HEA~ORNEY GENERAL
Hon. 0. P. Lockhart Opinion No. O-3185
Chairman Re: The authority of the Board of In-
Board of Insurance surance Commissioners to advise members
Commissioners of a fraternal benefit scciety as to
Austin, Texas their rights under their original certi-
ficates issued 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 benefit socLety incorporated under the
laws of Texas and now operating under the provisions of
Chapter 8, Title 78, R.C.S. 1925 as amended, for many years
issued benefit certificates at wholly inadequate premium
rates, and in a great many instances these policies were
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 certificate holders (unless such general consent
thereto in advance is validly provfded by the certlffcate
provisions 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 original 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 certificates contain substantially the
following provisions:
. .
.
Hon. 0. P. Lockhart, page 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 of its Consti-
tution and Laws now in force or which may hereafter be
adopted and has not untruthfully answered any question or
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 issued (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 certificate 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 benefit
certificates without the present assent of the members, es-
pecially where such changes are disadvantageous or otherwise
unacceptable to the members (a) by materially increasing the
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 to
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?
“4. In so advising members of such society, would the
Board violate any provision of Article 4855, R.C.S., or any
other legal provision?”
As to your first question, this department cannot
. .
Hon. 0. P. Lockhart, page 3 (O-3185)
categorical1 answer same. Being divided into several parts,
(a), (b) , (cy and Cd), and all relating to certain original
benefit certificates of a fraternal benefit society, from the
provisions of which the society seeks to make substantial and
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 benefit certificates would be af-
fected by whether the by-law was adopted in a manner constitut-
ing a waiver on the part of 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-
ed December 18, 19 2:1, we held that the right of a benevolent or
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 business fraudulently
or is not carrying out its 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 to
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 of this chapter (Chapter 8, Title
781, or is exceeding its powers, or is not carrying out its con-
tracts in good faith, or is transacting business fraudulently.”
(Article 4852 and krticle 4856, Revised Civil Statutes1
In the above opinion, we cited the case of E~icson v.
Supreme Ruling of Fraternal Mystic Circle, 146 S.W. 160, wherein
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 the society for all assessments paid with interest. Alsb,
citing in this opinion Wirtz v. Sovereign Camp W.O.U., 268 S.W.
438, we followed this case and held that a stipulation in the
contract with its members that the insured would comply with and
be bound by all future regulations or by-laws of the association
. .
Hon. 0. P. Lockhart, page 4 (O-3185)
does not mean that the benefits stated in the certificates can
be legally reduced without the consent of its members. Although
fraternal benefit societies ,operating under the provisions of
Chapter 8, Title 78, Vernon’s hnotated Civil Statutes, are ex-
pressly excluded from Senate Bill 135s 46th Legislature (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 benefit society to mater-
ially change the amount payable Ian the certiffcate issued to its
members without their consent 0 *n;zillo Mutua.1 Benefit %ssocia-
tion v. Franklin, et al, 50 S.W.(2d) 265,
It seems quite Jpparent -,hat all four subdivisions of
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 odr -Vii?J regw.rd~ing any phase of
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 relating to this subject appears to have
been furnish.ed you by your Sen,ior Exan~irrer~ MrO .id.fred M. Scottz.
review of the authoriti:s thirej.r; 6 I.,~--+
6e,,~..ed 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 business fraudu-
lently would be insufficient for enabl,ing thi.s department to
render an opinion, categorically answering your first question-
Proceeding to your questions 2, 3 and ,%, above set
forth, you point out Article 4855, Revised Civil Statutes, which
prohibits certain publications by the Board of Insurance Conmis-
sioners as to any society, either domestic or foreign,, of any
financial statement , report or finding except under certain con-
ditions. This article is to be construed with A:rticles 4852,
4854 and 4856 of the statutes, each in part hereafter set out and
providing :
“Qrticle 4852. ‘C;l.t Coumis,sioner (ZBo;Lrd~of Insurance
Commissioners) or any person he may appoint 9 shall have the
power of visitation and ex;,;l-ination into the &fai,rs of an,y
domestic society. He may employ assistants for tne purpose
of such examination, and he, or any person he may appoint,
shall have free access to all the books, papers and docu-
ments that relate to the business of the society, and may
. -
Hon. 0. P. Lockhart, page 5 (O-3185)
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 of this chapter, or is exceeding its
powers, or is not carrying out its contracts in good faith,
or is transacting business fraudulently; a D 0 safd Commis-
sioner may present the facts relating 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 to
close the affairs of the society, and to distribute its
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 society transacting
or apply~lrig_ for admission to transact business in this State,
The said Commissioner may employ assistants, z~.d he, OP any
person he may appoint, shall have free access to all the
books, papers and documents that relate to the business of
the society, and may summon and qualify as witnesses under
oath and examine its officers, agents, and employees and
other persons in relation to the affairs, transactfons and
conditions of the society. He may, in h1.s discretion, ac-
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 4855. Pending, during, or after an examina-
tion or investigation of any such society, either domestic
or foreign, the Commissioner shall make public no financial
statement, report or finding, nor shall he permit to become
public any financial statement, report or finding affecting
the status, standing or rights of any such society until a
copy thereof shall have been served upon such society, at
its home office, nor until such society has been afforded
Hon. 0. P. Lockhart, page 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 4856. When the Commissioner on investigation
is satisfied that any foreign society transacting business
under this law has exceeded Its powers, or has failed to
comply with any provision of this 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, and
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
the society 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 business in this State, Al.1 de-
cisions and findings of said Commissioner made under the
provisions 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 society 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, or
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, or is not carrying out its
contracts in good faith, 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 of its
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
visions of Articles 4852, t 854, 4855 and 4856 above set %t gfo
ford to the Board the necessary procedure and authority within
the scope of its official duties in dealing with a fraternal
benefit society which is transacting business fraudulently or S.s
Hon. 0. P. Lockhart, page 7 (O-3185)
not carrying out its contracts with its members in good faith.
The giving of such advice as outlined in your question No. 3
previous to following the procedure outlined in Article 4855,
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 benefit society by the Board of Insur-
ance Commissioners as to their individual rights under the
original certificate issued 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, their original certificate benefits or recover from
the society all amounts paid upon same togetherwith legal inter-
est from date of payment, would be prohibited by Article 4855,
Revised Civil Statutes, as calculated to affect the status,
standing or rights of such corporate society and not in compli-
ance with said statute.
Yours very truly
ATTORNEYGENERALOF TEXAS
By /s/ Wm. J. R. King
Wm. J. R. King, Assistant
APPROVEDJUL 29, 1942
/s/ Grover Sellers
FIRST ASSISTANT ATTORNEYGENERAL
This opinion considered and approved in limited conference.
WJRK:GO: wb