The Attorney General of Texas
November 9, 1983
JIM MATTOX
Attorney General
Supreme Court Bollding Mr. Lyndon L. Olson, Jr. Opinion No. ~~-88
P. 0. Box 12546 Chairman
Austin. TX. 76711. 2549
State Board of Insurance Re: Whether article 3.68 of
5121475~2501
Telex 9101674-1367
1110 San Jacinto Boulevard the Insurance Code applies to
Telecopier 51Z475.0266 Austin, Texas 78711 non-Texas business of a life
insurance company holding a
Texas certificate of authority
714 Jackson. Suite 700
Dallas. TX. 75202-4506
2141742.6944
Dear Mr. Olson:
You have requested our opinion concerning the scope of article
4624 Alberta Ave., Suite 160 3.68 of the Insurance Code. Specifically, you ask whether the article
El Paso. TX. 799052793 requires your agency to revoke the Mid-South Life Insurance Company's
9151533-3464
certificate of authority to transact business in Texas. Article 3.68
of the Texas Insurance Code provides as follows:
,-
‘01 Texas. Suite 700
,,ouston. TX. ‘77002-3111 Art. 3.68. No Commissions Paid Officers
7131223.5666
No life insurance company transacting business
606 Broadway, Suite 312
in this State shall pay, or contract to pay,
Lubbock. TX. 79401-3479 directly or indirectly, to its president, vice
6061747-5236 president, secretary, treasurer . . . or to any
officer of the company other than an agent or
solicitor, any commission or other compensation
4309 N. Tenth. Suite B
McAllen. TX. 78501-1665
contingent upon the writing or procuring of any
512/062-4547 policy of insurance in such company, or procuring
a" application therefor by any person whomsoever,
or contingent upon the payment of any renewal
200 Main Plaza. Suite 400
premium, or upon the assumption of any life
San Antonio. TX. 76205.2797
5121225-4191
insurance risk by such company. Should any
company violate any provision of this article, it
shall be the duty of the Board of Insurance
An Equal OpportunityI Commissioners to revoke its certificate of
Affirmative Action Employer
authority to transact business in this State.
Mid-South Life Insurance Company (hereinafter "insurance
company"), a Mississippi insurer, holds a certificate of authority to
write life, health, and accident insurance in Texas. The insurance
company owns 100% of the voting securities of MS Services, 1°C.
(hereinafter "service company"), a Mississippi corporation. The
president and secretary of the two companies are the same.
p. 371
Mr. Lyndon L. Olson, Jr. - Page 2 (JM-88)
The insurance company and the service company entered into a
service agreement in 1981, whereby the service company would provide
sales promotion services, clerical help, office space, office
equipment, and other equipment, facilities, and support services for
the insurance company. The agreement provided that the insurance
company would pay the service company a fee based on the amount of
annual "et premiums written.
The first question to be addressed is whether the payment of
compensation under the terms of the 1981 agreement would violate
article 3.68 if paid for the Texas business of the companies. The
payment to an officer of the insurance company of any commission or
other compensation contingent upon the procuring of any policy of
insurance would violate the statute. The 1981 agreement provides for
the payment by the insurance company of a fee based on the number of
premiums written; this fee is thus contingent upon the procuring of
insurance policies.
The statute forbids the payment by a" insurance company to "its"
officers, directly or indirectly, of a commission. Although the 1981
agreement is between two corporations, it does contemplate the
indirect payment by the insurance company to "its" officers of such a
commissio". The service company is a wholly owned subsidiary of the
insurance company. The president and secretary of the service company
are also president and secretary, respectively, of the insurance
company. When the insurance company pays the service company a
commission under the 1981 service agreement, it is indirectly paying
the officers of the service company. Because the officers of the two
companies are the same, they would be receiving the indirect benefits
of the commission payments through their salaries or otherwise.
