Case Information

*1 HEA~ORNEY GENERAL Opinion No. O-3185 Hon. 0. P. Lockhart Re: The authority of the Board of In-

Chairman surance Commissioners to advise members Board of Insurance of a fraternal scciety as to Commissioners rights under their original certi- Austin, Texas

ficates to the members of the society, and whether so advising such members would be in violation of the provisions of Qrticle 4855, Revised Dear Sir: Civil Statutes*

We quote from your letter of November 6, containing your amended request for an opinion of this de artment in lieu of your original request under date of August c 9 1941, as follows:

“ii fraternal socLety incorporated under the laws of Texas and now operating under the provisions Chapter 8, Title 78, R.C.S. 1925 as amended, for many years issued benefit certificates at wholly inadequate premium and in a great many instances these policies were rates, what is commonly known as a twenty payment life certificate, that is, premiums, in accordance with the terms of the con- tract, were to be paid for twenty years only. Such society by recently enacted amendments to its constitution, char- ter, and by-laws, effected without the consent of the ex- isting holders (unless such general consent thereto in advance is validly provfded by the certlffcate hereinafter quoted) 9 is purporting to alter sub- stantial and material terms and provfsions of the preexfst- ing contracts by rerating certain members of the society designated as Class ii and Class C members and forcing such members without their present assent either to pay very greatly higher dues and assessments or by reducing the amount of insurance granted by the certificates or by forc- ing such members to transfer from one class to another, ac- cepting in lieu of their certificates new and other certfficates or benefits of substantially less value and advantage to the members than their original certificates; the weapon of coercion being their assertion that the classes to which the members originally belonged are in- solvent or threatened with insolvency and that the existing certificates will be virtually valueless unless the members accede to the demands of the society.

“Such origi,nal contain substantially following provisions: *2 . to-31851

“Provided that this Order shall not be liable for the payment of any sum hereunder, unless said member has fully complied with all the terms and conditions its Consti- tution and Laws now in force or which may hereafter be adopted and has not untruthfully answered any question made any untruthful statement in the application, or untrue statements to the medical examiner of the Order upon the faith of which this certificate is (said Constitutim, Laws, application, statements and Charter of the Order be- ing expressly made a part thereof). It is expressly agreed that if all dues or assessments (payments) herein shall be paid when due, for a full term of twenty years from date, this shall become an obligation against the Or- der upon the death of said member without further payments thereon, subject to the terms and conditions of said Con- stitution.

“We invite your attention to the provisions of Articles 4834 and 4839 especially and ask you to give us your opinion in the above stated circumstances upon the following points:

“1. Does the society have lawful authority to make substantial and material changes in the original without the present assent of the members, es- pecially where such changes are disadvantageous or otherwise unacceptable to the members (a) by materially increasing dues and assessments, (b) by restoring dues and assessments where the contracts have been paid out as per original terms, (c) by reducing the amount of benefits payable, (d) by arbi- trarily transferring or forcing transfers from one class another or from one form of certificate to another?

“2. If you answer in response to any branch of Para- graph 1, supra, that such attempted action is unlawful and invalid, then state whether or not this Board has any au- thority, and if so what authority, and under the provisions of what statutory enactments, to correct such abuses.

“3. May this Board lawfully advise members of such so- cieties that they do not have to accept such proposed changes or reductions in benefits but that they may stand upon and enforce by legal process if necessary their origi- nal certificate benefits or recover from the society all amounts paid upon same together with legal interest from date of payment? In so advising members of such society, would the

“4. Board violate any provision of Article 4855, R.C.S., or any other legal provision?”

As to your first question, this department cannot *3 3 (O-3185) categorical1 answer same. Being divided into several parts, (a), (b) , (cy and Cd), and all to certain certificates of a fraternal benefit society, from the of which the society seeks to make substantial material changes, we do not have before us a copy of the Con- stitution, By-laws, the original certificate, or the financial condition of any society with which your department is chiefly concerned, rendering it necessary to make any one or more of the mentioned material changes inquired about. In this con- nection it would appear that the question of any such society’s right to subsequently, by by-law, materially increase the dues and assessments of original would be af- fected by whether the by-law was adopted in a manner constitut- ing a waiver on the part its members to be bound by such in- crease, and further in this connection, it would be proper to place before us the Board’s conclusions or findings and such facts upon which same are based.

