honorable 0. P. Lockhart, Chairman 

Boerd of Insurance Commissioners 

Austin, Texas 

Zear Sir: Opinion NO. O-3387 

Re: Insurance - Mutual assessment 

companies - increese of rate: 

Reduction of benefits 

Your request for opinion has been received and carefully considered. We quote from your request as follows: 

“Section 17 of Senate Bill 135, passed by 

the Forty-sixth Legislature, reads as follows; 

“‘Payments on Certificates Alreedy in Force. 

If the oa.mnents of tf any association co&i&g within the scope of thi.s-Act, on 

certificates Issued and in force wh$n this Act 

takes effect, or the relnsurance or renewals 

of such certificates, shall prove insufficient 

to pay matured death and disability claims in 

the maximum amount stated in such policies or 

certlflcates, and to provide for the creation 

and maintenance of the funds required by its 

laws, such association may with the approval of 

the Board of Insurance Commissioners and after 

proper hearing before said Board provide for 

meeting such deficiency by additional, increased or extra rates of payment, or by reduction 

in the maximum benefits stated in such pOliCi8S 

or certificates then in force, or by both such 

increased payments and reduced maximum benefits, 

or the members may be given the option of agreeing to reduced maximum benefits, or of making 

Increased payments .I 

“After this lew was in effect, several 

mutual assessment insurance companies subject 

to Its provisions made application to the Board 
Honorable 0. P. Lockhart, Page 2 

to Increase rates charged for their policies 

or to decrease pollcg benefits under Section 

17. Cases in point are the Underwriters Life 

Insurance Company of Waco, which was authorized by the Board in Its order, dated July 24, 

1939, to increase rates; and the Provident 

insurance Company of Dallas, which was authorleed by the Board in its order, dated November 

29, 1939, to revised benefits in certain policies. Copies of the orders are attached. 

“Will you please advise if, In your opinion, the action taken by these companies In 

increasing rates and revising policy benefits 

under Section 17 of Senate Bill 135, following 

the Board’s orders, was legal?” 

3 

inion No. 0-3763 of this department held Section 17 of enate Bill 135, Acts of the 46th Legislature, 

unconstitutional. Because of the Importance of the question, the matter was reconsidered by this department, and 

upon reconsideration w8 again held said Section 17 unconstitutional, in limited conference opinion No. O-3763-A. 

Copies of these opinions have already been furnished you. 

As pointed out in opinion No. 0-3763-A, the 

courts of Texas have r8COgnis8d a clear distinction between the reduction of benefits and the increase of rates 

with reference to mutual assessment insurance companies. 

We quote from said opinion as follows: 

“The raising of rates aside, we are bound 

by the law in T8xaS that the reduction of benefits in a mutual insurance contract constitutes 

an impairment of the obligations of such contract. In Supreme Council American Legion of 

Honor v. Batte, 79 S. W. 629, it was said: 

“‘In our opinion, however, the enactment of this by-law constituted a substantial repudiation of the contract. The benefit certificate upon its face provided for 

the payment of the sum of $5,000 out of the 

benefit fund of the order. The by-law was, 

In effect, an announcement that the appellant would only pay $2,000 out of the 
Honorable 0. P. Lockhart, Page 3 

benefit fund, and would only pay the 

remaining $3,000 provided that amount 

could be paid out of the emergency fund 

of the order * l *. The by-law itself 

was, In our opinion, unauthorized, and 

appellee might have treated it as void 

* * .*I 

“Wirtz v. Sovereign Camp, W. 0. W., 268 S.W. 

438, by a special Supreme Court, expressly recognized and reaffirmed the doctrine of the Batte 

case as follows: 

“‘It does not appear to us that 

the Batte case, 34 Tex. Civ. App. 456, 

79 S. W. 629, militates against what 

has been said above. That case did not 

directly involve the question of the 

right to increase rates; but the association had issued a policy upon which 

they had agreed to pay, upon the death 

of the insured, $5,000, but it subsequently changed the contract so as to 

make It liable for only $2,000, and the 

Court of Civil Appeals held -- and we 

think properly -- that there was a 

repudiation of the contract. * * * 

“‘That the stipulation or promise in 

p. contract, such as Is the basis of this 

action, that the insured will comply 

with and be bound by all future regulations or by-laws of the association, does 

not mean that the society may Interfere 

with the essential purpose of the contract, viz., the payment of the indemnity 

promised, or, in other words, cannot be 

construed as authorieing the society to 

repudiate a plain contract is clearly 

settled there is no doubt. * * *I 

“‘The distinction between reducing by 

means of a by-law or an amendment the 

amount stipulated in the most unqualified 

terms to be paid, and merely increasing 
Eon,rable 0. P. Lockhart, Page 4 

by a by-law dues or assessments to such 

extent as is necessary to meet the exigency ensuing out of the changed finmcial condition of the association brought 

about by decrease of membership by death 

or other causes, is obvious. 

