insured or applying for insurance is aggrieved by the final action of the board of directors of the association or in the event the association is aggrieved by the action of the board with respect to any ruling, order, or determination of the board of directors of the association or of the board or in the event that the board of directors fails to act after having received notice under paragraph (1) of this subsection, the aggrieved party may, within 30 days after such action, make a written request to the board for a hearing thereon. The board shall hear the association, or the appeal from an act, ruling, or decision of the association within 30 days after receipt of such request or appeal and shall give not less than 10 days' written notice of the time and place of hearing to the association making such request or the person, or his duly authorized representative, appealing from the act, ruling, or decision of the board of directors of the association. Within 30 days after such hearing, the board shall affirm, reverse, or modify its previous action or the act, ruling, or decision appealed to the board. Pending such hearing and decision thereon, the board may suspend or postpone the effective date of its previous rule or of the act, ruling, or decision appealed to the board. The association, or the person aggrieved by any order or decision of the board, may thereafter appeal in accordance with the Insurance Code, Article 1.04(f).
7. (g) Suspension of the association. Pursuant to the Act, the board shall promulgate a plan of suspension consistent with provisions of the Act as amended. The plan of suspension shall provide for the maintenance of reserves for losses and loss adjustment expenses which may be reported subsequent to the expiration of all policies in force. If, after the date of suspension ordered by the board, the board finds, after notice and hearing, that all known claims have been paid, provided for, or otherwise disposed of by the association relating to policies issued prior to such suspension, then the board may wind up the affairs of the association relating to policies issued prior to such suspension by paying all funds remaining in the association to a special fund created by the statutory liquidator of the board as a reasonable reserve to be administered by said liquidator for unknown claims and for reimbursing assessments and contributions in accordance with the Act, §4(b)(5). The board shall, after consultation with the representatives of the public, the Texas Medical Association, the Texas Podiatry Association, the Texas Hospital Association, and other affected individuals and organizations, promulgate a plan for distribution of funds, if any, less reasonable and necessary expenses, to the policyholders ratably in proportion to premiums and assessments paid during the period of time in which the association issued policies. When all claims have been paid and no further liability of this association exists, the statutory liquidator shall distribute all funds in its possession to the applicable policyholders in accordance with the plan promulgated by the board. If such reserve fund administered by the statutory liquidator proves inadequate, the association shall be treated as an insolvent insurer in respect to the application of the provisions of the Insurance Code, Articles 21.28, 21.28-A, and 21.28-C, not inconsistent with the Act. Notice of claims shall be made upon the board.
8. (h) Termination of policies. No policy shall be issued by the association after the date fixed in the Insurance Code, Article 21.49-3, for a plan of suspension to become effective and operative. All then issued policies shall continue in force until terminated in accordance with the terms and conditions of such policies.
9. (i) Auditing of members. The association may audit the records of any member relating to the subject matter of the Act or these sections according to rules promulgated by the board which may establish what policies, records, book of accounts, documents, and related material shall be necessary to carry out its functions. Such material shall be provided by the members in the form and with the frequency reasonably required by such rules.
10. (j) Reactivation. Pursuant to the Act, the board may reactivate the Texas Medical Liability Underwriting Association, in keeping with the provisions of the Act.

Source Note:The provisions of this §5.2003 adopted to be effective October 31, 1984, 9 TexReg 5427; amended to be effective June 27, 1986, 11 TexReg 2744; amended to be effective January 19, 1988, 13 TexReg 124; amended to be effective June 17, 1988, 13 TexReg 2836; amended to be effective March 18, 1993, 18 TexReg 1411.