R-479



## T~EA~TORNEY GENERAL

OF TEXAS

July 11, 1947

Hon. George B. Butler, Chairman Board of Insurance Commissioners Austin, Texas Opinion No, V-300
Re: Whether the Assured Home Ownership Plan of the Equitable Life Assurance Society of the United States violates Article 5053, V,C.S.
Dear Sir:
In proeenting me&, you hare srslosed the above question to this Depart-

. ^.. your complete record of' tne nearing before your Board on the Fquitable plan. You have also encleeed able briefs submitted by Equitable end those complaining of the plan. The Equitable plan is in essence one to require, simultaneously with the making of R loan on residential property, one of Equitable's own policies of life insurance as security for the loan in the event of the desth of the borrower. It may be important to note that in the course of negotiations the plan does not contemplate the premise of a loan. The plan, in its broadest aepeot, involves a complete sellin? program, with contracts and applications consistent with the plan; and of course, the administration of the loan znd insurance policy subsequent to the closing of each loan. The statute involved, Article 5053, Vernon's Civil Statutes, reads as follows:

"No insurance company of any kind doing business in this State shall make or permit any distinction or discrimination in favor of individuals between the insured of the same class and of equal expectation of life inhe amount of, or payment of, prembums or rates charged for policies ef life or endowment insurance, or in the dividends or other benefits thereon; nor shall any such company or agent thereof make any contract of insurance or agreement as to such contract otherBon, George BI Butler, Page 2s V-300

than as expressed in the policy issued thereon; nor shall any such company, or any officers agent, solicitor, or representative thereof, pay) allow, ‘or give, or offer to pay, allow or give, directly or indirectly, as an inducement to insurance, any rebate of premiums payable on the ~olfcs, or any special favor or advantage in the dividends or other benefits to accrue thereon, or any paid employment or contreat for service of any kind or anything of value whatsoever, or any valuable consideration or inducement whatever not specified in the polioy or contract of insurance; 9 L 0n (Emphasis supplied)
The requirement of insurance, both property and life, as additional security for loans 

### fsgenerally recognized as a wholesomepractice if it is not abused. Lending organizations universally require some type of insurance on the property mortga~ged. Property insurance agents are quite generally engaged in, the loan buefness 0 In the very nature of things the agent, d~qsiree .the insurance bus’iness in conjunction with the loans he negotiates 0 Any borrower knows that the agent wfl,l take greater interest in the loan applfcatfon~ when he 

### expects to write the insurance0 The probable advantage, to the borrower in purchasing his insurance from the agent is present in any such negotiation by tacit understanding. We see no real distinction between such a transaction and. the plan utilized by the Equitable, Equitable is free to select its borrowers and its insureds, It,may refuse to make a loan unless secured to its satisfaction. It is not contended that it may not require life insurance as additional security for its loans; We see no reason why this concern legally engaged in both lines of business may not take advantage of their complementary features 5

Article 5053 Ss primarily designed to prohibit discrimination between insureds of the same class i 

### As stated in Coueh on Insurance, Volume 3, Section 5Mp page 1872“
,

“The object or intent of statutes aimed against discrimination and rebates is that uniform rates shall be established and maintained 9 so as to secure all persons equality as to burdens imposed, as-. -

ITon, George B. Butler, Page 3, V-300

well as to benefits derived, by preventing discrimination by insurers in favor of individuals of the same class, either as to premiums charged or dividends allowed, or as has been stated, in order that prospective insurants of the same class shall not be unfairly treated or discriminated against, by inducements being given to one of such class, which are not available to all therein."
As is true of all anti-discrimination statutes, the elements of reasonableness and fairness are to be read into them, The law cannot and does not attempt to place everyone on an identically equal basis in every situation, Of this statute, the Court of Civil Appeals at Texarkana said in the case of Morris v. Ft, Worth Life Insurance Company, ZOOS. W. 1114:

