Case Information
*1 The Attorney General of Texas Auj:Ist 13, 1984 JIM MATTOX
Attorney General Mr. Lyndon L. Olson, Jr. Opinion NO. JM-187
Supreme Court Building Chairman P. 0. BOX 12548 State Board of Insurance Re: Reconsideration of JM-88: Austin. TX. 78711. 2548 512l475.2501 1110 San Jacinto Boulevard Whether the Insurance Code Telex 910/874-1387 Austin, Texas 78786 per se prohibits certain finan- Telecopier 512l475.0286 cial arrangements between a life
insurance company and its sub- sidiary which is compensated on 714 Jackson. Suite 700 Dallas, TX. 752024508 a percentage of annual premiums 2141742.8944 written Dear Mr. Olson: 4824 Alberta A”.%, Suite 160 El Paso, TX. 79905.2793
915/533-3464
You have reque!;ted a reconsideration of ~~-88 regarding whether
all financing arrangements between a parent life insurance company and an affiliate which are based on a fee computed on a percentage of hW Texas. Suite 700 annual premiums written are per se prohibited by article 3.68, or .mston, TX. 77002.3111 whether they are su>ject to the fair and reasonable test set out in ?13/2234666 article 1.29 and article 21.49-1, section 4, of the Texas Insurance Code. You have no': raised any question about the reasoning of JM-88 606 Broadway, Suite 312 that article 3.68 applies to arrangements between foreign corporations Lubbock, TX. 79401-3479 regarding out of si:ate business, and we reaffirm the conclusion of 8061747-5233 JR-88 as to that matter. However, upon reconsideration, we withdraw those portions of the reasoning and conclusions of JM-88 which hold 4309 N. Tenth. Suite S that any arrangement by which a life insurance company pays a fee k&Allen, TX. iS501-15S5 based on the number of policies sold, to a subsidiary having the same 512f682.4547 president and secretary as the parent company per se violates article
3.68 of the Texas lr,surance Code.
200 Main Plaza. Suite 400
San Antonio, TX. 782052797 The question addressed by JM-88 asked whether a life insurance 512,225-4191 company was permitix!d to compensate another corporation with officers
in common for the provision of certain services, when such compensation was bar,ed on a percentage of net premiums received by the An Equal Opportunity/ insurance company from non-Texas business. You advised that it was Affirmative Action Employer
the long-standing construction of your agency that article 3.68 prohibited certain "officers" of a life insurance company from receiving any com)+?nsation based on a percentage of the business produced by their cx~mpapany. Our attention was called to a letter dated MY 29. 1926, fron an assistant attorney general regarding article 4745. V.T.C.S., whL:h was later transferred unchanged to article 3.68 of the Insurance Code. See Attorney General Letter Opinion Book 281 (1926). page 106.
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Mr. Lyndon L. Olson, Jr. - :?.ige 2 (m-187)
The only other applic;;tion which we found of article 3.68, also in its prior codification 8s article 4745, is contained in Attorney General Opinion O-5913 (19!,[). Neither of those opinions dealt with the meaning of the prohibic:ory language in the statute as applied to the situation at issue in y','lr request.
No legislative history .?rovides guidance as to the mesning of the statutory language which wa ,3 originally section 7 of a 1909 enactment, which indicates that the statute was one other than the 1909 title, :ertain persons for procuring insurance." "making it unlawful to pay (Emphasis added). Acts 190 3, 31st Leg., 2d C.S., ch. 25, at 448. Nor does the subject matter of the remainder of that act give any further indication as to its purpose. Hence, we must ascertain the meaning and intention of the legislature from the language of article 3.68 as it has existed unchanged fcr over seven decades. See 53 Tex. Jur. 2d Statutes 5130 (1964).
The language in ques:ion prohibits the payment to certain "officers" of "any commissi~~:~ dr other compensation" if payment is (1) contingent upon the writing l)r procuring of s policy of insurance in such company; or (2) [ccntingent upon] procuring an application therefor by x person whon.eoever; or (3) contingent upon the payment of x renewal premium; or (,i) [contingent] upon the assumption of 9 life insurance risk by suC1 company. Excluded from this prohibition of payment resulting from the listed actions are agents and solicitors. We think this exclusion is significant and is indicative of the objective of this seatute. An insurance agent is routinely compensated by commissions '>,%sed on his rates. Article 3.68 obviously prohibits payments to certstn specified non-sales personnel -- i.e. "president, vice president, secretary, treasurer, actuary, medical director . . . or . . . any officer of the company" -- for the types of activities listed above, all of which constitute discrete steps in the sale of life insurance .?,,licies.
We think these references to specific steps 1~ the process of life insurance sales clarify the meaning of the use of the otherwise ambiguous word "any" in thl: enumeration of each action. See Black's Law Dictionary 86 (5th ed. 1379). The nature and context ofhis list indicate that the prohibition is directed at particular, individual transactions and was intentiazd to prevent only conflicts of interest between those persons who I'l'oduce applications for insurance business in order to receive commissions therein, and those persons who have the responsibility to appruJz the applications for insurance on behalf of such companies and ther&,:r bind them on the policy.
Indeed, two other Insul:ance Code provisions adopted in 1971 and otherwise unnecessary or :onflicting support this result. Both article 1.29, a broad conflict of interest statute, and article 21.49-1. a comprehensive l,egulatory scheme for insurance holding company systems test the Ill'opriety of transactions within insurance holding company systems by standards of fairness, reasonableness, and
p. a17 *3 (JM-187)
Mr. Lyndon L. Olson, Jr. - Page 3 other equitable bases. For example, section l(c)(S) of article 1.29 allows:
(A) Any tranciactions within an insurance holding company r%:%tem by insurers with their holding companies, subsidiaries or affiliates that are not prohibitetl by law, that meet the test of being fair and pr#,:,er, and that are regulated by other statutes; ;nld (B) other transactions or arrangements not pxohibited by law that meet the test of being fa:.?. and proper as prescribed by rules and regulat:ions adopted by the State Board of Insurance.
Likewise, section 4. subsections (a)(l), (a)(2), and (d)(Z)(iii) of article 21.49-1 establishes that such transactions as "rendering of services on a regular or systematic basis" are governed by standards including "fair and equit%,Le" terms and "reasonable" charges and fees. Neither statute prohL)its, per se, payments to the subsidiary service corporation based on the amount of annual net premiums issued, this being a measure of thr value of work done by the affiliate for the parent company.
We see no basis for concluding that article 3.68 ever prohibited payments such as those at ir;rue here. Transactions such as those you have inquired about which are based on the volume of business transacted are not prohibited by article 3.68.
SUMMARY A life insurance! company may base its payment to a wholly own1~11 subsidiary corporation, for services rendered by the affiliate corporation, on the net premiums received by the parent life insurance company rrithout violating article 3.68, so long as the arrangement is consistent with article 1.29 and z,rticle 21.49-1, section 4, of the Insurance Code.
JIM MATTOX Attorney General of Texas TOM GREEN
First Assistant Attorney General
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Mr. Lyndon L. Olson, Jr. - 'hge 4 ~(JM-187)
DAVID R. RICHARDS
Executive Assistant Attorrq General
Prepared by Colin J. Carl
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Rick Gilpin, Chairman
David Brooks
Colin Carl
Susan Garrison
Henry Robinson
Nancy Sutton
Bruce Youngblood
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