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### THE ATTORNEY GENERAL OF TEXAS

April 23, 1990

Honorable Paul T.Wrotenbery Opinion No. JM-1163 Chairman State Board of Insurance Re:Authority of anon-res1110 SanJacinto ident property and casualty Austin, Texas 78701-1998 insurance agent to transact certain business inTexas (RQ-1834)

DearMr. Wrotenbery:

You ask several questions regarding activities of a non-resident property and casualty insurance agent:

Assuming the policies inquestion were underwritten by an authorized insurer, contained the proper counters.ignaturesandwere written at the correct rates, we **ask** your opinion as to the following:

1. **May** a non-resident property and casualty insurance agentwho acts as an agent foracorporation domiciled inanother state enter the state to sell insurance to Texas residents who are corporate affiliates? MaY such agent who acts as an agent for a franchiser enter the state . to sell insurance to Texas residents who' have the right to use the franchise's name and products?

2. When the initial solicitation occurred inanother state and subsequent contacts by telephone or mail are incidental to the initial contact, may anon-resident property and casualty insurance agentmake subsequent contacts with a resident of this state for the purpose of completing an insurance transaction?

3. When the non-resident
. . .agent who sold the original insurance policy calls a Texas resident asking the insuredwhether he wishes to renewhis policy, is such act a

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direct solicitation prohibited by the statute?

We assume that bynon-resident property and casualty insurance agent you mean a @'licensednon-resident insurance agent" asprovided for in article 21.11 of the Insurance Code.

Article 21.11, prior to 1955,made noprovision for "licensed non-resident insurance agents" but simply prohibited resident licensed property and casualty insurance agents from paying commissions tonon-resident agents or other unlicensed persons. In 1955, the legislature amended article 21.11 topermit "local recording agents" to divide commissions on policies "originatedl* by a "licensed non-resident insurance agent," and wcovering property or persons in this state." H.B. 103,Acts 1955, 54th Leg., ch. 209, at 605. Under article 21.14, section 3, a "local recording agent" must be a resident of this state.1 Article 21.11 as amended defines and provides for the licensing of non-resident agents, whomust be licensed by, and residents of, states which donot prohibit residents of this state from acting as insurance agents within.2

Article 21.11 continues:

1. Article 21.14, section 3, subsection b,makes an exception for local recording agents residing intowns on the state line.

2. The emergency provision in section 2 of the 1955 enactment indicates that thepurpose of the amendment was to place Texas ina reciprocal relation with other states, the laws of which restricted division of commissions with non-resident agents to agents from states permitting division of commissions with their resident agents:

The fact that many other States issue licenses to Non-Resident Agents and permit the division of commission on aretaliatory basis, makes it possible for aRecording Agent of Texas to obtain a Non-ResidentAgent's license in these States and thereby citizens of Texas having property located in these States are prevented fromhaving the services of their
ownRecording Agents of Texas for such risks, creates
an emergency . . . . .

--.

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The issuance of a Non-Resident Agent's license shall be for the purpose of permitting aLocal Recording Agent of Texas todivide commission with an agent of another State on insurance covering property persons inthis State placed with or throui:
aLocal Recording Agent, and to permit an agent of another state,who qualifies and is licensed as aNon-Resident Agent, to inspect and service such risks in Texas, which license shall be subject to the same fees, qualifications, requirements and restrictions
as apply to Local Recording Agents of this State, except that an office shall not be maintained in this State by a Non-Resident Agent and all such insurance transacted shall be through licensed Local Recording Agents as provided in Article 21.09 of the Texas Insurance Code
. . . . Article 21.09 prohibits insurance companies authorized todo business in Texas from allowing any non-resident person, agent, firm, or corporation to issue insurance policies onpersons orproperty located inthis state except through local recording agents, with certain exceptions not relevant to your concerns. The above-quoted language of article 21.11 authorizing licensed non-resident agents to "inspect and service risks" in Texas, and the reference earlier in the article to suchnon-resident agents dividing commissions with local recording agents on policies 1'originated8q

by non-resident agents, indicates that the legislature contemplated that non-resident agents could perform some actswhich would constitute "doing an insurance business inthis state." See Ins. Code art. 1.14-1, § 2 (describing what acts constitute "doing an insurance business in this state"). However, subsection (c) of article 21.11 specifically provides:

Nothing contained herein shall be construed
. . .topermit anyperson or firmwho holds a Non-Resident Agent's license as authorized herein to engage in any form of direct solicitation of insurance within this State.