"It is one of the evident purposes of the statute above quoted to prevent discrimination and secret agreements bvxich certain nolicVholders may be enabled to secure speciai favors as"a consideration for their contracts of insurance."
The Equitable plan is essentially uniform in its application to insureds of the same class. On its face, the plan contains no element of a secret or side agreement with the assured which could be considered as an inducement or consideration for the sale of an insurance policy any different from that offered to any other assured of the same class. Simply because a prospective mortgagor is required to secure his loan by a policg of life insurance, affords no.basis for the contention that the borrower is induced illegally to purchase insurance, or that the loan forms a part of the consideration for the policy, To hold otherwise would be reading into the statute a broader prohibition than is contemplated. The inducement aimed at is that which actually occurs, proved by competent evidence which of necessity by the very nature of the term involves the intent, purpose, methods and approach of the company, officer or agent employed in each transaction. According to Webster, the word 7'induceY9 is synonymous with "instigate" s "luretl, "incite" o "entice" s "impel" 9 "urge". We cannot speculate that these elements will be present in each transaction even before it occurs,

Questions raised in various states undoer essentially identical statutes have been resolved by StateL

.-

Hon. George B. Butler, Page 4, V-300

Courts, Attorneys General, and insurance offfcfals agaPnst holding the plan and sfmflar transactions to be prohfbfted as a matter of law, While the basis of these holdings, findings and opfnfons are not entirely uniform, the ultflate conclusions that such transactfens are not per se illegal have been practfcally unanimous y

In the case of Greer vs, Aetna Life Insurance Company (Supreme Court of Alabama) 9 142 So, 393, the court held that an arrangement by Aetna to secure loans by fts own policies of frsurance did not violate the Alabama Statute, which is in essence the same as the Texas statute, However, in that case the main contention discussed by the court was that the pol.fcy issue& on a 15 year term on a flat premium to all persons between the ages of 21 and 59s the same premium to be applicable to every age, constituted a discrimination between the policyholders and in that way violated the statutes.

In the case of Phillips vsO Ffshback, (140 Pae, Ml), the insurance agent agreed with the assured that & loan would be made and that a policy of insurance was required to secure the loan, It was contended there that the loan agreement was an illegal consfderatfon or fnducement for the policy of insurance, The Oourt said:

“If the inducement and consideration flcwfng from appellant in such transa~otfons constitute an inducement or favor for anything, it is for the grantfng of a loan,”
We find this statement in Joyce on Insurance: Volume 2, page 2195, section 192g:

“Nor is it vfolatfve of the statutes as to rebates Eet@, j to require one who desires a mortgage loan from the company to take out lff e fnsuranc e0n
In considering thfs plan, the NewYork Department of Insurance had the following to say:

“In view of all the cfrcumstances, and after listening t.r, the pofnts raised by the members of the insured Savings Associations !, I am convfnced that the Equitable is making every reasonable effort to conduct its affairs ethically and with due consideration to the effects of replacing mortgage loansRon. George B. Butler, Page 5, V-300

with lower interest rates. I can see no justification for the charge of rebate and, so far as I can determine, the charge of

‘raiding’ other portfolios seems unjustified d However, it does appear to be a fact that the Equitable has an advantage in obtaining this type of 1-n by reason of its trained )ersonnel and the selected areas in Which they appear to be operatingrW Likewise, the Superintendent ef Insurance la Ohio is quoted as follows:

“An applicant for a loan must at the same time apply for a policy of life insurance is same amount; the policy is then assigned as oollateral to the loan. e 0

“In my opinion, to say, an insurance company in requiring an applicant for a loan to take out a policy of life insurance, is violating General Code 9404 in that in so doing it is ‘giving something of value, ’ is urroneous r To require a life insurance policy to be taken with each loan end to have said policy assigned as collaPera1 security for said loan is within the rights of the company, a I

“The complaint as a whole attacks the general plan, and we find that the evidence introduced is insufficient to sustain the complaint, The complaint is therefore dismissed,”
The Attorney General of Ohio is quoted in a ruling in 1941 as follows:

“At no time does it appear from the papers which you have submitted to me that the insurance company gives or offers to give 2 or enters into any separate agreement promising to secure the loan of any money as an inducement oY consideration for insurance. It would therefore seem that the loan, if made, is mot an inducement to insurance but rather that the insurance is an inducement to the loan.Bon. George B. Butler, Page 6SV-300

