Honorable William Hunter McLean Opinion No. C-159 

Chairman, State Board of Insurance 

1100 San Jaclnto Re: Construction of House 

Austin 14, Texas Bill 938, Acts 58th 

Leg. R.S. 196 , ch. 

405, P. 981; ? amending 

Article 3.53 of the 

Dear Sir: Texas Insurance Code) 

By letter of August 15, 1963, the State Board of Insurance requested that this office answer several questions concerning the proper construction of the subject act commonly 

known as ?Che Model Act for the Regulation of Credit Life 

Insurance and Credit Health and Accident Insurance." 

Your Initial question inquires whether or not the 

"monthly outstanding balance" method of premium 

creditors or lenders Is in violation of Section ts 

ayments by 

-D of Article 

3.53, as amended by House Bill 938, if the creditor or lender 

has previously charged the debtor the entire single premium 

or identifiable insurance charge in advance for the full term 

and amount of the Indebtedness. 

There are two principal methods by which the premium or 

charge collected from the debtor is remitted to the insurance 

company, and your opinion request describes them essentially 

as follows: 

(1) The single premium or advance premium method under 

which the creditor, after collecting from the debtor an amount 

sufficient to cover the insurance for the full amount and term 

of the debt (or adding such amount to the indebtedness of the 

debtor) promptly remits such full single premium to the lnsurante company to Insure the debtor for the amount of the debt 

for the entire term of up to five years. 

(2) The "monthly outstanding balance' method under 

which the creditor does not remit the full single premium to 

the Insurance company but instead remits to the insurance 

company a monthly premium in payment of coverage for the 

total monthly outstanding unpaid balances on all indebtedne,sses of the creditor, as per the group master policy between the creditor and the insurance company. 

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Hon. William Hunter McLean, page 2 (C-159 ) 

Section 8-D of Article 3.53 reads as follows: 

"D. The amount charged to a debtor by the 

creditor for any credit life or credit accident 

and health insurance issued to the debtor shall 

not exceed the actual premium charged the 

creditor by the insurer for such insurance, as 

computed at th$ time the charge to the debtor 

is determined. 

,We are of the opinion that the "monthly outstanding 

"balance" method of premium payment is not In violation of 

Section 8-D of Article 3.53 of the Insurance Code of Texas. 

A reading of Section 8-D indicates clearly that it is 

concerned with and seeks to regulate only the amount charged 

to a debtor by the creditor for credit life or credit accident 

and health insurance. It is not concerned with the method of 

premium payments. The Legislature sought to insure that the 

debtor would not pay to the creditor an amount in excess of 

the actual premium charged the creditor by the insurer for 

such insurance. The maxImum limitation on the amount charged 

to a debtor by the creditor is the actual premium charged the 

creditor by the insurer, and such premium Is to be computed 

at the time the charge to the debtor is determined. Had the 

Legislature Intended to prohibit the monthly outstanding 

balance method of payment, it could easily have done so by 

requiring prompt remittance by creditors to the insurers of 

amounts charged debtors for insurance coverage. 

Our opinion is strengthened by the fact that House Bill 

938, as originally introduced , contained the following sentence 

as the last paragraph of Section 8-D. 

"If a creditor collects a single identifiable 

insurance charge in advance from the debtor or ineludes said amount in the total amount of the indebtedness upon which an interest or finance charge 

Is made to the debtor for the entire term of the 

indebtedness, said creditor shall promptly pay said 

amount as a single premium to the insurance company." 

The inclusion of this language in Section 8-D would effectively 

have abolished the monthly outstanding balance method of payment in those instances where a creditor had collected the 

single advance premium from the borrower at the time the indebtedness was incurred. The fact that the Legislature 

originally considered such language and specifically omitted 

it from the Actis, In our opinion, equivalent to legislative 

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Hon. William Hunter McLean, page 3 (C-159 ) 

authorization of the monthly outstanding balance method of 

payments. Had this language remained in tha Act, it would 

have permitted the utilization of only the advance premium" 

method of payment. That more than one method of payment was 

recognized by the Legislature is evidenced by the following 

underscored language of Section 2-A(2) of the Act: 

"(2) All life Insurance and all accident and 

health insurance sold in connection with loans or 

other credit transactions of less than five (5) 

years duration, the premium for which is charged 

to or paid for in whole or in part either directly 

or Indirectly by the debtor, shall be subject to 

the provisions of this Act, regardless of the 

nature, tyoe or plan of the credit Insurance 

coverage or premium payment system except where 

the Issuance of such insurance is an isolated 

transaction on the part of the Insurer not related to an agreament or plan for insuring debtors 

of the creditor. 

In view of the foregoing, we are of the opinion that the 

monthly outstanding balance method described above does not 

violate Section 8-D of Article 3.53 of the Texas Insurance 

Code. The remaining questions are based upon the assumption 

that the monthly outstanding balance method does not violate 

Section 8-D and we now turn to them: 

Your second question inquires whether the insurance 

company should calculate Its reserves upon the basis of the 

monthly premium collected by it from the creditor or upon 

the basis of the entire single charge to the debtor. In our 

opinion, irrespective of the method of premium payment, the 

insurer Is required to maintain appropriate reserves consistent 

with the risk to which it Is exposed by its policies. 