In our o inion No. O-3387, rendered to you and approv- 2: ed December 18, 19 1, we held that the right of a benevolent a mutual assessment insurance association to increase its rates is limited to the extent that such increase must be reasonable and necessary. Of course, this is a fact question upon which your department may pass only in determining whether the society has exceeded its powers, or is conducting fraudulently or is not carrying contracts in good faith in accordance with the statutes hereinafter set forth. The only authority we find in the statutes for the Board of Insurance Commissioners question such action on the part of the society is where the Board has uncovered sufficient evidence to show the officers acted arbitrarily, or the by-law authorizing such increase was passed without the assent of its members and these and many oth- er acts on the part of the officers of the society must go to sustain a finding by the department that the society “has failed to comply with any provisions chapter (Chapter 8, Title or is exceeding its powers, out its con- tracts or is transacting fraudulently.” (Article 4852 and krticle 4856, Revised Civil Statutes1

In the above opinion, we cited the case of E~icson v. 146 S.W. 160, wherein Supreme Ruling of Fraternal Mystic Circle, the Supreme Court of Texas held under the facts of that case that where the assessment of a member was increased from $3*30 to $23*16 per month without his consent, such act was a repudia- tion of the contract and the member was entitled to a judgment against for all assessments paid with interest. Alsb, citing in this opinion Wirtz v. Sovereign Camp W.O.U., 268 S.W. 438, we followed case and held that a stipulation in the this contract with its members that the insured would comply with and be bound by all future regulations or by-laws of the association *4 does not mean that the benefits stated in the certificates can be legally reduced without the consent of its members. Although fraternal societies ,operating under the provisions of Chapter 8, Title 78, Vernon’s hnotated Civil Statutes, are ex- from Senate Bill 135s 46th Legislature pressly excluded (Article 5068-l in Vernon’s), their rights under contract with its mem- bers are similar to those of mutual assessmen,t companies in re- spect to the questions raised by you and therefore opi.nl,on No. 0-3387 is applicable.

We do not construe Arti.:::le 4834, Revised Civil Statutes, as furnishing authority to a fraternal to mater- ially change the amount payable Ian the certiffcate to consent 0 *n;zillo Mutua.1 Benefit %ssocia- members without et al, 50 S.W.(2d) 265, tion v. Franklin, It seems quite Jpparent -,hat all four subdivisions your question No. 1 arise by reason of conclusions drawn from, a state of fact or facts not before this department, Consequently, were it possible for us to state regw.rd~ing any phase of odr -Vii?J the question other than as pointed ov,t, we are of the opinion such would serve no useful purpose, likely to create @onFusion tind harm rather than be helpful. A careOu1 and able digest of olur Texas court decisions to this subject appears to have been furnish.ed you by your Sen,ior Exan~irrer~ MrO .id.fred M. Scottz. thirej.r; 6 6e,,~..e review of the authoriti:s I.,~--+ d discloses each case decided solely as to t,he p~ticular facts before the court. A mere conclusion by theBo?.rd of Insurance Commissioners thdt a societv is coercing its ze:nbers wl.thout a, fin.dicg or report by the Bo:,:rd based upon the submitted facts showing acts of coer- cion and that by such ~.:oercion, t;z~z society i.s not carrying out its contracts in good fhith or :s crsnsactlag fraudu- lently would be insufficient for enabl,ing thi.s department render an opinion, categorically answering your first question- 2, 3 and ,%, above set

Proceeding to your questions you point out Article Revised Civil Statutes, which forth, prohibits certain publications by the Board of Insurance Conmis- sioners as to any society, either domestic or foreign,, of any , report or finding except under certain con- financial statement is to be construed with A:rticles 4852, This article ditions. 4854 and 4856 of the statutes, each in part hereafter set out and providing :

“Qrticle ‘C;l.t Coumis,sioner (ZBo;Lrd~ of Insurance Commissioners) or any person he may appoint 9 shall have the the &fai,rs of an,y power of visitation and ex;,;l-ination into He may employ assistants for domestic society. tne purpose and he, or any person he may appoint, of such examination, shall have free access to all the books, papers and docu- ments that relate to the business of the society, and may *5 - 5 summon and qualify as witne,sses under oath and examine its officers, agents and employes or other person in relation to the affairs, transactions and conditions of the society. The expense of such examination shall be paid by the so- ciety examined, upon statement furnished by the Commission-

and the examination shall be made at least once in Eiee years D Whenever after examination the Commissioner is satisfied that any domestic society has failed to comply with any provisions chapter, or is exceeding its powers, out its contracts or is transacting fraudulently; a D 0 safd Commis- sioner may present the facts thereto to the Attor- ney General, who shall, if he deem the circumstances war- rant, commence an action in quo warrant0 in a court of com- petent jurisdiction, and if it shall then appear upon the trial that such society should be closed, said society shall be enjoined from carryfng on any further business and some person shall be appointed receiver of such socfety and shall proceed at once to take possession of the books pa- pers, moneys and other assets of the society, and shall ‘* forthwith, under the direction of the court, proceed

close the affairs of the society, and to distribute funds to those entitled thereto* No such proceedings shall be commenced by the Attorney General against any such so- ciety until after notice has been duly served on the chief executive officers of the society and a reasonable opportun- ity given to it, on a date named in said notice, to show cause why such proceeding should not be commenced.