“‘The first Is a violation and repudiation of an unambiguous contract, while 

the other is not, 1 

“The doctrine of the Wirtz case was expressly 

recognized and reaffirmed in Supreme Lodge Ancient 

Order of Workmen v. Kemper, ljj S. W. (2d) 64, 

Pehearlng denled October 8, 1941. Before quoting 

with approval the above quoted language in the 

Wlrte case, the Beaumont Court of Civil Appeals 

said: 

“rThe law will enforce the contratual right of a life insurance corporation to increase the amount of its 

monthly assessments against Its members. 

Supreme Lodge K. of P. v. Mims, Tex. Civ. 

APP., 167 s. w. 835. But the right to 

Increase assessments dqes not authorize 

. the corporation to diminish the amount 

payable under its certificate. . .I 

“Therefore, Section 17 of Senate Bill 135 

In its express authorization to mutual Insurance 

associations to reduce benefits authorizes the 

Impairment of obligations of contract, Is vlolative of Section 16, Article 1, of the Texas 

Constltution, and cannot, under the pronouncements, of the Supreme Court of Texas, be upheld 

as a valid and constitutional exercise of the 

police power of this State.” 

We quote from the Wlrtz case, supra, as follows: 

“That the stipulation or promise in a 

contract such as is the basis of this action, 

that the insured will comply with and be bound 

by all future regulation3 or by laws of the 

association, does n.ct mean that the society 
Honorable 0. P. Lockhart, Page 5 

may interfere with the essential purpose of 

the contract, vie., the payment of the indemnity promised, or, in other words, cannot 

be construed as authorizing the society to 

repudiate a plain contract is clearly settled there is no doubt. Xorton v. Sunreme. 

etc., loo MO. App. 76, 73 s. W. 264, i9 . 

S. W. 629; Erlcson v. Supreme, etc., 105 Tex. 

170, 146 s. w. 16~. 

“Such hoiding, however, is equally sound 

in law and in morals, but it is, however, 

also settled law that benevolent societies 

may increase their rates within reasonable 

limits In order to enable them to meet their 

obllgatlons, 

contract, ” 

and in doing so they violate no 

The right of a benevolent or a mutual assessment 

insurance association to increase its rates is, of course, 

limited to the extent that such increase must be reasonable 

and necessary. For example, in the case of Ericson v, 

Supreme Ruling of Fraternal Mystic Circle, 146 S. W. 160 

(Supreme Court of Texas), where the assessment of a member 

yo;s;;;reased from $3.30 to $23.16 a month, without his 

the Supreme Court held under the facts of that 

case th;t this was a repudiation of the contract and that 

the member was entitled to a judgment against the society 

for all assessments paid with interest. 

In answer to your question, you are respectfully 

advised that it is the opinion of this department that 

since Section 17 of Senate Bill 135, 46th Legislature of 

Texas, is unconstitutional, orders of the Board of Insurance Commissioners based thereon are of no force and effect. 

It is our further opinion that mutual assessment insurance 

companies cannot legally reduce benefits promised its members in its policies without the consent of such members 

and policyholders. It is our further opinion that mutual 

assessment Insurance companies have the right to increase 

their rates to the extent that they are reesonable and 

necessary. The question of reasonableness and necessity, 

of course, is a fact question to be determlned by the facts 

in each case. 
Honorable 0. P. Lockhart, Page 6 

This opinion Is not to be construed as specifically 

passing on the legality of the acts of the insurance companies 

named in your letter, in raising rates or reducing benefits, 

as we have not been furnished with copies of their policy 

contracts, nor have we been furnished information as to whether 

such reductions of benefits were made with the consent of the 

policy holders of the company, and we have not been Informed 

whether the increased rates are reasonable and necessary. In 

other words, the legality or Illegality of the acts of the 

insurance companies In raising rates or reducing benefits will 

not be determined by Section 17 of Senate Bill 135, but will 

be determined by the policy contracts In each case and by all 

the facts in each cask. - 

Trust 

qulry, we are 

lng that this sat isfactorlly answers your lnVery truly yours 

ATTORNEY GENERAL OF TEXAS 

BY 

WJF:GO 

APPROVED DEC. 18, 1941 

/s/ Grover Sellers 

FIRST ASSISTANT ATTORNEY GENERAL 

APPROVED OPINION COMMITTEE 

By: /s/ B. W. B., Chairman