Board of Insurance Commissioners

Austin, Texas

Gentlemen: Attention: Mr. D. B. Barrow OpinionNo. O-2543 Re: Certain claims of the ExamlnationDivision under the facts set forth.

Your recent request for an opinion of thisDepartment
on the questions as are herein stated has been received.

We quote from your letter as follows:

"In connectionwith the operation of the LiquidatingDivision of thisDepartment, which Division was created by the Forty-sixth Legislature,we wish to submit the followingquestion for your ruling:

"Anumber of mutual assessment associations operatingunder the provisions ofArticle 4859f
as statewideassociations, or Article 4875a as local mutual aid associations, orArticle 4784 to 4799 as life, health, and accident associations, have been placed In the hands of the Llquidator following examinationsby our Examining Division. Innearly all cases the associations
were insolventand the bills for the examinations remainunpaid at the time the associations
are declared insolventand placed in charge of the Liquidator. Innearly all such cases the only funds recoveredby the Liquidator are Mortuary Funds and ordinarily theiruse is confined to the payment of claims or claim expenses, Does the Liquidator have legal authority to use such Mortuary Funds in the payment of examination bills referred to or may the claim of the EXaminationDivision for the amount ofunpaid bills be consideredas of equal standingwith claimsunder ~ollcies issuedby the insolvent associations?Board of InBUrSnCe CO~iSSione~S, page 2 0-2543

Article 5068-1, Vernon's Annotated Civil Statutes, fB a statutewhich applies to and embracesall insurance companies and aSBOCtatiOn3,whether incorporated or not, which issues policies OP certificates of insurance on the lives of persons, or provide health and accident benefits, upon the so-called mutual assessmentplan, orwhose funds are derived from the assessmentupon its policyholders or members, and in fact, applies to all life, health and accident companies,associations,which do not come wlthln the provisions of Chapter8 3, 5, 7, 8, 9, 18, 19 and 20, Title 78 of the Revised Civil Statutes of Texas. The act includes local titual aid associatlons; Statewide life; or life, health and accident associations; mUtua1 assessment life, health, accident associations; burial associations;and similar concerns,by WhStsOeVer name or class designated,whether specificallynamed in statute or not. The companiesmentioned in your inquiryare operating eitherunder Chapter 8a, Chapter ga, or Chapter 6, Title 78, Vernon's Annotated Civil Siztutes, and Article 5068-1, suw-a, is applicable to such companies.

Section 12 ofArticle 5068-1, supra,provides in part
as follows:

"Assessmentswhen collected shall be divided into at least two (2) fUndsO One (1) of these shall be the mortuary or relief fund, by whatever name it may be called in the different associations, fromwhich claims under certlflcates shallbe paid, and to a limited extent the cost of defending contested claims, and nothing else; and the other funds shall be the expense funds fromwhich expensesmay be paid. At least sixty (609per cent of assessments collected, except the membership fee,

mUBt be placed inthemortuary or relief fund. O

. "Suchassociation shall provide in fts bylaws for the portion of its assessments to be allotted to the mortuary or relief fund and may provide for the payment out of saidmortuary or relief fund of attorneys' fees and necessary expenses arising out of the defense, settlement,
or payment of contested claims. Any suchpayments out of the mortuary or relief fund for other than claims shallbe subject to approval of the Board of Insurance Commissioners.

"A separaterecord shallbe kept of the mortuary or relief funds of each group, club, or class, and the mortuary or relief fund8 of oneBoard of Insurance Commlssloners,page 3 O-2543

group, club, or Class shallnot be used to pay the claims or obligations of any other group, club, or class."

