_ _-
R-419
JE ORNEY'GENERAL
OIF 71'EXAS
PRICE DANIEL
ATTORNEY GENERAL
June 30, 1947
Honorable George B. Butler, Chairman,
Board of Insurance Commissioners,
Austin, Texas Opinion No. V-279
Re; Whether specimen
aoplos OT elioy
forms of 1lefe and
health and aoci-
dent Srsuramoe are
aonslstent with
and n&t prohibited
by Seotioa 31 ef
Psur request ipar an spinian ie as r0ihs8
"Southern Medical Hospital &e~%i,oe is
licensed undsr the xo~i$i03m of Chapter 8a
Title, 78 as qmlendefi and Article 5063*3, te'
5 inclusiv., ef Ve&n's Tpxaa Civil Stat-
utt)so
@Will y)u )lsaas advise me whs$her the
attached feWa of pbl$&y prQpa&%d by &uth*
emI MediQal E#apb?Al samios i,a aend#tont
wi;h2:: net proh;Gbited by Soot&o* 11 OP Chap*
Southern Msdioal Hos@.*al SaxMe* is a state-
wide mutual assessmsnt corn any irauing lhfs, health and
accident policies, &word Eng to the shartor (bf the oom-
i, pany,, as amended in lW3,W the purpose is stated as fol-
low:
*The purporb Bf the corporation is and
shall be the craa%iem, eperation and main&
tenance of a nut-1 Wiurancr association,
on what is knewn aa the statswide assessment
plan, for the p'roteotion, indemnification,
and insurance of the lives of its members and
against loss to thsr by rsaaan ef ill health
and/or aacidentd"
:
The 43rd ,Legfslature in 1933 passed House
‘. ~3Q3, Chapter 245, page 856, which regulates
-:-a$sessieent’“ar,sso,ciatibns engaged in issuing pol-
t$ficates of Life insurance, This bill has
,., +w &ftik$Za &3SSf, V, C. 3. The 46th Leg-
,i.(D@Qp&Wed Gnate Bill No, 135 e Chapter 6,
~Mi&& %,$.raQrn i+&d 4s &rtiole 5068,-l, V,C,S.
.’rjrt %~hi@-~~+$t&&@raoed ‘,al:l mutual assessment
‘,@xd ~sfsmoiatierm issuing oertifioates br life
trrbalth and accident certificates, Section
Q ~~:A&+%$cLe&W-:1, contains the Poll.owing provisions:
,:,,
“All certificate forms hereafter
,+wod ptst be ,i,d ao,o’ord with the provis-
,, Jhaq nf this ‘Act and with all other Laws
: ; a’%#&&m4&ig8uch assoo&atiemB as are am-
,.
., ,.lcra&#a ia th$s AOil.”
,. “I
.Ji&#&4~ 5O@+l do,eg not repeal any laws relating to mu-
$&a@e,s, eqoept those in oonfl.ict svith it, Ob-
g$i’,$he ~Arti,cle is an effort by the Legi~sJature to
$ ~Wd harmC@.se the laws governing mutual assess-
osagetiies. The above quoted provision of Article
&9~MIt6 Secti,on 15 of Artic~le 4859f to cover not
eniy ii,fe policies but health and accident as well,
The pertinent part of Section 11, Article
:
4!M%W, provides:
“No corporation hereunder shall is-
sue any certifica,te or policy upon a lim-
$ted payment plan, nor kuarantee or prem-
$*e t,o par any type of eh4oment or anfin-
$6~ benefits, but shall confine its oper-
Btdon to the issuance of certificates
P+k&ng to oontinuous payment premiums or
rine: the life time of the
And provided further that
@&io@ shall i5su% any certi-
6i$C 4grbWng to Fag any ben-
WLtis uptil a copy of such cert#icate or
po~licy has been filed with the Board of
Insurance Con&.slsionera and approved by
them a\$ being in cempliance with this Act.”