There are several policy reasons for this interpretation of the
scope of article 3.68. First, if a life insurance company coul~dpay
commissions to a subsidiary company whose officers were the same as
the insurance company's, the" the intent of the statute could easily
be thwarted by merely setting up "dummy" corporations when commissions
were desired. Second, this type of arrangement could be used to
channel funds from the insurance company to the subsidiary, eventually
leading to insolvency on the part of the insurance company and a
subsequent inability to fulfill its obligations to policyholders.
Finally, if one of the purposes of the statute is to prevent the
promotion or condoning of unscrupulous selling techniques, then it is
necessary to apply the statute to this agreement, because the service
company rather than the insurance company will be providing all sales
promotion services.
Statutes regarding insurance should be liberally construed in
favor of the public and the insured. Johnson v. Prudential Insurance
co. of America, 519 S.W.2d 111 (Tex. 1975). For the foregoing
reasons, it is our opinion that the 1981 agreement does violate the
statute.
p. 372
Mr. Lyndon L. Olson, Jr. - Page 3 (~~-88)
The two companies entered into another service agreement in 1982
which uapplies only to services in connection with Texas Business.”
The agreement provides that the insurance company would pay the
service company a fee after the commencement of business in Texas, but
does not specify on what basis the compensation will be pa~id.
According to the director of the legal staff of the Commissioner of
the State Board of Insurance, the 1982 agreement was intended to
provide that no commission would be paid based on the procurement of
policies in Texas, as opposed to other states. We now consider
whether the 1982 agreement violates article 3.68.
No direct authority could be found in response to this question
other than an Attorney General Opinion, unnumbered (1926), Book 281,
page 106, interpreting the predecessor to article 3.68. This opinion
provides in pertinent part as follows:
I have your letter of recent date in which you
ask for the opinion of this Department upon the
legality of the practice indulged in by a life
insurance company organized under the laws of
Kansas whereby it pays to an officer commisslons
upon life insurance business written by the
company but in which there is a specific waiver of
P any right to any part of the commission derived
from business written in Texas . . . .
It will be noted that [the predecessor to
article 3.681 does not confine the restrictions to
companies doing business under a charter granted
by the State of Texas but every company which
transacts business in this state is prohibited in
the most general terms from paying commission to
its president and other executive officers upon
life insurance policies written by it. We think
that if any company transacting business in this
state, no matter where organized, shall violate
the provisions of this article, it is your duty to
cancel its certificate of authority.
Under this interpretation of the predecessor of article 3.68 by this
office, the 1982 agreement would violate the statute.
An analogous case to the instant situation is State v. State
Mutual Life Assurance Co. of America, 353 S.W.2d 412 (Tex. 1962).
State Mutual was a Massachusetts corporation with its home office in
Massachusetts. It held a certificate of authority to do business in
Texas, and sold life, health, and accident insurance and annuities in
.this state. The National Association of Securities Dealers
(hereinafter NASD) was incorporated under the laws of Delaware. It
had offices in Delaware and Washington, D.C., with member firms all
across the country, including many member firms in Texas.
p. 373
Mr. Lyndon L. Olson, Jr. - Page 4 (JM-88)
NASD instituted an i"S"lX."CS trust for the purpose of
establishing a plan of group insurance for its member firms and their
employees. Applications for group insurance were mailed from NASD's
office in Delaware to State Mutual's office in Massachusetts, which in
turn issued and mailed group policies to Delaware, including policies
for twenty-five Texas member firms of NASD. The group policies were
valid under the laws of Massachusetts and Delaware. They would not
have been valid in Texas had they been executed and delivered in
Texas, because article 3.50, section 3 of the Insurance Code did not
authorize group insurance for members of a trade association. That
statute provided In pertinent part as follows:
[I]t shall be unlawful to make a contract of life
insurance covering a group in this state, and the
license to do business in Texas of any company
making a contract of life insurance covering a
group in this state except as may be provided in
this Article may be forfeited by a suit brought
for that purpose . . . .
