JIM MATTOX 

Attorney General 

Supreme Court Bollding 

P. 0. Box 12546 

Austin. TX. 76711. 2549 

5121475~2501 

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714 Jackson. Suite 700 

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San Antonio. TX. 76205.2797 

5121225-4191 

An Equal OpportunityI 

Affirmative Action Employer 

The Attorney General of Texas 

November 9, 1983 

Mr. Lyndon L. Olson, Jr. 

Chairman 

State Board of Insurance 

1110 San Jacinto Boulevard 

Austin, Texas 78711 

Opinion No. ~~-88 

Re: Whether article 3.68 of 

the Insurance Code applies to 

non-Texas business of a life 

insurance company holding a 

Texas certificate of authority 

Dear Mr. Olson: 

You have requested our opinion concerning the scope of article 

3.68 of the Insurance Code. Specifically, you ask whether the article 

requires your agency to revoke the Mid-South Life Insurance Company's 

certificate of authority to transact business in Texas. Article 3.68 

of the Texas Insurance Code provides as follows: 

Art. 3.68. No Commissions Paid Officers 

No life insurance company transacting business 

in this State shall pay, or contract to pay, 

directly or indirectly, to its president, vice 

president, secretary, treasurer . . . or to any 

officer of the company other than an agent or 

solicitor, any commission or other compensation 

contingent upon the writing or procuring of any 

policy of insurance in such company, or procuring 

a" application therefor by any person whomsoever, 

or contingent upon the payment of any renewal 

premium, or upon the assumption of any life 

insurance risk by such company. Should any 

company violate any provision of this article, it 

shall be the duty of the Board of Insurance 

Commissioners to revoke its certificate of 

authority to transact business in this State. 

Mid-South Life Insurance Company (hereinafter "insurance 

company"), a Mississippi insurer, holds a certificate of authority to 

write life, health, and accident insurance in Texas. The insurance 

company owns 100% of the voting securities of MS Services, 1°C. 

(hereinafter "service company"), a Mississippi corporation. The 

president and secretary of the two companies are the same. 

p. 371 
Mr. Lyndon L. Olson, Jr. - Page 2 (JM-88) 

The insurance company and the service company entered into a 

service agreement in 1981, whereby the service company would provide 

sales promotion services, clerical help, office space, office 

equipment, and other equipment, facilities, and support services for 

the insurance company. The agreement provided that the insurance 

company would pay the service company a fee based on the amount of 

annual "et premiums written. 

The first question to be addressed is whether the payment of 

compensation under the terms of the 1981 agreement would violate 

article 3.68 if paid for the Texas business of the companies. The 

payment to an officer of the insurance company of any commission or 

other compensation contingent upon the procuring of any policy of 

insurance would violate the statute. The 1981 agreement provides for 

the payment by the insurance company of a fee based on the number of 

premiums written; this fee is thus contingent upon the procuring of 

insurance policies. 

The statute forbids the payment by a" insurance company to "its" 

officers, directly or indirectly, of a commission. Although the 1981 

agreement is between two corporations, it does contemplate the 

indirect payment by the insurance company to "its" officers of such a 

commissio". The service company is a wholly owned subsidiary of the 

insurance company. The president and secretary of the service company 

are also president and secretary, respectively, of the insurance 

company. When the insurance company pays the service company a 

commission under the 1981 service agreement, it is indirectly paying 

the officers of the service company. Because the officers of the two 

companies are the same, they would be receiving the indirect benefits 

of the commission payments through their salaries or otherwise. 

There are several policy reasons for this interpretation of the 

scope of article 3.68. First, if a life insurance company coul~d pay 

commissions to a subsidiary company whose officers were the same as 

the insurance company's, the" the intent of the statute could easily 

be thwarted by merely setting up "dummy" corporations when commissions 

were desired. Second, this type of arrangement could be used to 

channel funds from the insurance company to the subsidiary, eventually 

leading to insolvency on the part of the insurance company and a 

subsequent inability to fulfill its obligations to policyholders. 