One of the policy for:cs submitted is entitled
Yiospital,i~~ation, biedical Care and Surgery riith 20 Year
Pay Partloipating; Rfvserve ,” which shall hereafter be re-
ferred to as health policy. The other is entitled “Fam-
haorablr George B. ~Butler - Page 3 V-279
The health policy oalls for an adg;vazrre-
miwn payment by the rirst insured or
and a like amount on the day or thereafter
for a period of 20 conseciiZFZ years fmte of issue”
The Service agrees to create and maintain an,amount not
to exceed dollars as a 20 year participating
reserve. The certificate contains provisions concern-
the manner of esteblishiq the Value Of the reserve
3 further provides under “Cafiditions ant! Privileges”
for extended insurance s a schedule of 20 year pay par-
ticipating reserve,and the mnner in which the assured
play with&raw the amount of the participating reserve,
The funds of this reserve may be withdrawn in a lump
sum at any time while the policy is in force, or extend-
ed aa retirement inao~ for a period of 120 months, The
bwb withdrawn is Lees indebtedness, which’ according to
the polioy shall inalude any obligation of the insured
on the palicy or reserve; all benefits pai& during the
term of the poliOy; all premium paylaents made by the Ser-
vice on. behalf bf the assured for extended insurance; and
all unpaid due prc@ums. Another feature contained in
this policy is that after the expiration of 20 years, if
continuaus premiums have been paid. by the insured, the
policy may remain In force with a further premQum payment
of $A,00 per year, If the assured withdraws ,the cash in
the participating reserve fund, it shall be in lieu of
all other benefits and all liability of the Service shall
cease, This policy further provides that no extra as-
sessments will be made upon the assured, and that the pol-
icyholder’s liability is to the extent of the premium
rates shown on the race of the policy,
The life polioy form oalls first for the pay-
ment of an advanoed premium and a like amount on or be:
fore day of each month thereafter for full
yearsTii?Ta rurtber psymnt or $l,OO a year ‘EEiGfter
so long as the poliog is in Poroe, The policyholders s
l$.rb;l&it !t%r.pr8riums is the same as that contained in
the heel t b pol$~~ TJds policy carries proM.sions re-
lating ta settlelrieuegt; cgsh withdrawal value; loan value;’
cash value or the reseYve, and extended insurance. con-
aernj.ng cash withdrawal value, the company agrees to pay
in cash not later than 60 days after legal surrender of
the policy, the matured reserve shown under “Schedule of
Cash Value df the Reserve A less indebtedness (not ae-
rind by thie polioy). This payment is made subjeot to
Honorable George B. Butler - Page 4 V-279
a deductiOn of death bemflts paid LIB&N the policy,
The Service further agrees to advance to the Last sur
vlvlng Insured, if he so deslree~, a loa,? of all or any
part of the sum shown by~the Jckeaul'e ,o,f Cash Value of
t4n Reserve, aubjeot to awh~tiom of all ina8bfea-
SoISr Th& Urn shall bear intsrest at the rat& of 6%
per swam payable in odnp8qqo?, Failure to repay such a
lo911 will mot void the policy until ,the indebtedness
shall equal of exceed Its loan value, Under dh3nd0a
Insurance, the 3ervice agrees to pay any premiums
which the inmurea does not pay, such.~payments to be
made .out of the cash value of the reserve; anrl.wi~ll be
made for the insured ,until the funds in the cash:vaiur
of the reserve are exhausta,$g,
In the case of 3ankerO.s Life and Loan Asps
soclation vs. Chase (Court of Civil Appeals), 114 S-W‘
(2a) 374, writ aim,, we have found the only construo,~
tlon of Section 11, Article 4859f, made by any of .the
Courts In Tezas. The Court said, after quoting the
.:ffSst part of Section 112,
lithe limitation contained lSn this
section, we think, is a limitation on the
time and method of payment rather than on
the amount the insurer must pay under the
policy; a restriction confining it to the
Issuance of certiflcortes of ordinary in-
surance."