“Article 4854. The Commissioner, or any person whom he may appoint, may examine any foreign transacting or apply~lrig_ for admission to transact in this State, The said Commissioner may employ assistants, z~.d he, OP any shall have free access to all person he may appoint, books, papers and documents that relate to the business and may summon and qualify as witnesses under the society, oath and examine its officers, agents, and employees and other persons in relation to the affairs, transactfons He may, in h1.s discretion, ac- conditions of the society. cept in lieu of such examination the examination of the In- surance Department of the State, territory, district, prov- ince or country where such society is organized. D o . 0

“Article Pending, during, or after an examina- tion or investigation of any such society, either domestic or foreign, the Commissioner shall make public no financial nor shall he permit to become statement, report or finding, report or finding affecting public any financial statement, standing or rights of any such society until a the status, copy thereof shall have been served upon such society, at its home office, nor until such society has been afforded *6 6 CO-31851 a reasonable opportunity to answer any such financial state- ment, report or finding, and to make such showing in con- nection therewith as it may desire.

“Article When the Commissioner on investigation is satisfied that any foreign society transacting business under this law has exceeded Its powers, or has failed comply with any provision chapter, or is conducting business fraudulently, or is not carrying out its contracts in good faith, he shall notify the society of his findings and state in writing the grounds of hf.s dissatisfaction, after reasonable notice require said society, on a date nam- ed, to show cause why its license should not be revoked* If, on the date named in said notice, such objections have not been removed to the satisfaction of said Commissioner, or does not present good and sufficient reason why its authority to transact business in this State should not at that time be revoked, he may revoke the authority of the society to continue in this State, Al.1 de- cisions and findings of said Commissioner made under the of this article may be reviewed by proper pro- ceedings in any court of competent jurisdiction.”

It will be noted that by the provisions of the forego- ing articles the Board of Insurance Commissioners has the right of visitation and examination into the affairs of any foreign o: domestic for determining whether any such soci.ety has failed to comply with any provisions of Chapter 8, Tic1.e 78, Re- vised Civil Statutes, or whether it is exceeding its powers, is not carrying out its contracts in good faith, or is transact- ing business fraudulently0 kssuming you have determined any such society has exceeded its powers,

contracts or is unlawfully increasing the dues and assessments , or unlawfully doing the acts mentioned in your first question, you would be required under the law to reduce such findings to writing, serve a copy thereof upon such society at its home office and afford such society a reasonable oppor- tunity to be heard.

The principle underlying the organization and opera- tion of such societies is one of equality and mutuality among its members, The advising of its members of a violation contracts by the society would not meet the requirements that a copy of such findings of the Board of Insu,rance Commissioners be first served upon the society at its home office and affording it a reasonable opportunit to be heard prior there,toO 854, 4855 and 4856 above set %t gfo t visions of Articles ford to the Board the necessary procedure and authority within the scope of its official duties in dealing with a fraternal society which is transacting fraudulently or S.s *7 not carrying contracts with its members in good faith. The giving of such advice as outlined in your question No. 3 in Article 4855, previous to following the procedure outlined Revised Civil Statutes, would be outside the official scope and duties of the Board of Insurance Commissioners.

From what has been said, we have reached the conclu- sion and it is the opinion of this department that the advising of members of a fraternal society by the Board of Insur- ance Commissioners as to their individual rights under the original certificate them by the society to the effect that they do not have to accept proposed changes or reductions in benefits but that they may enforce by legal process, if ne- cessary, benefits or recover from all amounts paid upon same togetherwith legal inter- by Article 4855, est from date of payment, would be prohibited Revised Civil Statutes, as calculated to affect the status, standing or rights of such corporate and not in compli- ance with said statute.

Yours very truly ATTORNEY GENERAL OF TEXAS By /s/ Wm. J. R. King Wm. J. R. King, Assistant APPROVED JUL 29, 1942

/s/ Grover Sellers

FIRST ASSISTANT ATTORNEY GENERAL

This opinion considered and approved in limited conference.

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