“I realize, of course, that the plan makes it possible for an agent to offer to **secure** a loan as an inducement to a prospective purchaser of fnsurance to apply for such insurance, This, however, is not contemplated by the documents which you have submitted to me and the mere possibility of such misconduct on the part of an agent does not suffice to make the plan illegal, In suoh event the **statutes** gLve to you ample authority to punish such an agent, In view of the rules of construction applicable to the statutes in question and since the documents which you have submitted to me do not contain any promise on the part of the insurance company to make a loan of money to the applicant p I conclude that the plan as evidenced by these documents does not constitute an induc,ement to Insure within the meaning of the sections above referred to,
From his Biennial Report of 1950: the Attorney General of Alabama is qtlated as follows:

“It seems to **me** that there is a queatfon of fact to be determined in each case, When the loan is the principal transaction, and the life insurance fs a bona fide fncfdental requfrement of the company, for the purpose of augmenting the loan security, a requirement made of all applicants alike Bwfthout discrimination, who may apply for a loan, then I am of th,e opinion that the transactions do not fall withln the inhibitions of the statute.

“However p if the company or agent call upon a prospect for life insurance, and as a sales argument or inducements makes the promise that ff the policy of insurance is taken, the company will make long time mortgage loans to the insured, at a low rate of interest, ana without charging any commission, then I amof the opinion that this will constitute an rinducement Ip in fact and in law, and would be offensive to statutes> supra-

### Hon.GeorgeB. Butler, 

### Page ?$Vi300

unlessit is specifiedin the contrscti of insurance,

and unlessIt appliesto allpersonsalikewho applySor.insnrantewithoutdiscrimination. Sore,holdthatthemethodofw--' loans in connection with the .-

_--. _ issuance ._,

_.. _ - _ - or i

### nsurancepolicies,as outlinedinthe statementof facts.is notoffensiveto _:* theAlabamaStatutes:,ana doesnothave tobe set out In 

### the poliogof insuranc&?v-c ..~ The twoTexascasesconstruingthisstatute. in connection

withthe offerof a loan in connection with thewritingof an insurancepolicy,Morrisv. Ft.Worth Life InsuranceCompany,supra,and Gausev. SeourltyLife InsuranceCompanyofAmerica (CivilAppeals),207S.W. 346,are clearlyaistlnguishable In thateachinvolvedan isolatedinstanceof an agentofferingto mke or 

### pmmisinga loan clearlyandmanifestlyforthepurposeof inducingtheparticularprospectto take a 

### policyof insurance. The objectwas primarilyto sellan Insurancepolicyand the loanwas offeredin the fullestsenseas "an inducementto insurance." The EquitableinputtingSorward thisplanpurportsto bemotivatedby a desirefor protectedloans. Ii thatpurportedpurposela proseouted by itsagentsingood faithanti is notmisrepresented to theborrowerin sucha way ag to procureinsuranoeon the promiseofa loanwhichdoesnotmaterialize,it isnot subjectto criticism. It isa legitimate prosecutionof the oompany'sauthorizedbusiness. It isnot theplan nor theultimateresultin thewritingof a policywhich the statute 

### conaemns. scrutinized. It is theapproaahwhichmustbe

Everynegotiation

mustbe judgeduponthe occurrencestranspl.ring while it isbeing conauotea.
We believethat thisplancanbe legallypresentedtoprospective borrowers. Whetherit is used 

### in amannercontraryto the spiritofArticle5053 is a questiontobe determinedon the factsof eachtransaction.

TheAssuredHome OwnershipPlanof the EquitableLifeAssuranceSocietyof the UnitedStatesdoesnot-violate Artiole5053Hon. George B, Butler, Page 8, V-300

0s Vernonps Civfl Statutes **as** a matlxr of law.

**Yours** very truly
ATTORNEY

GENERAL

OFTEXAS

BYWd Ned McDaniel Assistant

BY?-‘?Charles E0 Crenshaw

Assistant

.

ATTORNEY

GENE%IL CEC:jmc:jrb