The Court then defines limited payment plan, endowmcnr
insurance and annuity insurance as follows:
"37 c. J,, page 362, par: 6i is as
follows: sEndowment insurance is a con
tract to pay a certain sum to insured if
he lives a certain length of time, or, if
heCdis.e, before th$t*t$ie. to some other
person ihaicatea.
"*Annuity insurance is a contract
tc pay the. Insured or the beneficiary a
sum for a certain period or during llfeGf
Couch, Cyclopea,la of Insurance Law, Vol.,
1, page 38, par, 25,
"A policy upon a limited payment
plan, as we understand, is a paid-up pox-
lays and insurance upon which no further
Homrable George B. Butler - Page 5 v-279
t .i premium is to be paid. 37 C, J., page
364, par. 11."
Under the Court's definition of endowment
insurance, we conclude that neither of the policies
&tempts to *promise or guarantee the paylaent of en-
dowment benefits.* The definition makes It plain that
the amount to be paid shall be certain and th&t the
ooatraat rest be for a certain Length of time, Nal-
tker of these pelioi4s contracts ta pay a oertain sum;
rather, the sum is lndefidte and uncertain, Thb
health policy establishes the value of the reserve by
setting aside a sup not to exoead 5% of the earned in-
oome during the preoo$ing year. The income of the
oomoy will, by the very nature of the business, vary
fTen year to year. In some years there may net be any
rarmii 11104~e, In which bvent, it Is stated in the
eliof that the deficit shall be prorated to each pol-
5 cy holder's sche@de of the value of the reserve as
hls Interest appears, And If the oompany~ls unable to
establish the value within 5 years after a deficit oc-
curs or within the 20 years, the Service shall be re-
lieved of the liability to make adjustments, This man-
ifestly renders the sum to be paid the Insured from
the participating reserve fund indefinite and uncer-
tain and cannot be said to constitute endowment lnsur-
ame m
The same reasoning answers an objsotion
that the life policy is a type of annuity insurance.
But the health poIlcy, wherein it provides for the pay-
remt of whatever sum has accumulated in the reserve
fund as a retirement Income for a period of 120 months,
:zvz type of annuity Insurance under the definition a-
We hold that this policy violates the prov$,sions
of &lotion 11 prohibiting the issuanoe~of pollcfes with
a premise to pay mny tJba of aMuity insurance.
Aside from the questions raised by the pro-
visions of the policy relating to endowment and annuity
insuranoe, the provision of Section II of the statute
which more strongly indicates the intention of the Leg-
islature In the regulation of mutual companies Is:
" * 0 D but shall confine Its op-
eration to the issuance of certificates
104Me to continuous payment premiums
or assessments during the lifetime of the
pollcyh41der.n
“.
.‘;,~ ., ..~
”
Hwiomble Oecrg$eBr Butler - Page B t-219
he the Court seid In thd: Chars ottse l supra:
Aocording to the. defl@ijA.oa of "ordinary Onsuraacen
f0una in 44 c. J. s,,,page 487, s0ean b, par, 27,
it is:
%kslr bs l*sum@ca is on 1 Lev-
el, or i&i-at m3;15 plan, that is, where
for a fixed p.t?eaium payable, without
~oon8lt,isfi, at stated loterva1s, a sum
cer$+l8 is to Se paidl m Bteatk.without
oe@dklbXss, it is lmmn va~V.au$ly .as
'general insurance', *brdipary insurance @)
*olbLLne im8usancev, or qleVeL-predum
insunace ' , e?ea though insurer fs doing
busfgess on the asses&eat plan, and pay-
me&& to be We by iuwred em dasig-
Bltod au tm3ee.sm~u.”
