Mr. A.W. Pogue Opinion No. JM-1125

Commissioner State Board of Insurance Re: Construction of theprovi1110 San Jacinto sions of Insurance Code article Austin, Texas 78701-1998 21.28-A, regarding conservatorship (RQ-1804)

DearMr. Pogue:

You ask:

(1) whether section 3of [Insurance Code] art. 21.28-A provides analternate route to conservatorship orare sections 5and 6 the only governing statutes for conservatorship; and

(2) whether the legislature intended to give the Commissioner discretionary authority toproceed under section 3or 5.

Article 21.28-A of the Insurance Codewas substantially amended in 1987and 1989. You say that your questions are prompted by concerns as to the application of section 5A, added in 1989, to theprovisions of sections 3 and 5, as amended in 1987and 1989. Section 5Aapplies to conservatorships imposed on and after September 1, 1989. The section provides in subsection (a):

on appointment ofa conservator as arovided b;-Sections 5and 6 of this Article, the Commissioner of Insurance shall publish notice of the conservatorship inat least one newspaper with general circulation in each county that has apopulation of at least 100,000 according to themost recent federal decennial census. (Emphasisadded.)

Acts 1989, 71st Leg., ch. 1082, §4.02, at 4385.

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Section 6, referenced in section 5A, makes special provisions for supervision, conservatorship, etc., with regard to insurance companies doing business but not domiciled inTexas. Apart from its reference to appointment of a conservator under section 6, section 5Aalso requires publication ofnotice when aconservator isappointed **“ 2s**  provided by" section 5. Section 5makes detailed provisions for the appointment of and powers and duties of a conservator. As section 3 also refers to a conservator being appointed (after a period of supervision), your
concern appears tobe focussed onwhether the commissioner
may utilize section 3 as independent authorization for appointment of aconservator such that the appointment would not trigger thepublication requirement of section 5A, since the latter section's publication requirement applies, on its face, only to appointments under sections 5and 6.

Article 21.28-A was added to the Insurance Code in 1967. Acts 1967, 60th Leg., ch. 281, at 671. In section 1, the legislature declared that ithad found existing laws sometimes inadequate

inrespect of aneed to remedy the financial condition and the management of certain insurers.

. . . It is thepurpose of the Legislature toprovide forrehabilitation and conservation of insurers by authorizing and requiring the additional facility of supervision and conservatorship by the State Board of Insurance, to authorize action to resolve whether an attempt be made to rehabilitate and conserve an insurer, and to avoid, if possible and feasible, the necessity of temporary orpermanent receivership.

Prior to 1987, section 3provided for the commissioner's determining that acompany was inneed of supervision. If acompany was placed under supervision, the
company had 60days to comply with requirements imposed by the commissioner. If the company failed to comply within 60 days, the commissioner, after notice and hearing, was to take charge "as conservator of the insurance company and all of theproperty and effects thereof."

Prior to 1987, section 5began:

If, after notice, and after hearing, at the conclusion of said sixty (60)dayperiod, it isdetermined that such insurance company

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has failed to comply with the. lawful requirements of the Commissioner, or upon consent by an insurance company, the Commissionermay appoint a conservator, who shall immediately take charge of such insurance company and all of the property, books, records, and effects thereof, and conduct the business thereof, and take such steps toward the removal of the causes and conditions, which have necessitated such order, as the Commissioner may direct.

The rest of section 5detailed thepowers and duties of

aconservator, and gave the commissioner discretion to operate the company through a conservator or report the matter to the attorney general to take appropriate action. Ifthe company's affairs werewound up and its policies reinsured or terminated under the conservatorship, the commissioner then had to report thematter to the attorney general who was to take action "to effect the forfeiture or cancellation of the charter of the insurance company so reinsured and liquidated." Id.