Finally, if one of the purposes of the statute is to prevent the 

promotion or condoning of unscrupulous selling techniques, then it is 

necessary to apply the statute to this agreement, because the service 

company rather than the insurance company will be providing all sales 

promotion services. 

Statutes regarding insurance should be liberally construed in 

favor of the public and the insured. Johnson v. Prudential Insurance 

co. of America, 519 S.W.2d 111 (Tex. 1975). For the foregoing 

reasons, it is our opinion that the 1981 agreement does violate the 

statute. 

p. 372 
Mr. Lyndon L. Olson, Jr. - Page 3 (~~-88) 

P 

The two companies entered into another service agreement in 1982 

which u applies only to services in connection with Texas Business.” 

The agreement provides that the insurance company would pay the 

service company a fee after the commencement of business in Texas, but 

does not specify on what basis the compensation will be pa~id. 

According to the director of the legal staff of the Commissioner of 

the State Board of Insurance, the 1982 agreement was intended to 

provide that no commission would be paid based on the procurement of 

policies in Texas, as opposed to other states. We now consider 

whether the 1982 agreement violates article 3.68. 

No direct authority could be found in response to this question 

other than an Attorney General Opinion, unnumbered (1926), Book 281, 

page 106, interpreting the predecessor to article 3.68. This opinion 

provides in pertinent part as follows: 

I have your letter of recent date in which you 

ask for the opinion of this Department upon the 

legality of the practice indulged in by a life 

insurance company organized under the laws of 

Kansas whereby it pays to an officer commisslons 

upon life insurance business written by the 

company but in which there is a specific waiver of 

any right to any part of the commission derived 

from business written in Texas . . . . 

It will be noted that [the predecessor to 

article 3.681 does not confine the restrictions to 

companies doing business under a charter granted 

by the State of Texas but every company which 

transacts business in this state is prohibited in 

the most general terms from paying commission to 

its president and other executive officers upon 

life insurance policies written by it. We think 

that if any company transacting business in this 

state, no matter where organized, shall violate 

the provisions of this article, it is your duty to 

cancel its certificate of authority. 

Under this interpretation of the predecessor of article 3.68 by this 

office, the 1982 agreement would violate the statute. 

An analogous case to the instant situation is State v. State 

Mutual Life Assurance Co. of America, 353 S.W.2d 412 (Tex. 1962). 

State Mutual was a Massachusetts corporation with its home office in 

Massachusetts. It held a certificate of authority to do business in 

Texas, and sold life, health, and accident insurance and annuities in 

.this state. The National Association of Securities Dealers 

(hereinafter NASD) was incorporated under the laws of Delaware. It 

had offices in Delaware and Washington, D.C., with member firms all 

across the country, including many member firms in Texas. 

p. 373 
Mr. Lyndon L. Olson, Jr. - Page 4 (JM-88) 

NASD instituted an i"S"lX."CS trust for the purpose of 

establishing a plan of group insurance for its member firms and their 

employees. Applications for group insurance were mailed from NASD's 

office in Delaware to State Mutual's office in Massachusetts, which in 

turn issued and mailed group policies to Delaware, including policies 

for twenty-five Texas member firms of NASD. The group policies were 

valid under the laws of Massachusetts and Delaware. They would not 

have been valid in Texas had they been executed and delivered in 

Texas, because article 3.50, section 3 of the Insurance Code did not 

authorize group insurance for members of a trade association. That 

statute provided In pertinent part as follows: 

[I]t shall be unlawful to make a contract of life 

insurance covering a group in this state, and the 

license to do business in Texas of any company 

making a contract of life insurance covering a 

group in this state except as may be provided in 

this Article may be forfeited by a suit brought 

for that purpose . . . . 

