Board of Insurance Commissioners 

Austin, Texas 

Gentlemen: Attention: Mr. D. B. Barrow 

Opinion No. O-2543 

Re: Certain claims of the Examlnation Division under the facts 

set forth. 

Your recent request for an opinion of this Department 

on the questions as are herein stated has been received. 

We quote from your letter as follows: 

"In connection with the operation of the 

Liquidating Division of this Department, which 

Division was created by the Forty-sixth Legislature, we wish to submit the following question for your ruling: 

"A number of mutual assessment associations 

operating under the provisions of Article 4859f 

as statewide associations, or Article 4875a as 

local mutual aid associations, or Article 4784 

to 4799 as life, health, and accident associations, have been placed In the hands of the Llquidator following examinations by our Examining 

Division. In nearly all cases the associations 

were insolvent and the bills for the examinations remain unpaid at the time the associations 

are declared insolvent and placed in charge of 

the Liquidator. In nearly all such cases the 

only funds recovered by the Liquidator are Mortuary Funds and ordinarily their use 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 EXamination Division for the amount of unpaid 

bills be considered as of equal standing with 

claims under ~ollcies issued by the insolvent 

associations? 
Board of InBUrSnCe CO~iSSione~S, page 2 0 -2543 

Article 5068-1, Vernon's Annotated Civil Statutes, fB 

a statute which applies to and embraces all 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 assessment plan, or whose funds are derived from the 

assessment upon 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 specifically named in statute or 

not. The companies mentioned in your inquiry are operating 

either under 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 of Article 5068-1, supra, provides in part 

as follows: 

"Assessments when 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, from which claims under 

certlflcates shall be paid, and to a limited 

extent the cost of defending contested claims, 

and nothing else; and the other funds shall be 

the expense funds from which expenses may be 

paid. At least sixty (609 per cent of assessments collected, except the membership fee, 

mUBt be placed inthe mortuary or relief fund. O . 

"Such association 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 said mortuary or 

relief fund of attorneys' fees and necessary expenses arising out of the defense, settlement, 

or payment of contested claims. Any such payments 

out of the mortuary or relief fund for other than 

claims shall be subject to approval of the Board 

of Insurance Commissioners. 

"A separate record shall be kept of the mortuary or relief funds of each group, club, or 

class, and the mortuary or relief fund8 of one 
Board of Insurance Commlssloners, page 3 O-2543 

group, club, or Class shall not 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 Insurance Commissioners that such association be insolvent, 

or its condition be, 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 

shall notify the association of its determlnation and said association shall have thirty 

(30) day8 under the supervision of the Board 

within which to comply with the requirements 

of the.Board; and In the event of its failure 

to so comply wlthin such time, the Board, acting for itself, or through a conservator appointed by the Life Insurance Commlssioner for 

that purpose, shall immediately take 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 

operation by the conservator under the direction 

of said Board , pendlng the election of new Directors and officers by the membershlp in such 

manner as the Board may determine, the same 

shall be done. If the Board, however, is satlsfied that euch association is not in condition 

to satisfactorily continue bU8ineSB in the 

interest of Its policyholders under the conservator as above provided, the Board shall proceed to reinsure the outstanding liabilities 

In some solvent association or compang,-authorized to transact bUSineBB in this State, or the 

Board shall proceed 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 shall be In the discretion of 

the Board to determine whether 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 liabilities 
Board of Insurance Commissioners, page 4 O-2543 

of an association are reinsured or liquidated, 

a's herein provided, the Board shall report the 

same to the Attorney 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 shall be reported to the Attorney General 

who shall prcceed to effect the forfeiture or 

cancellation of the charter of the association 

from which the membership was merged, transferred or consolidated,in the same manner as IS 

provided for the charters of associations reinsured or liquidated. No merger or transfer 

shall be approved unless the association assuming the members transferred or merged is operating under the supervision of the Board of Insurance Commissioners. The cost incident to the 

conservator's services shall be 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 Instances where the Board ha8 proceeded to 

liquidate an association or corporation, etc., as above mentioned the liquidatlor has 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 enumerates and classifies certain liabilities, which, 

except for court costs, accrued during the pendencg of the 

receivership, and prescribes the order in which they Shall be 

paid. It applies to earnings of the property during 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 equitably among claims of a given class; however, one of 

the claimants may have sued out an attachment, or attempted 

to acquire a lien upon 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, he will share equally with unsecured creditors of the same class. See Texas Jurisprudence, Vol. 36, 

Page 234, and cases cited thereunder. 

Claims that do not fall within any of the statutory 

classes will be adjusted and given such preference or priority 

as the court deems equitable in the circumstances. We believe 
Board of Insurance Commissioners, page 5 O-2543 

that when any association or corporation, etc., as above 

mentioned, is liquidated, the liquidator or receiver would 

be governed by the same principles of law, with reference 

tothe order in which 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 prescribed by 

statute. 

In view of the foregoing authorities you are respectfully advised that it is the opinion of this Department that 

the liquidator does not have the legal authority to use the 

mortuary funds of the insolvent associations or corporations 

above mentioned In the payment of examination bills referred 

to In your inquiry prior to adjustment of claims under policies 

issued by such associations or corporations. Neither do we 

think that there is any authority which would sustain the proposition that the unpaid bills of the Examination Division 

could be considered as of equal standing with claims under 

policies issued by the insolvent associations or corporations. 

In other words, we believe that the claims under the policies 

issued by the insolvent associations or corporations would 

be prior to the claims of the examination division for services rendered prior to the liquidation of such associations 

or corporations. 

Trusting that the foregoing fully answers your 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/Ardell Williams 

Ardell Williams 

AssIstant 

Approved Opinion Committee by REK Chairman