The court stated that the "plain and unambiguous language" of the
statute prohibited the coverage of trade association groups in Texas
by contracts of insurance executed and delivered in states where this
type of group insurance was legal. The court next noted that to hold
otherwise would "destroy the effectiveness of article 3.50 and . . .
make a mockery of its purpose and intent." Finally, the court held
that the statute "authorizes cancellation of the license to do
business in Texas of any company which executes and delivers anywhere
a contract of insurance covering a" unauthorized group in Texas,
irrespective of the validity of the contract where executed and
delivered." -Id. at 414-15.
As in the State Mutual case, the plain and unambiguous language
of the statute at issue here mandates a" even-handed applicati.onof
the prohibition against commissions to officers on both out-of-state
and in-state business. Article 3.68 applies to any life insurance
company transacting business in this state and forbids "any commission
or other compensation contingent upon the writing or procuring of 3
commissio" or other compensation contingent upon the writing or
procuring of s policy of insurance in such company." (Emphasis
added). The legfslature made no distinction between foreign companies
and domestic companies or between commissions made on Texas policies
and foreign policies, although it makes such distinctions in other
code provisions. See, e.g., Tex. Ins. Code arts. 3.12 and 21.43.
Furthermore, public policy and legislative intent appear to
require equal application to commissions on both domestic and foreign
policies. Article 1.14-1 of the Insurance Code provides in pertinent
part:
p. 374
Mr. Lyndon L. Olson, Jr. - Page 5 (JM-88)
The Legislature declares that it is . . .
concerned with the protection of residents of this
state against acts by persons and insurers not
authorized to do an insurance business in this
state by the maintenance of fair and honest
insurance markets . . . by protecting authorized
persons and insurers, which are subject to strict
regulation, from unfair competition by
unauthorized persons and insurers and by
protecting against the evasion of the insurance
regulatory laws of this state.
Article 3.24-l provides as follows:
When a foreign or alien company has complied
with the requirements of this Subchapter and all
other requirements imposed on such company by law
and has paid any deposit imposed by law, and the
operational history of the company when reviewed
in conjunction with its loss experience, the kinds
and nature of risks insured, the financial
condition of the company and its ownership, its
proposed method of operation, its affiliations,
its investments, any contracts leading to
contingent liability or agreements in respect to
guaranty and surety, other than insurance, and the
ratio of total annual premium and net investment
income to commission expenses, general insurance
expenses, policy benefits paid and required policy
reserve increases, indicates a condition such that
the expanded oueration of the cornDan" in this
State & its operations outside this state will
not create a condition which might be hazardous to
its policyholders, creditors or the general
public, the Commissioner shall file in the office
the documents delivered to him and shall issue to
the company a certificate of authority to transact
in this State the kind or kinds of business
specified therein. Such certfficate shall
continue in full force and effect upon the
condition that the company shall continue to
comply with the laws of this State. (Emphasis
added).
Thus, the legislature has indicated that it is concerned with
operations of a company outside Texas as well as within Texas, if
those operations may have an effect on Texas policyholders, creditors
or the general public.
Commissions paid to officers of an Insurance company, eve" if
restricted to out-of-state business, would have a potentially
p. 375
Mr. Lyndon L. Olson, Jr. - Page 6 (JM-88)
hazardous effect on policyholders, creditors, or the general public in
Texas. Company officers set company policy governing attempts to sell
life insurance policies to the public. If officers receive
commissions based on the number of policies written, they may advocate
unscrupulous selling techniques or ignore malfeasance by insurance
agents so that their income will not be affected. This situation
would affect all policyholders, whether located in Texas or not.
Furthermore, in our opinion, one purpose of the statute is to prevent
overselling of insurance policies, which would impair the financial
well-being of the company. If policies were oversold in other states,
even if not in Texas, the overall financial well-being of the company
would be affected. Insolvency of the company would certainly affect
Texas policyholders and the Texas public as well as the policyholders
and public in those states where commissions are allowed.