Section 19 of Article 5068-1, supra,reads as fOllOWS:
"If,upon an examination or at any other time, it appears to the Board of InsuranceCommissioners that such associationbe insolvent,
or its conditionbe, in the opinion of the Board, such as to render the continuance of its bU8ineBB hazardous to the public, or to holders of its certificates, or if such associatlon appears to have exceeded its powers or failed to comply with the law, then the Board shallnotify the association of itsdetermlnation and said association shall have thirty (30)day8 under the supervisionof the Board within which to complywith the requirements of the.Board; and In the event of its failure to so complywlthin such time, the Board, acting for itself, or through a conservatorappointed by the Life Insurance Commlssioner for that purpose, shall immediatelytake charge of such association,and all of the property and effects thereof. If the Board is satisfied that 8UCh association can best serve its policyholders and theplblic through its continued operationby the conservatorunder the direction of saidBoard,pendlng the electionof new Directors and officersby the membershlp in such
manner as the Board may determine, the same shallbe done. If the Board, however, is satlsfied that euch association is not in condition to satisfactorilycontinuebU8ineSB in the interest of Its policyholdersunder the conservator as above provided, the Board shallproceed to reinsure the outstanding liabilities In some solvent association or compang,-authorized to transact bUSineBB in this State, or the Board shallproceed through such conservator, to liquidate such association, or the Board may give notlce to the Attorney General as provided under the general laws relating to insurance corporations. It shallbe In the discretion of the Board to determinewhether or not it will operate the association through a conservator,
as provided above, or proceed to liquidate the association, as herein provided, or report it to the Attorney General. When the liabilitiesBoard of InsuranceCommissioners,page 4 O-2543

of an association are reinsured or liquidated, a'shereinprovided, the Board shall report the
same to theAttorney General, who shall take such action as may be necessary to effect the forfeiture or cancellation of the charter of the association so reinsured or liquidated. Where the Board lends its approval to the merger, transfer or COnBOlidatiOn of the membershlp of one association with that of another, the
same shallbe reported to the Attorney General who shallprcceed to effect the forfeiture or cancellation of the charter of the association from which the membershipwas merged, transferred or consolidated,inthe samemanner as IS provided for the charters of associationsreinsured or liquidated. No merger or transfer shall be approvedunless the associationassuming the members transferred or merged is operatingunder the supervisionof the Board of InsuranceCommissioners. The cost incident to the conservator's services shallbe fixed and determined by the Board and shall be a charge against the assets and funds of the association to be allowed and paid as the Board may determine."

In some Instanceswhere the Board ha8 proceeded to liquidatean association or corporation, etc., as above mentioned the liquidatlorhas been appointed receiver of such by the court. In general,with reference to the application of funds by receiver,Article 2299, Vernon's Annotated Civil Statutes enumeratesand classifies certain liabilities,which, except for court costs, accrued during the pendencg of the receivership, and prescribes the order inwhich they Shallbe paid. It applies to earnings of the propertyduring the receivership, and gives a lien or a preference thereon, in favor of the classes of claims mentioned. But the statute gives no lien upon the corpus of the property. In the application of earnings, it seems that they will be apportioned equally and equitablyamong claims of a given class; however, one of the claimantsmay have sued out an attachment, or attempted to acquire a lienupon the property in receivershlp, so as to have a right superior to other creditors. Thus it has been decided that when a secured creditor is entitled to participate in earnings, hewill share equallywith unsecured creditors of the same class. See Texas Jurisprudence,Vol. 36, Page 234, and cases cited thereunder.

Claims that do not fallwithin any of the statutory classeswill be adjusted and given suchpreference or priority
as the court deems equitable in the circumstances. We believeBoard of Insurance Commissioners,page 5 O-2543

that when any association or corporation, etc., as above mentioned, is liquidated, the liquidator or receiverwould be governedby the same principles of law,with reference tothe order inwhich the various claims shall be paid. Before any association or corporation, etc., is liquidatea it is clear that the mortuary fund cannot be expended for any purposes other than those specifically set out in the statute. However, during the process of liquidation the various claims are to be paid in the order prescribedby statute.

In view of the foregoingauthoritiesyou are respectfully advised that it is the opinion of this Department that the liquidatordoes not have the legal authority to use the mortuary funds of the insolventassociations or corporations above mentioned In the payment of examinationbills referred to In your inquiryprior to adjustment of claims under policies issued by such associations or corporations. Neither do we think that there is any authoritywhich would sustain the proposition that theunpaid bills of the ExaminationDivision could be considered as of equal standingwith claims under policies issuedby the insolventassociations or corporations. In otherwords, we believe that the claimsunder the policies issuedby the insolventassociations or corporationswould be prior to the claims of the examinationdivision for services rendered prior to the liquidation of such associations
or corporations.

Trusting that the foregoing fully answersyour inquiry,
we are

Yours very truly

ATTORNEY GENERAL OF TEXAS

AW:ew:wc

APPROVED AUG 19, 1940 s/Grover Sellers FIRST ASSISTANT ATTORNEY GENERAL By s/ArdellWilliams Ardell Williams AssIstant

Approved Opinion Committeeby REK Chairman