The court stated that the "plain and unambiguous language" of the 

statute prohibited the coverage of trade association groups in Texas 

by contracts of insurance executed and delivered in states where this 

type of group insurance was legal. The court next noted that to hold 

otherwise would "destroy the effectiveness of article 3.50 and . . . 

make a mockery of its purpose and intent." Finally, the court held 

that the statute "authorizes cancellation of the license to do 

business in Texas of any company which executes and delivers anywhere 

a contract of insurance covering a" unauthorized group in Texas, 

irrespective of the validity of the contract where executed and 

delivered." Id. at 414-15. - 

As in the State Mutual case, the plain and unambiguous language 

of the statute at issue here mandates a" even-handed applicati.on of 

the prohibition against commissions to officers on both out-of-state 

and in-state business. Article 3.68 applies to any life insurance 

company transacting business in this state and forbids "any commission 

or other compensation contingent upon the writing or procuring of 3 

commissio" or other compensation contingent upon the writing or 

procuring of s policy of insurance in such company." (Emphasis 

added). The legfslature made no distinction between foreign companies 

and domestic companies or between commissions made on Texas policies 

and foreign policies, although it makes such distinctions in other 

code provisions. See, e.g., Tex. Ins. Code arts. 3.12 and 21.43. 

Furthermore, public policy and legislative intent appear to 

require equal application to commissions on both domestic and foreign 

policies. Article 1.14-1 of the Insurance Code provides in pertinent 

part: 

p. 374 
Mr. Lyndon L. Olson, Jr. - Page 5 (JM-88) 

The Legislature declares that it is . . . 

concerned with the protection of residents of this 

state against acts by persons and insurers not 

authorized to do an insurance business in this 

state by the maintenance of fair and honest 

insurance markets . . . by protecting authorized 

persons and insurers, which are subject to strict 

regulation, from unfair competition by 

unauthorized persons and insurers and by 

protecting against the evasion of the insurance 

regulatory laws of this state. 

Article 3.24-l provides as follows: 

When a foreign or alien company has complied 

with the requirements of this Subchapter and all 

other requirements imposed on such company by law 

and has paid any deposit imposed by law, and the 

operational history of the company when reviewed 

in conjunction with its loss experience, the kinds 

and nature of risks insured, the financial 

condition of the company and its ownership, its 

proposed method of operation, its affiliations, 

its investments, any contracts leading to 

contingent liability or agreements in respect to 

guaranty and surety, other than insurance, and the 

ratio of total annual premium and net investment 

income to commission expenses, general insurance 

expenses, policy benefits paid and required policy 

reserve increases, indicates a condition such that 

the expanded oueration of the cornDan" in this 

State & its operations outside this state will 

not create a condition which might be hazardous to 

its policyholders, creditors or the general 

public, the Commissioner shall file in the office 

the documents delivered to him and shall issue to 

the company a certificate of authority to transact 

in this State the kind or kinds of business 

specified therein. Such certfficate shall 

continue in full force and effect upon the 

condition that the company shall continue to 

comply with the laws of this State. (Emphasis 

added). 

Thus, the legislature has indicated that it is concerned with 

operations of a company outside Texas as well as within Texas, if 

those operations may have an effect on Texas policyholders, creditors 

or the general public. 

Commissions paid to officers of an Insurance company, eve" if 

restricted to out-of-state business, would have a potentially 

p. 375 
Mr. Lyndon L. Olson, Jr. - Page 6 (JM-88) 

hazardous effect on policyholders, creditors, or the general public in 

Texas. Company officers set company policy governing attempts to sell 

life insurance policies to the public. If officers receive 

commissions based on the number of policies written, they may advocate 

unscrupulous selling techniques or ignore malfeasance by insurance 

agents so that their income will not be affected. This situation 

would affect all policyholders, whether located in Texas or not. 

Furthermore, in our opinion, one purpose of the statute is to prevent 

overselling of insurance policies, which would impair the financial 

well-being of the company. If policies were oversold in other states, 

even if not in Texas, the overall financial well-being of the company 

would be affected. Insolvency of the company would certainly affect 

Texas policyholders and the Texas public as well as the policyholders 

and public in those states where commissions are allowed. 

