HonorableWilliam Hunter McLean OpinionNo. C-159

Chairman, State Board of Insurance 1100 San Jaclnto Re: Constructionof House Austin 14, Texas Bill 

### 938,Acts 58th Leg. R.S. 

### 196 , ch. 

### 405,P. 

### 981; ?amending Article 

### 3.53of the Dear Sir: Texas Insurance Code)
By letter of August 

### 15, 1963,the State Board of Insurance requested that this office answer severalquestions concerning the proper construction of the subjectact commonly known as ?CheModel Act for the Regulation of Credit Life Insurance and Credit Health and Accident Insurance."

Your Initial question inquireswhether or not the "monthlyoutstandingbalance"method of premium creditors or lenders Is in violationof Section ts ayments by -D of Article 

### 3.53,as amendedby House Bill 

### 938,if the creditor or lender has previously charged the debtor the entire singlepremium 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, andyour opinion requestdescribes them essentially as follows:
(1) The singlepremium 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 (oradding such amount to the indebtednessof the debtor) promptly remits such full singlepremium to the lnsurante company to Insure the debtor for the amount of the debt for the entire term of up to fiveyears. (2) The "monthlyoutstandingbalance'method under which the creditordoes not remit the full singlepremium to the Insurance company but instead remits to the insurance company a monthlypremium in payment of coverage for the total monthly outstandingunpaid balances on all indebtedne,ssesof the creditor, as per the groupmasterpolicy between the creditor and the insurance company.

-771-Hon.William Hunter McLean,page 2 (C-159 )

Section 8-D of Article 

### 3.53reads 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 actualpremium charged the creditorby the insurer for such insurance, as computed at th$ time the charge to the debtor is determined.
,Weare of the opinion that the "monthlyoutstanding "balance" method of premium payment is not In violationof Section 8-D of Article 

### 3.53of the Insurance Code of Texas.

A reading of Section 8-D indicates clearly that it is concernedwith 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 concernedwith the method of premiumpayments. The Legislature sought to insure that the debtor would not pay to the creditoran amount in excess of the actualpremium charged the creditorby the insurer for such insurance. The maxImum limitationon the amount charged to a debtor by the creditor is the actual premium charged the creditorby the insurer, and suchpremium Is to be computed at the time the charge to thedebtor is determined. Had the Legislature Intended to prohibit the monthly outstanding balance method of payment, it could easilyhave done so by requiringprompt remittanceby creditors to the insurers of amounts charged debtors for insurance coverage.
Our opinion is strengthenedby the fact that House Bill 938, as originally introduced, contained the following sentence as the lastparagraph of Section 8-D.

"If a creditor collectsa single identifiable insurance charge in advance from the debtor or ineludes said amount in the totalamount of the indebtednessupon which an interestor finance charge Is made to the debtor for the entire term of the indebtedness, said creditor shallpromptlypay said amount as a singlepremium to the insurance company."
The inclusion of this language in Section 8-D would effectively have abolished the monthly outstandingbalancemethod of payment in those instanceswhere a creditorhad collected the singleadvance premium from the borrower at the time the indebtedness was incurred. The fact that the Legislature originally considered such languageand specificallyomitted it from theActis, In our opinion, equivalent to legislative

-772-Hon.William Hunter McLean,page 3 (C-159 )

authorizationof the monthly outstandingbalance method of payments. Had this languageremained in tha Act, it would have permitted the utilization of only the advancepremium" method of payment. That more than one method of payment was recognizedby the Legislature is evidencedby the following underscored language of Section 2-A(2) of the Act:

"(2) All life Insuranceand all accident and health insurance sold in connectionwith loans or other credit transactionsof less than five (5) years duration, the premium for which is charged to or paid for in whole or in part eitherdirectly or Indirectlyby the debtor, shall be subject to theprovisions of this Act, regardless of the nature, tyoe or plan of the credit Insurance coverage or premiumpayment system except where the Issuance of such insurance is an isolated transaction on thepart of the Insurernot related to an agreament or plan for insuringdebtors of the creditor.

In view of the foregoing,we are of the opinion that the monthly outstandingbalancemethod described above does not violate Section 8-D of Article 3.53 of the Texas Insurance Code. The remaining questionsare based upon the assumption that the monthly outstandingbalance method does not violate Section 8-D and we now turn to them:

Your second question inquireswhether the insurance company should calculate Its reserves upon the basis of the monthlypremium collectedby 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 appropriatereserves consistent with the risk to which it Is exposedby its policies.

Your third question inquireswhetherpremium taxes are owed to the State of Texas on the full single charge to the debtor by the creditor or upon the monthlypremiums collected by the company from the creditor. In our opinion,premium taxes are owed only on the premiums actually collectedby the insurance company whether it be a foreign companypaying taxes under Article 4769, or a domestic companypaying taxes under Article 7064a. Both of theseArticles require that the companies report the gross amount of premiums "collected" during the taxableyear and require that the companies "shall pay an annual tax computed on.
. .thegross amount of premiums collectedduring suchyear.
. . .“

-773-. -

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

Your fourth question reads as follows:
"(4) In the event of termination of the indebtednessby refinancingor 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 monthlypremiumpaid to the insurance company?"

We are of the opinion that the insurance company is responsible for refunding the unearned portion of the monthlypremiumpaid 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 paymentby the insurance company to the creditor of the full amount of the lndebtedness, including an amount equal to the full single premium charge to thedebtor in advance, there Is an amount of money paid by the insurance company to the creditor which represents an unused premium for the insurancewhich was never paid to the insurance compatay and which under the monthly outstandingbalance method was never due to the insurance company. Does this amount of money paid by the insurance company to the creditorbelong 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 appropriaterules and regulationsmay be adopted to insure the proper refund of such amount by the creditorunder the provisions of Section 8-D of Article 3.53, quoted as follows:

"B. Each Individualpolicy, or grouppolicy and group certificate shallprovide that In the event of terminationof the indebtednessor the insuranceprior to the scheduledmaturitydate of the indebtedness,any refund of an amountpaid by or charged to the debtor for insurance shall be paid or creditedpromptly to the person entitled thereto;provided,however, no refundneed be made if the amount thereof is less than One Dollar ($1). The formula to be used in computing such refund shall,,be filedwith and approvedby the Commissioner.

-774-Hon. William Hunter McLean,page 5 (C-159 )

Becauseyour requestdoes 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 toyour sixth question. However, the question as framed suggests the possibility that the debtor might be furnisheda 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 creditorhad previously charged the debtor the entire singlepremium or identifiable insurance charge in advance for the full term and amount of the indebtedness and furtherassuming that the certificate furnished to the debtor is phrased in languagewhich would indicate to the ordinarydebtor 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 indebtednesswould be contrary to good morals and would, therefore,violate the public policy of the State of’Texas.

We answeryour 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 giveno more definite answer at this time. Many transactions of this nature come within thepurview 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 outstandingbalance 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 shouldmaintain 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.

-775-. -

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

4. The insurance company is responsible for refunding the unearnedportion of the monthly premium paid it by the creditor.
5. The amount of unused premiumpayments In the event of a death which terminatesa policy belongs to the estate of the deceaseddebtor and shouldbe remitted to his estate, by the creditor.
6. If the debtor is furnisheda certificate of insurance which would indicate to the ordinary debtor that his debt is protected for the entire period contemplatedby his loan, any policy provisionwhich would restrict the coverage to a lesser term would violate thepublic 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 violateHouse Bill 918. Manv transactionsof this type come under the jurisdictionof 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 AssistantAttorney 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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