In 1987, section 3was amended to allow the commissioner to extend the time acompany under supervision had to comply with the commissioner's requirements before conservatorship was imposed. Acts 1987, 70th Leg., ch. 1073, §34, at 3653. The same bill also added essentially identical provisions to sections 3and 5authorizing the commissioner to impose conservatorships upon determining that the company
was insolvent, had exceeded its lawful powers, or that its continuation inbusiness would behazardous.1 Section 5was also amended to delete reference to the prior 60 day requirement of section 3 and to give the commissioner discretion as to when and if he would proceed from supervision to management of the company through a conservator. Before 1987the sentence of section 5read:

It shall be inthediscretion of the Commissioner of Insurance todetermine whether or not he will operate the insurance company

1. These provisions essentially track the language which has always appeared in section 3 regarding the commissioner's determinations prior to imposition of supervision.

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through a conservator, asprovided above, or to report it to the Attorney General, as herein provided.

Itwas amended inthe 1987 act to read:

It shall be inthe discretion of the Commissioner of Insurance to determine at anv time whether or not the insurance comoanv is placed in supervision orhewill operate the insurance company through aconservator, as provided above, orreport itto the Attorney General for thevurvose of takinq anv remedial action includins. without limitation, avolvinctforappointment of areceiver under Article 21.28 of this code. (Language added by amendment underscored.)

In 1989, inan apparent effort to remove some of the discretion given to the commissioner in 1987 vis-a-vis extending the supervision period, the legislature again amended section 3. Companies under supervision are now given aperiod of "notmore than 60 days" to comply with the commissioner's requirements, and the period can be extended for another period of 30days ifthe commissioner determines there isa "substantial likelihood of rehabilitation." At that point, ifthe commissioner determines that the company has failed to comply with his requirements, it isnot rehabilitated, it is insolvent, etc., the section provides that the commissioner "shall" impose conservatorship. Acts 1989, 71st Leg., ch. 1082, §5.01. No further amendment to the provisions of section 5 relevant to the issues presented here was made in 1989. Section 5A, requiring publication of notice ofan appointment of a conservator, however, was added at that time. Id. 54.02. For convenience, we consign the lengthy provisions of current sections 3and 5to anappendix.

We think that the reference to appointment of a conservator in section 3 appears there to clarify that supervision, theprimary concern of that section, must lead within the stated time period either to conservatorship or to release from supervision. Section 5 provides for the powers andduties ofaconservator, while section 3does not at all except inthephrase t'shalltake charge as conservator of the insurance company and all of theproperty and effects thereof." Id. 55.01. Even ifaconservator were considered to have been appointed under section 3 subsequent to supervision, hewould have to refer to section

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5 for theprovisions governing his activities as conservator.

As towhat weperceive tobe the focus ofyour inquiry, whether there canbe a section 3 appointment ofa conservator such that thepublication requirement of section 5A is not triggered, we conclude in the negative. Apart from section 6 appointments regarding non-Texas domiciliary companies, which are also embraced in the section 5A publication requirement, we think that anappointment of a conservator under article 21.28-A, even ifgoverned in part by section 3provisions, isan appointment made "asprovided by section 5"within themeaning of section 5A, and triggers the notice publication requirements of the latter section.

We doubt the legislature could have intended to create inso circuitous amanner an exception to the publication requirement of section 5A for a "route to conservatorship" through prior supervision which has throughout the history ofarticle 21.28-A been the principal, and until 1987 at least, the only torship.2 I route, absent company consent, to conservaThe language of section 5regarding the commissioner's discretion "to determine at any time whether or not the company is placed in supervision or hewill operate the insurance company through aconservator," coupled with that inboth sections 3 and 5regarding other determinations which authorize imposition of conservatorship, appears to have authorized the commissioner, since 1987, toplace a company inconservatorship, absent company consent, without its firsthaving undergone section 3 supervision. Even if that language has such effect, we do notbelieve itoperates to create "two routes to conservatorship," such that an appointment may be made under section 3alone and not be subject to the section 5Apublication requirement.

As to your questions as stated, you have raised no other consequences ofour finding an "alternative route" to conservatorship or "discretion" in the commissioner "to

See also Bill Analysis (1989f.(the act adding section 5; to S.B. 255, 71st Leg.