Your third question inquires whether premium taxes are 

owed to the State of Texas on the full single charge to the 

debtor by the creditor or upon the monthly premiums collected 

by the company from the creditor. In our opinion, premium 

taxes are owed only on the premiums actually collected by the 

insurance company whether it be a foreign company paying taxes 

under Article 4769, or a domestic company paying taxes under 

Article 7064a. Both of these Articles require that the 

companies report the gross amount of premiums "collected" 

during the taxable year and require that the companies "shall 

pay an annual tax computed on. . .the gross amount of premiums 

collected during such year. . . .“ 

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Hon. William Hunter McLean, page 4 (C-159 ) 

Your fourth question reads as follows: 

"(4) In the event of termination of the indebtedness by refinancing or otherwise, is the 

insurance company responsible for refunding the 

unearned portion of the full single premium 

charged to the debtor or just the unearned portion 

of the monthly premium paid to the insurance 

company?" 

We are of the opinion that the insurance company is responsible 

for refunding the unearned portion of the monthly premium paid 

by the creditor to it. 

Your fifth question is as follows: 

“(5) In the event of the death of the debtor 

prior to repayment of the indebtedness, which results In the payment by the insurance company to 

the creditor of the full amount of the lndebtedness, including an amount equal to the full single 

premium charge to the debtor in advance, there Is 

an amount of money paid by the insurance company 

to the creditor which represents an unused 

premium for the insurance which was never paid to 

the insurance compatay and which under the monthly 

outstanding balance method was never due to the 

insurance company. Does this amount of money paid 

by the insurance company to the creditor belong to 

the estate of the deceased, the creditor or the 

insurance company?" 

We are of the opinion that such amount of money belongs to the 

estate of the deceased and that appropriate rules and regulations may be adopted to insure the proper refund of such 

amount by the creditor under the provisions of Section 8-D 

of Article 3.53, quoted as follows: 

"B. Each Individual policy, or group policy 

and group certificate shall provide that In the 

event of termination of the indebtedness or the 

insurance prior to the scheduled maturity date 

of the indebtedness, any refund of an amount paid 

by or charged to the debtor for insurance shall 

be paid or credited promptly to the person entitled thereto; provided, however, no refund need 

be made if the amount thereof is less than One 

Dollar ($1). The formula to be used in computing 

such refund shall,,be filed with and approved by 

the Commissioner. 

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Hon. William Hunter McLean, page 5 (C-159 ) 

Because your request does not submit specific information 

with respect to the terms and provisions of the certificate 

and policy that might be Involved, we are unable to give a 

definite answer to your sixth question. However, the question 

as framed suggests the possibility that the debtor might be 

furnished a certificate which would Indicate the existence of 

coverage for the full term of the loan, while there might be 

provisions in the policy which would restrict the liability 

of the insurance company to a period of one month with a 

right to monthly renewals subject to the payment of premiums 

by the creditor. Assuming that the creditor had previously 

charged the debtor the entire single premium or identifiable 

insurance charge in advance for the full term and amount of 

the indebtedness and further assuming that the certificate 

furnished to the debtor is phrased in language which would 

indicate to the ordinary debtor that he had coverage for the 

full term of the Indebtedness, it is our opinion that any provision In the policy which would llmlt the coverage to a 

period of one month or such other period of time as would be 

less than the full term of the indebtedness would be contrary 

to good morals and would, therefore, violate the public policy 

of the State of’ Texas. 

We answer your seventh question that the charging of 

interest or other finance charge on the amount of the single 

premium, where monthly outstanding indebtedness Insurance is 

provided, would not necessarily violate House Bill 938. In 

the absence of a specific fact situation, we can give no more 

definite answer at this time. Many transactions of this 

nature come within the purview of the Regulatory Loan Act Of 

1963 and would be subject to regulation by the Regulatory Loan 

Commissioner of the State of Texas. 

SUMMARy 

1. The monthly outstanding balance method of 

premium payment on credit life insurance is..not 

prohibited by Section 8-D of Article 3.53 of the 

Texas Insurance Code. 

2. The insurance company should maintain its 

reserves so that they will be consistent with 

the risk to which it Is exposed. 

3. Taxes are owed to the State of Texas only 

on the premiums actually collected by the lnsurante company. 

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Hon. William Hunter McLean, page 6 (C-159 ) 

4. The insurance company is responsible for 

refunding the unearned portion of the monthly 

premium paid it by the creditor. 

5. The amount of unused premium payments In 

the event of a death which terminates a policy 

belongs to the estate of the deceased debtor 

and should be remitted to his estate, by the 

creditor. 

6. If the debtor is furnished a certificate 

of insurance which would indicate to the ordinary debtor that his debt is protected for the 

entire period contemplated by his loan, any 

policy provision which would restrict the coverage to a lesser term would violate the public 

policy of the State of Texas. 

7. The charging of interest or other finance 

charge to the,debtor on the amount of the single 

premium not actually remitted to the insurance 

company does not necessarily violate House Bill 

918. Manv transactions of this type come under 

the jurisdiction of the Regulatory-Loan 

missioner of the State of Texas and are 

to his regulations. 

Yours very truly, 

Comsubject 

WAGGONER CARR 

Attorney General of Texas 

BY: 6-h-J 

Scott Garrison 

Assistant Attorney General 

SG:br 

APPROVED: 

OPINION COMMITTEE 

W. V. Geppert, Chairman 

Albert Jones 

Grady Chandler 

J. C. Davis 

John Reeves 

APPROVED FOR THE ATTORNEY 

By: Stanton Stone 

GENERAL 

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