It isapparent that the focus ofyour concern in your questions is whether the activities described constitute "direct solicitation" by a non-resident agent in violation of the above-quoted language ofarticle 21.11. "Solicitation" asused inarticle 21.11 isnot statutorily defined. The ordinary meaning of %olicitation" isthe "act or an

p. 6143Honorable Paul T.Wrotenbery -Page 4 (JM-1163)

instance of soliciting." @USolicitllordinarily means to "makepetition to," "entreat,Ifor "approach with a request." SeeWebster's New Collegiate Dictionary (9th ed. 1983). From the contexts of the term's usage inother provisions of the Insurance Code, it appears that "solicitation of insurance" isdistinct fromnegotiating, writing, signing,
or executing policies. See. e.a. Ins. Code art. 1.14-1, 52(a)(6) (doingbusiness of insu;ance defined to include l*solicitation,negotiation, procurement, or effectuation of insurance"); & art. 21.14, 5 2 (at'localrecording agent" isaperson authorized inter alia "to solicit business and to write, sign, execute, and deliver policies of insurance").

The word "direct" in the language of article 21.11 prohibiting "direct solicitation" refers, we think, to solicitation of insurance business not done through a resident Texas local recording agent, authorized under articles 21.09 and 21.14.3 Aspreviously mentioned, article 21.09 prohibits an insurer authorized to dobusiness in this state from allowing any non-resident to issue, etc., policies of insurance onproperty orpersons located inthis state except through regularly licensed local recording agents. Article 21.14 provides that a local recording agent isaperson authorized "to solicit business, write; sign, execute, and deliver policies." Comnare Ins. Code art. 1.14-2, 5 2(a)(2) (l'surplus lines" license limited to acceptance ofbusiness through aregularly "licensed surplus lines agentI'and shall not authorize surplus lines agency "to transact business directly with the applicant for insurance").
Though a licensed non-resident property and casualty insurance agent may not under article 21.11 make "direct solicitations" of insurance inthis state, other language in

3. Article 21.14 also provides in section 2 for licensing of *'solicitorsI' who "engage in the business of soliciting insurance onbehalf of a local recording agent." Indetermining that wsolicitationV' by non-resident agents must be done throuah local recording agents, we mean to include scenarios wherein the solicitation done Vhrough" local recording agents is actually performed by such solicitors acting on the former's behalf.

There isan exception in section 2of article 21.14 for various kinds of nonprofit societies, associations, and other institutions described there.

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that article indicates that hemay "originatel'policies of insurance. Construing these provisions of article 21.11 together, we are of the opinion that they contemplate that the non-resident agentmay work up aproposal for providing property or casualty insurance fromthe insurer-principal he represents to prospective clients L&I "originatel' a policy) but that contacts with prospective clients for purposes ofproposing they buy such insurance must be made through a Texas local recording agent (i.e., no "direct solicitationw).

Inresponse to your first question --whether a nonresident property and casualty insurance agent, acting as agent for anon-Texas domiciliary corporation, may enter Texas to sell insurance to Texas resident corporate affiliates, orwhether such agent acting for a franchiser may enter Texas to sell insurance to Texas resident franchisees -- we think it follows from the foregoing discussion that such non-resident agent may enter Texas to sell such insurance so long as the contacts with the prospective clients, be they corporate affiliates franchisees or others, forpurposes of proposing they bzc such insurance, aremade through a Texas local recording agent.

Inyour second question you outline a scenario inwhich the non-resident agent's lBinitialcontacts" aremade out-ofstate, but "subsequent contacts . . .for the purpose of completing the transaction" are made by the agent by telephone ormail, presumably while the prospective clients
are located in this state. We think that the answer toyour second question would depend on the facts of the particular
case. If the UVsubseguentcontactstl could be accurately characterized as "solicitations," theywould be prohibited by article 21.11 unless made through a local recording agent. For example, ifa "subsequent contact" consisted of: "1 spoke at the convention of corporate affiliates you attended in St. Louis about insurance programs. I can offer, and Iamphoning you now, to askwhether youwould be interested in one of those programs" --such "subsequent contact8'would probably be characterized as a prohibited "direct solicitationIt under article 21.11.4

4. Article 1.14-1 of the code provides in section 3(b):

Inrespect to the insurance of subjects resident, (Footnote Continued)

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We donot think that the fact that such 18subseguent contact" ismade bymail or telephone takes such contact out of the article's prohibition on "direct solicitation" if the prospective client is located in this state at the time of the contact. Article 1.14-1, section 2(a), in describing which acts "effected bymail orotherwise" constitute doing
an insurance business in this state, specifically provides that "thevenue of anact committed bymail isat the point where thematter transmitted bymail isdelivered." We see no reason why a telephone contact from out-of-state to a prospective client inthis state should be treated differently than acontact bymail.