,which states that section 5Aapplies "ifthe commissioner appoints a conservator," without making distinctions as towhich sections of the article authorized such appointment).

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proceed under section 3or 5,I)than the avoidance of section 5A'spublication requirement. Since we have concluded in response towhat we perceive tobe the focus ofyour inquiry that section 3 does not for purposes of section 5A's publication requirement provide an alternative route to conservatorship, and that.the commissioner has no discretion toproceed under section 3 inappointing aconservator such that the section 5A publication requirement is not triggered, wewill defer treating any other issues as to alternative routes orproceedings open to the commissioner under sections 3and 5until they are squarely presented.

SUMMARY

Section 3of article 21.28-A of the Insurance Code does not provide an "alternative route to conservatorship" such that the Commissioner of Insurance may appoint a conservator foratroubled insurance company by invoking only section 3provisions for the appointment, and thereby not triggering the requirement of section 5A that notice of appointment ofa conservator bepublished.

JIM MATTOX Attorney General ofTexas

MARY KELLER FirstAssistant Attorney General

LOUMCCREARY Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY Special Assistant Attorney General

RICK GILPIN Chairman, Opinion Committee

Prepared byWilliam Walker Assistant Attorney General

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APPENDIX

Section 3of Insurance Code article 21.28-A now provides:

Ifupon examination or atany other time

itappears to or is the opinion of the Commissioner of Insurance that any insurance company is insolvent, or its condition is such as to render the continuance of its business hazardous to the public or to holders of itspolicies or certificates of insurance, or ifsuch company appears tohave exceeded its powers (as defined herein) or has failed to comply with the law, or if such insurance company gives its consent (as defined herein), then the Commissioner of Insurance shall upon his determination (a) notify the insurance company of his determination, and (b) furnish to the insurance company a written list of the Commissioner's requirements to abate his determination, and (c)if the Commissioner makes a further determination to supervise he shall notify the insurance company that it is under the supervision ofthe Commissioner of Insurance and that the Commissioner is applying and effecting theprovisions of this Article. Such insurance company shall comply with the lawful requirements of the Commissioner of Insurance. Ifplaced under supervision, the insurance company shall have not
more than sixty (60)days from thedate of the Commissioner's notice of supervision to comply with the requirements of the Commissioner. The Commissioner may extend the supervision foran additional period not to exceed thirty (30) days onwritten determination by the Commissioner that there is a substantial likelihood of rehabilitation. No hearing isrequired before the Commissioner makes the determination. During the period of supervision, the insurance company shall continue topay claims according to terms of the insurance policy, and the Commissioner
may schedule a hearing relating to the insurance company in supervision with not less than ten (10)days' written notice to

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allparties of record onhis ownmotion or that of anyparty ofrecord. However, notice may bewaived by theparties of record. If after hearing it is determined that the insurance company has failed to comply with the lawful requirements of the Commissioner, it has not been rehabilitated, it is insolvent, or it is otherwise in such a condition as to render the continuance of its business hazardous to the public or to holders of itspolicies or certificates of insurance, or ifthe company appears to have exceeded its powers as defined in this Article, the Commissioner of Insurance, acting forhimself, or through a conservator appointed by the Commissioner of Insurance for that purpose, shall take charge as conservator of the insurance company and all of the property and effects thereof. If after hearing it is determined that the insurance company has been rehabilitated or itscordition has otherwise been remedied such that the continuance of itsbusiness is

no longer hazardous to the public or to holders of itspolicies or certificates of insurance, the Commissioner may release that insurance company from supervision. Section Administrative Procedure izgister. Act (Article and Texas 6252-13a, Vernon's Texas Civil Statutes), does not apply to hearings held by the Commissioner or his representative under~thisArticle.