MeaauE'ed by this sta$Cm-d, these policies
not only contraot to pay death and health benef~ta,
but also aontract to pay the assured the amount acc~-
ulated ik the special~reserve fund, even though the
assured has dot sustained a loss under the policy,
These prooislons settfnE up the partScipatinC reserve
'fund on the basis of a 20 year pay‘prograiv, cash with-
drawal value, loan value and extended Insurano~, are
in additioh to a cQntra0t of ordj.&q insyranee~. In
other worda, by the creation of this speoYa.& reserve
fund, in addition ix co~Wia~ the assured for either
life or health, the policies have not remained wi'thfn
th boupds of the lititatFQh$ prescribed by the &e&s-
lature . Neitker can suck previsions bs W.?onciled
with tke puraWe sf the company as is stated in tke
ohart,*@ q&d bbeter Tha life ~p~oU#yitself is ek-
titgod e year pay lifen, and the Ualth pslfof
0aMes i#X?#T%a twiskty year pay patiticfpatihir: re-
serve on (I gremium Plan exactly as the life plpey,
It is true that ordinary polioies of life ihaugance
he,&pp schedules of reserve values relatix to cash
Surrender valuee, and some of then may possibly pro-
vide for similar features carried by the Wealth and
S’ k&W poMc%es, T!itere is a fundameatal clffleredca;
hmmftm, between.an ordinary policy of life insurance
and these policies in the mamer of establishing the :
,'~ :
Homerable George B. Jhat1.r - FaSe 7 v-210
retiomo . An srdimry life pclioy establidwn fib8 FQI-
EO~Y~up08 the barni8 of the aohrral premium paid by the
lr su r e4There
, poliairr establirh the ratverve by sat-
ting arida eaoh year a o er taamount in of the 'earmd ln-
ooaa Sr o aall af the policiar conta5aing suoh provis-
la8gr Tho value ti;LbLaorbatrd my, 4eprnding up68 the
aaount OS ramad law&e, far bxa604, @r ba mch 1~08
tha8, a nra4r nlua est#bliahrd upon ths babir or an
indf*idnal~ I roalum. The polie~hhclders are’ .&Gwin(c
in the pro&se a P derived Irma NOmr polioles aa8 in this
way taka ea ssme of the eharaateristica df tantine in-
auraace, which is not nepessary to discuss here. In
any event, thsse foras are differehtfror ordinary in-
s~tansa and additional evidr~~ea that the'company has
erse$dad the limitation declared by the Legislatum in
Seotien 11 of Article 4@591, and by tha Court in the
chase ease, aupra.
It is ebvious that befars this eompaay
oould be iiaa~alally able to artablish ruoh a ms~rvr
fund as eohteaplatad by these poliolea, it would, ar
nemssity, be forced to,oharge a premium in excess of
a grbsllrll on an ordipery pelioy, This must have bden
carefully oonsidared by the oompany when provision was ;
aade to charge the assuredonly $1.00 per year after he i'
bad paid regular pre53iums for twenty years and atill
. aarry the palicy ia f'orcpe. The solvenoy of the ooapany :,
1, eeuld not aurvivr otherwise. This is doing nothihg Bore
tbaai~suhg a pclioy on what is kmwn aa a twenty year
:_-. plan, For all praetieal purposes the assured has corn-
plated the payment of what can be tsrned regular prom-
iusle at the end of twenty years, and his obligation to
pay $l.,OO per year after auah tiae does hot meet any
standard af pretaium charge based upon losses. Certain-
ly this is true if the preonium paid for twenty years be
considered an adequate premiwn to meet losses Rna em-=
pawma during such period. It amounts to nothing more
than a token.payment $-+.a flacoid attempt to meet the
statutory raquiremnt of noolatinuous colleotion 0r pram-
irpats or assessments during the lifetim of the pelioy-
holder. n Were it hot for this requirement in the stat-
ute, there would be ao need whatever under this plan of
imurame to,eall for~furthar sellaction of $laQO prem-
ium at the lxpi.ratlon of tba ~gaxtiaipatily pariod. The
p~lieias, then, are aotually paid up" polioiss at thr
end of the partioipating period; and, come within the
definition of "limited payaent plan** adopted in the Chase
oafm, supra. They are in violation of the express pro-
hibiticn a&againstirruing any cartl?ioate or policy on a
.. .,
Honorable George B. Sutler - Fage 8 V-279
“lid ted payment plan” O
Where no express authority is to be found
im either the charter 0% the statutes-permitting a
mutual assessment company to issue policies of this
nature, the rule is that such policies are ultra vires.