Inyour third question you askwhether a non-resident agent's telephoning aTexas resident, presumably while the latter is inTexas, asking whether the latter wishes to renew apolicy the non-resident agent had initially sold to him, constitutes a "direct solicitation'* under article 21.11. Again the facts of the t.he particular case -- for example, provisions, if any, inthe original contract regarding renewals --might have abearing on the determinationwhether such contact isa "direct solicitation" under article 21.11. Wewould observe, however, that absent any mitigating factors, the non-resident agent's asking the Texas client, by telephone, mail, or in person, to enter into a new contract for apolicy, would appear to be *qsolicitation,l'

which ifnot done through a local recording agentwould be "direct" and therefore in violation of article 21.11. Concededly, article 21.11 does provide that licensure ofnon-resident agents is for the purpose, inter alia, ofpermitting such non-resident agents to '*inspectand service
. . .risks in Texas." However, in view of the article's explicit prohibition on "direct solicitation,"
we think that whatever scope the language "inspect and service
. . .risks" has, if solicitation is involved, such solicitation may not bedone directly, butmust rather be done through a Texas local recording agent in order to comport with the provisions of article 21.11.
Finally, we note that though you donot raise in your request any constitutional issues with respect to the

(Footnote Continued) located or tobe performed within this state this section shall not prohibit the collection of premium
orother acts performed outside of this state **by** persons or insurers authorized todobusiness in this state provided such transactions and insurance contracts otherwise comply with statute.

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application of the article 21.11 prohibition on direct solicitation bynon-resident agents, a brief submitted to this office in response toyour request argues that those provisions must be construed in light of theU.S. Constitution's guarantees of free speech (firstamendment), equal protection (fourteenth amendment), and that "the citizens of each state shall be entitled to all privileges and immunities of citizens in the several states" (article IV, section 2, clause 1). See. e.a McKinnev v. Blankenshiu 282 S.W.Zd 691 (Tex.1955) (sta&e will notbe interpreted
soas to render it unconstitutional if by any reasonable construction itmay be held constitutional).

The above-mentioned brief relies principally on three federal court cases inarguing that aprohibition on direct solicitation by non-resident property and casualty insurance agents would violate the federal constitution. In Metrogo ita 7, 470 U.S. 869

Li e (1985) the Supreme Court considered whether Alabama's imposition of a higher gross premium tax on out-of-state insurance companies than ondomestic ones violated the equal protection clause. The Court noted that in Southern Life Ins. Co.v. State Bd. gf Ecualization ofCalifornia, 451U.S. 648 (1981), they had considered it

now established that,whatever the extent of
a State's authority to exclude foreign corporations fromdoing business within its boundaries, that authority does not justify imposition of more onerous taxes or other burdens on foreign corporations than those imposed ondomestic corporations, unless the discrimination between foreian and domestic cornorations bears a rational relation to a leaitimate state nurnose. (Emphasis added.)

Ward at 875. The Court inWard found that under the circumstances there thepurposes of theAlabama statute, as argued by the state --promotion ofdomestic business and investment inAlabama assets5 --were not legitimate state purposes justifying, under the Equal Protection clause, the discriminatory tax, and remanded the case for further proceedings not inconsistent with its opinion.

5. TheAlabama statute provides forreduction of the tax rate differential forout-of-state insurance companies investing inAlabama assets and securities. SeeWard at - -I 870.

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Insv., 760 F.2d 33 (1stCir. 1985) the first circuit court of appeals ruled that Puerto Rico's licensing provisions for insurance consultants requiring that they be Puerto Rico residents violated the privileges and immunities clause (article IV, section 2, clause 1,U.S. Constitution). The court noted, citing Toomer v. Witsell, 334U.S. 385 (1948), that "the privileges and immunities clause isnot anabsolute." Garcia, at 38.

Discrimination against nonresidents is permitted where:
(i) there isa substantial reason for the difference in treatment; and (ii) the discrimination practiced against nonresidents bears a substantial relationship to the State's objective
. . . . Indeciding whether the discrimination bears a close
or substantial relationship to the State's objective, the Court has considered the availability of less restrictive means.