Section 5nowprovides inpertinent part:

If, after notice and opportunity for hearing, it isdetermined that such insurance company is insolvent, or its condition is such as to render the continuance of its business hazardous to the public or to holders of itspolicies or certificates of insurance, or ifthe company appears to have exceeded its powers as defined in this Article, or has failed to comply with any lawful requirements of the Commissioner, or upon consent by an insurance company, and if it isdetermined that supervision is inadequate to accomplish the rehabilitation of the company, the Commissioner inhis discretion

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### may appoint a conservator, who shall immediately take charge of such insurance company and all of the property, books, records, and effects thereof, and conduct the business thereof, and take such steps toward the removal of the causes and conditions, which have necessitated such order, as the Commissioner may direct. During the pendency of conservatorship, the conservator shall make such reports to the Commissioner from time to time as may be required by the Commissioner, and shallbe empowered to take allnecessary measures topreserve, protect, and recover any assets or property of such insurance company, including claims or causes of action belonging to or which may be asserted by such insurance company, and to deal with the same in his own name as conservator, and shallbe empowered to file, prosecute, anddefend any suit or suitswhich have been filed orwhich may thereafter be filedby or against such insurance company which are deemed by the conservator to be necessary to protect all of the interested parties or anyproperty affected thereby. If at the time of appointment of a conservator
or atany time during the pendency of such conservatorship itappears that the interest of thepolicy holders or certificate holders of such insurance company can best be protected by reinsuring the same, the conservator may, with the approval of or at the direction of the Commissioner: (1) reinsure all oranypart of such insurance company's policies or certificates of insurance with

some solvent insurance company authorized to transact business inthis state, and (2) to the extent that such insurance company in conservatorship is possessed of reserves attributable to suchpolicies or certificates of insurance, the conservator may transfer to the reinsuring company such reserves ,or any portion thereof as may be required to consummate the reinsurance of such policies, and any such reserves so transferred shall notbe deemed apreference of creditors. The liquidator of the State Board of Insurance,
orhis duly appointed deputy, maybe appointed to serve as the conservator. During the

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pendency of aconservatorship, the Commissioner may schedule ahearing relating to the insurance company inconservatorship with not less than ten (10)days' written notice to allparties of record onhis ownmotion or that of any party of record: provided, however, that notice may bewaived by the parties of record. If the Commissioner of Insurance is satisfied at any time and regardless of thepresence or absence of any state of supervision or conservatorship, that such insurance company isnot incondition to continue business in the interest of its policy or certificate holders, the Commissioner of Insurance shall give notice to the Attorney General who shall thereupon apply to any Court in Travis County, Texas, having jurisdiction thereof for leave to file a suit inthe nature of quowarrant0 to forfeit the charter of such insurance company or to require it to comply with the law or to satisfy the Commissioner of Insurance as to its solvency, and to satisfy the requirement that its condition is such as to render the continuance of itsbusiness not hazardous to the public or to theholders of its policies

or certificates of insurance. It shall be in the discretion of the Commissioner of Insurance todetermine atany timewhether or not the insurance company is placed in supervision orhewill operate the insurance company through a conservator, as provided above, or report it to theAttorney General for thepurpose of taking any remedial action including, without limitation, applying for appointment of areceiver under Article 21.28 of this code. Noperiod of supervision or conservatorship is necessary as a prerequisite fortheAttorney General to take that remedial action. When all thepolicies of

an insurance company are reinsured or terminated, and all of itsaffairs concluded,

as herein provided, the Commissioner of Insurance shall report the same to the Attorney General, who shall take such action

asmay be necessary to effect the forfeiture

or cancellation of the charter of the insurance company reinsured and liquidated. Where t:eo Commissioner of

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Insurance lendshis approval to the merger, consolidation or reinsurance of all the policies of one insurance company with that ofanother, the same shallbe reported to the Attorney General who shallproceed to effect the forfeiture or cancellation of the charter of the insurance company from which the policies were merged, consolidated reinsured, inthe same manner as is providzdr for the charters of companies totally reinsured or liquidated. The cost incident to the supervisor's and conservator's service shall be fixed and determined by the Commissioner of Insurance and, subject to Subsection (a)of Section 8ofArticle 21.28 of this cede, shall be acharge against the assets and funds ofthe insurance company to be allowed and paid as the Commissioner of Insurance may determine.

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