Another compelling reason for applying article 3.68 to this 

arrangement between the insurance company and the service company is 

that to fail to do so would discriminate unfairly against domestic 

insurers in favor of foreign insurers. A domestic life insurance 

company that also did business in other states would be in violation 

of article 3.68 if it gave its officers commissions on its 

out-of-state business. There is no rational reason to treat foreign 

insurers differently. 

Under this interpretation of article 3.68, Texas is not seeking 

to prohibit a contractual arrangement made between the insurance 

company and the service company in another state. “It seeks only to 

take away from a foreign insurance corporation what is finally and 

essentially a privilege," which is the ability to do the business of 

insurance in this state. Texas does not deny full faith and credit to 

the laws of the state where the contract was made by denyi~ng the 

insurer the right to do business in Texas if the contract would be 

unlawful if made in this state. State v. State Mutual Life Assurance 

Co. of America, supra, at 419. 

This application of article 3.68 does not violate the Commerce 

Clause, because Congress removed all Commerce Clause limitations on 

the authority of the states to regulate the business of insurance when 

it passed the McCsrran-Ferguson Act, 15 U.S.C. section 1011, et seq. 

Western and Southern Life Insurance Company v. State Board of 

Equalization of California, 451 U.S. 648, 653 (1981). Furthermore, 

the Privileges and Immunities Clause is inapplicable to corporations. 

- Id. at 656. 

Finally, this application of article 3.68 does not deny the 

insurer due process of law. A statute denies substantive due process 

rights if it does not bear a rational relation to a legitimate state 

purpose. Exxon Corp. V. Governor of Maryland, 437 U.S. 117, 124 

(1978). The courts will assume that the objectives articulated by the 

legislature are the actual purposes of the statute. Minnesota v. 

Clover Leaf Creamery Company, 449 U.S. 456, 463 n.7 (1961). 

p. 376 
Mr. Lyndon L. Olson, Jr. - Page 7 (JM-88) 

The test for determining the validity of an application of a 

statute such as the one at hand is whether the state is regulating the 

business of insurance within the state, or is reaching beyond its 

borders to regulate a subject which was not of its legitimate concern. 

Osborn v. Ozlin, 310 U.S. 53, 62-67 (1940). In the Osborn case, the 

Court held that a Virginia statute prohibiting the writing of 

insurance on risks within Virginia except through resident agents was 

constitutional under the Fourteenth Amendment. In Hoopeston Canning 

Company v. Cullen, 318 U.S. 313 (1943), the Court upheld the 

constitutionality of New York's practice requiring an lllinois company 

to subject its Illinois contracts to New York regulations when 

insuring New York risks. As in the instant case, these laws and 

regulations reached beyond the border of the state where a license was 

sought, and actually controlled the financial and other internal 

systems of the company in its home state and other states. The 

Supreme Court held that this scope of authority was constitutional. 

- Id. at 320-21. 

In State v. State Mutual Life Assurance Company of America, 

a, at 416, the court held that a state may condition the right of 

a foreign corporation to do business in the state on compliance with 

all reasonable regulations. The application of article 3.68 to the 

insurance company for payment of commissions on out-of-state business 

bears a rational relation to legitimate state purposes, including the 

protection of Texas policyholders. 

SUMMARY 

The arrangement by which a life insurance 

company pays a fee to a subsidiary which has the 

same president and secretary as the insurance 

company based on the number of policies sold would 

violate article 3.68 of the Texas Insurance Code. 

Even if the arrangement were made between two 

foreign companies, and no commissions were paid on 

Texas business, the payment of commissions based 

on out-of-state business would violate article 

3.68. 

Very truly your L-L-J* . 

JIM MATTOX 

Attorney General of Texas 

TOM GREEN 

First Assistant Attorney General 

DAVID R. RICHARDS 

Executive Assistant Attorney General 

p. 377 
Mr. Lyndon L. Olson. Jr. - Page 8 (JM-88) 

Prepared by Margaret McGloin 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Rick Gilpin, Chairman 

Jon Bible 

Susan Garrison 

Margaret M&loin 

Jim Moellinger 

Nancy Sutton 

p. 378