. . . .
In order for there to be a 'substantial
reason for the difference in treatment,' nonresidents must be shown to constitute a 'peculiar source of the evil at which the statute isaimed.'

Id. (citations omitted). The Garcia court found, however, that

Puerto Rico has not offered substantial

reasons for its discriminatory treatment of nonresident insurance consultants, norhas it shown a substantial relationship between these reasons and itsdiscriminatory treatment ofnonresidents.

Id. at 40.

In Suureme Court of New Hamwshire v. Piuer, 470U.S. 274, 288 (1985), the Supreme Court ruled that

New Hampshire's bar residency requirement violates the Privileges and Immunities Clause of Art. IV, §2,of theUnited States Constitution.
. . .A state may discriminate against nonresidents only where its reasons are 'substantial,' and the difference in

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. Honorable Paul T.Wrotenbery -Page 9 (JM-1163)

h

treatment bears a close or substantial relation to those reasons. No su& showing has been made inthis case.

As to the brief's assertion thatprohibition of "direct solicitation@@by non-resident property and casualty insurance agents restrains %onmercial speech" inviolation of the first amendment, we note that the courts, aswith the equal protection and privileges and immunities claims addressed inm, m, and m, donot treat the first amendment's freedom of speech guarantee as an absolute. In
varmacv Bd.v.Virainia Consumer Council 425U.S. 748, 770 (1976)the court acknowledged that '~some'forms of commercial speech regulation are surely permissible.l' There, however, it found the justifications the state of Virginia offered for totally suppressing prescription drug advertising insufficient. &; see am Bates v. State Bar fArizona 433 U.S. 350 (1977)(discussion of proffered Tustifications for theArizona Supreme Court's disciplinary rule barring attorney advertising).

We findno cases onpoint as tothe issuesraised here.
m dealt with discriminatory taxation rather than the sorts of restrictions on non-resident insurance agents provided for inarticle 21.11. TheSilveZ:courts addressed restrictions on insurance consultants, who unlike insurance agents, and as the court specifically noted, didnot "sell insurance either directly or indirectly." Id.at34. PiDer dealt with residence restrictions on lawyers, not insurance agents. TheVirainia Pharmacy court expressly limited its holding under the first amendment as toprescription drug price advertising to the profession of pharmacy. & at 773 n.25 (observing that Ithistorical" and "functional" distinctions "mayrequire consideration of quite different factorst'when dealing with other professions). Moreover, &&88 specifically reserved questions as to direct solicitation of clients in its first amendment ruling on attorney advertising. J,& at 366.

We acknowledge that it is possible that a court, upon the taking of testimony and other evidence as. to the competing interests of the state andnon-president agents, could find constitutional infirmities in theprohibition on direct solicitation by the latter in article 21.11. But resolution of the issue whether the statehas a substantial interest, or is justified, in imposing such restriction
onnon-resident insurance agents would inevitably involve questions of fact. We inthe opinion process are unable to 'taketestimony or other evidence andmake findings of fact

r- as acourt does, andwewould therefore be unable tomake a

determination on the constitutionality of thoseprovisions.

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SUMMARY

Insurance Code article 21.11 prohibits 'direct solicitation of insurancewithin this state* by a licensed non-resident property and casualty insurance agent. Under that prohibition, such a non-resident insurance agent may not propose toaperson located in this state that hebuy insurance, unless such 'solicitation' ismade through aTexas local recording agent, subject to statutory exceptions. A solicitation **by** such anon-resident agent from outside the state by mail or telephone to aperson located in this state isa 'solicitation
. . . within this state' within themeaning ofarticle 21.11. Whether
aparticular contact constitutes a 'solicitation' isaquestion of fact.

Whether the prohibition inarticle 21.11
ondirect solicitations by licensed non-resident property and casualty insurance agents violates the constitutional guarantees of freedom ofspeech or equal protection, or the privileges and immunities clause of article IV,would involve questions of fact that cannot be resolved inthe opinion process.

MATTOX Attorney General of Texas

MARY KELLER FirstAssistant Attorney General

JUDGE ZOLLIE STEAKLEY Special Assistant Attorney General

RENEA HICKS 'SpecialAssistant Attorney General

RICK GILPIN Chairman, Opinion Committee
Prepared byWilliam Walker Assistant Attorney General -.

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