Another compelling reason for applying article 3.68 to this
arrangement between the insurance company and the service company is
that to fail to do so would discriminate unfairly against domestic
insurers in favor of foreign insurers. A domestic life insurance
company that also did business in other states would be in violation
of article 3.68 if it gave its officers commissions on its
out-of-state business. There is no rational reason to treat foreign
insurers differently.
Under this interpretation of article 3.68, Texas is not seeking
to prohibit a contractual arrangement made between the insurance
company and the service company in another state. “It seeks only to
take away from a foreign insurance corporation what is finally and
essentially a privilege," which is the ability to do the business of
insurance in this state. Texas does not deny full faith and credit to
the laws of the state where the contract was made by denyi~ng the
insurer the right to do business in Texas if the contract would be
unlawful if made in this state. State v. State Mutual Life Assurance
Co. of America, supra, at 419.
This application of article 3.68 does not violate the Commerce
Clause, because Congress removed all Commerce Clause limitations on
the authority of the states to regulate the business of insurance when
it passed the McCsrran-Ferguson Act, 15 U.S.C. section 1011, et seq.
Western and Southern Life Insurance Company v. State Board of
Equalization of California, 451 U.S. 648, 653 (1981). Furthermore,
the Privileges and Immunities Clause is inapplicable to corporations.
-Id. at 656.
Finally, this application of article 3.68 does not deny the
insurer due process of law. A statute denies substantive due process
rights if it does not bear a rational relation to a legitimate state
purpose. Exxon Corp. V. Governor of Maryland, 437 U.S. 117, 124
(1978). The courts will assume that the objectives articulated by the
legislature are the actual purposes of the statute. Minnesota v.
Clover Leaf Creamery Company, 449 U.S. 456, 463 n.7 (1961).
p. 376
Mr. Lyndon L. Olson, Jr. - Page 7 (JM-88)
The test for determining the validity of an application of a
statute such as the one at hand is whether the state is regulating the
business of insurance within the state, or is reaching beyond its
borders to regulate a subject which was not of its legitimate concern.
Osborn v. Ozlin, 310 U.S. 53, 62-67 (1940). In the Osborn case, the
Court held that a Virginia statute prohibiting the writing of
insurance on risks within Virginia except through resident agents was
constitutional under the Fourteenth Amendment. In Hoopeston Canning
Company v. Cullen, 318 U.S. 313 (1943), the Court upheld the
constitutionality of New York's practice requiring an lllinois company
to subject its Illinois contracts to New York regulations when
insuring New York risks. As in the instant case, these laws and
regulations reached beyond the border of the state where a license was
sought, and actually controlled the financial and other internal
systems of the company in its home state and other states. The
Supreme Court held that this scope of authority was constitutional.
-Id. at 320-21.
In State v. State Mutual Life Assurance Company of America,
a, at 416, the court held that a state may condition the right of
a foreign corporation to do business in the state on compliance with
all reasonable regulations. The application of article 3.68 to the
insurance company for payment of commissions on out-of-state business
bears a rational relation to legitimate state purposes, including the
protection of Texas policyholders.
SUMMARY
The arrangement by which a life insurance
company pays a fee to a subsidiary which has the
same president and secretary as the insurance
company based on the number of policies sold would
violate article 3.68 of the Texas Insurance Code.
Even if the arrangement were made between two
foreign companies, and no commissions were paid on
Texas business, the payment of commissions based
on out-of-state business would violate article
3.68.
L-L-J*
Very truly your
.
JIM MATTOX
Attorney General of Texas
TOM GREEN
First Assistant Attorney General
DAVID R. RICHARDS
Executive Assistant Attorney General
p. 377
Mr. Lyndon L. Olson. Jr. - Page 8 (JM-88)
Prepared by Margaret McGloin
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Rick Gilpin, Chairman
Jon Bible
Susan Garrison
Margaret M&loin
Jim Moellinger
Nancy Sutton
p. 378