This rule is well expressed on page 635, par. 256,
Ceueb, cyclopedia of Ihsurance Law:
“The measure of the powers of mu-
tual companies or benefit societies to
.’ contract whether they be voluntary or-
ganizatio4s or incorporations is foulla
in their charters or artioles of asso-
ciation, sinae these constitute their
: : fundamental and organic laww, the compact
L.’ ,, ~vering their acts, subject tb the
8 oastitution and law5 of the State. This,
or oourse, mesas that rmch companies and
societies have only such powers as are
tierein speCifically enumerated, togeth-
or with such others as are incidental,
or n%oeasary, to oarry the express pow-
cays into effect, and necessary to the
enjoyment of the rights and privileges
i~o~uded in the original authorization.
And, of cou@e, acts which do not fall
within &oh express or implied powers
are ultra vires and. void; and where an
I act is ultra vires, the motive which
prc+mpWd it is not of great importance.”
We have found no cases either in or out of
Texas construing similar policy forms under statutory
prohibitions such as we have here, However, in Vol, 128,
A. L. R., page 639, we find this general rule:
*Provisions for extended or baid-
up insurahce or for loan or surrenzer
values or endowment provisions doubt-
-cannot be included in life policies
issued by coapanies operating strictly
ad exclusively on the assessment plan,
beoause in such case. the asseasinents
i&g kl.ted to the ‘amount necessary to
pay death claims, no reserve fund can be
accumulated with which to fulfill such
provisions. Companies doing business
under this atriotlg assessment plan
.
Honorable Deargo B. Butler - Page 9 v-279
possesa no power to require the pay-
ment of fixed assesbments or’ premiums
at stated periods, regardless of the
current mortuary clalme against the
obapany, and it is the lack of this
power on the part of a life insurance
company that precludes it from put-
ting such provision in its policies,
There are, however, many assessment ’
plans of doing life insurance busi-
Iiess, under some of which companies,
dependent upon the statutes under
which they are organized, possess the
power to fix a premium ‘that will cre-
ate a reserve fund to pay for ex-
tended or )ai,d-up in urnnce or?%Iow-
m and which wil+ si’ve to thaii-
policies a loan or su&nder valw.n
e&tuphsis ours. )
Our statute contains no language, either exL-
grossly or implisdly, giving such companies a right to
issue policies with provisions for loan or cash with-
drawal values or a participating reserve fund. The very
nature of the plan upon which this company operates is
founded upon the levying af’ assessments limiter to the
amount required to pay losses and operating expenses,
Section 1,l of Article 5068-l apparent~ly recognized this
vdry prinolple when it provides:
“Each association shall levy reg-
ular and periodical assessments by what-
ever name they may be called, These as-
sessments must be in such amounts and at
such proper intervals as will meet the
reasonable operating expenses of the as-
sociation, and pay in full the claims a-
rising under its certificates. 0 c en
We believe after a ~thorou@ examination of
both polioies in the light of Section 11 of Article
4859f, Article 5068-1, and the charter purposes of this
company that both the life and health policies are ultra
virsr ana prohibited by Section 11, Article 4859f,
I
_.
.- . .
Irnhhlt, G~~a;~ I). Butler - Pago 10 V-279
Where the certificates or policies of
,a,mutua,l insurance company operating en the
2 #<';:~tual~assessment plan fmr the protectisn,
"" 'indemnification, and insurance of the lives
of its members and against loss to thea by
r&,&an of i&l health and/or accident, oon-
"ta%:n,prbvisions for the creation of a parti-
cip@iapg xemerpe fund km the bW.e of a
,' twunty year period, together with cash with-
drawal value, loan value, and erten&ed in-
surance features, such policies are inoon-
sistdnt with and prohibited by the provisions
Article 46591 and Article
Yours very truly
ATTORRRY
GENERALOF !I'RXAS
ATI'ORRRYGEWRRAL
..: