. . 

Hon. J. P. Gibbs 

Casualty Insurance Commissioner 

Board of Insurance Commissioners 

State Office Building 

Austin 14, Texas 

Dear Sir: Opinion No. O-5873 

Re: Control by Board of Insurance 

Commissioners over workman's 

compensation rates and specific questions answered in 

relation thereto. 

In your letter addressed to Honorable Grover Sellers, Attorney 

General, under date of February 15, 1944# you submit twenty-two 

separately numbered questions you desire answered by an opinion of 

this department. The submission of such questions grow out of a 

publicized notice issued relative to a puolic hearing held by the 

Board of Insurance Commissioners in Austin, Texas, on November 19, 

1943, at which time the Insurance Carriers were inf~ormed that the 

Board had under consideration the following matters, quoted herein 

from said notice: 

"It has come to the attention of the Board that various plans 

and agreements, both written and oral, are being used by a 

number of insurance carriers in the writing of workmenss compensation insurance, which plans and agreements are not written into the application and policy, It is the opinion of 

the Board that under the express terms of Article 4913, such 

agreements or contracts are void and of no effect and in 

violation of the provisions of the law. All interested insurers, regardless of type or plan of operation, and insureds 

are hereby invited to give definite and good reasons, if 

there by any, why the Board should not: 

(a) Prohibit premium surcharge waiver agreements under 

retrospective rating plans or prescribe a premium 

waiver table. 

(b) Prohibit so-called "cost-plus" plans. 

(c) Prohibit so-called "stop-loss" plans, 
, . 

Hon. J. P. Gibbs, page 2 O-5873 

(d) Require participating companies to file plan of 

operation and seals of proposed dividends to be 

approved by the Casualty Insurance Commissioner in 

the form of an endorsement to be attached to each 

and every policy written by such carrier. 

(e) Prohibit the use of any plan, contract, agreement or 

resolution not specifically prescribed or authorized 

by the Board." 

As pointed out in your letter, the Board contemplated taking such 

action under its authority to make rules and regulations considered by it necessary and proper to establish control over the 

rates promulgated ‘by it under statutory authority. 

Further in connection with your request, you submit certain facts 

pertaining to the practices and methods of various insurance 

carriers writing workmen's compensation insurance in this State 

in the form of exhibits and other data relating to grouping of 

insureds, payment of dividends and certain agreements entered into between these carriers and particular insureds. In addition 

you call our attention to eight former opinions heretofore rendered by the Attorney General's Office at various times during 

the period from December 18, 1926, to April 20, 1940, answering 

certain questions. The foregoing data has received our careful 

consideration. Such answers we may give to the questions individually must be considered in the light of the authorities incorporated herein as applicable to the power and authority of the 

Board expressly given in Art. 4915, K.C.S. of Texas, which reads: 

"The Commission (Board) is hereby empowered to make and enforce all such reasonable rules and regulations not inconsistent with the provisions of this law as are necessary 

to carry out its provisions." 

The matter of payment of premiums by the subscriber or the correctness of the applicable premium rate payable is one solely between the insurer and the insured, once the contract is entered 

into and with which the Board of Insurance Commissioners is not 

concerned, having fixed and promulgated the rate under the authority of the statutes. Nor is any question herein considered interpreted as affecting the reasonableness or adequacy of any particular rate schedule promulgated under the 8oard's rate making 

power, it being clear that the questions deal not with "control" 

as might 'be applicable to the reasonableness or adequacy of the 

rates applicable to all classifications of hazards but solely to 

indirect control as by contract and side agreements with insureds, 

such rates fixed and promulgated by the Board and accepted by the 

insurers on the face of the policies, are abrogated and modified, 

usually by endorsements or other means, having heretofore, in 
. . 

Hon. J, P. Gibes, Page 3 O-5873 

some instances, the approval of the tioard. Assuming, therefore, 

the proper exercise oi the doard's power in fixing rates of premium applicable to the various classifications of' hazards and 

the classes to which they apply as well as oeing adequate to the 

risks, we will endeavor to aiscuaa the power and authority of the 

board in the light of our interpretation and construction of the 

statutes, 

'The material statutes, vestin,g in the tioard of Insurance Commis-, 

stoners power and authority to classify hazards, promul,sate premlum rates s and prescribe stanor;rd and uniiorm policy contract 

f'orms, deemed necessary to cite, read: 

"Art. 4907 R.C.S. 1~25. 

"The said t ommission ('board) shall make, estaolish and promulgate all classifications of hazards and rates of' premiums respectively appiicaeie to each, contemplated and provided for 

by Title 139, known as the yjorkmen's Compensation Law and/or 

by the"Longshoremen~s and Ha&or ulorkers' Compensation Act" 

as enacted oy the Congress of the United States. Said Gemmission shall publish all rates promulgated by it as affecting Compensation insurance in tnis State, and said rates> or 

any change therein, shall be published fifteen days before 

they become effective and in force. Acts 1923, po 408; Acts 

1931, &Znd Leg., pO 290, ch. 1'71 1." 

"Art. l+yOc,. The iommission (Board) shail prescribe standard 

policy forms to be used by all companies or associations 

writing workmen"s compensation insurance in t'iis State, id 0 

company or association authorrzeci to write workmen".5 compensation insurance in this State shall, except as hereinarter 

provided f'or, use an'y classiT'icati0ris of nazarosp raies ot 

premium, or policy forms other Lhan tilose made, estaoll,shed 

and promulgated a,la prescri'bed by the Commission. Acts 122j y 

p0 408." 

"Art. 4909, 'The Commission (hoard) shall assemule all necessary data for its use in estaolishing classiilcations of 

hazards and making and promulgating premiun rates." 

"Art. 4910, The Commission (aoard) may require sworn statements from any insurance company or association affected oy 

this law showing,the payroll reported to it ana incurred 

losses by classii'ica.tions and such other information which 

in the judgement of the Commission may be necessary in determining proper classifications, rates and f'orms. 'I'he Sommission shall prescribe tne necessary forms for such statements 

and reports, having due regard to the methods and l~orms in 

use in other States for similar purpose in order that uniformity of statistics may not be disturbed," 
Hon. J. P. Gibbs, Page 4 G-5873 

“Art. 4911. The Commission (doard) shall determine hazards by 

classes and fix such rates of premium applicable to the payroll in each of such classes as shall be adequate to the 

risks to which they apply and consistent with the maintenance 

of solvency and the creation of adequate reserves and a reasonable surplus, and for such purpose may adopt a system of 

schedule and experience rating in such manner as to take 

account of the peculiar hazard of each individual risk, provided such rate shall ‘be fair and reasonable and not confiscatory as to any class of insurance carriers authorized by 

law to write workmen’s compensation insurance in this State. 

‘To insure the adequacy and reasonaoleness of rates, the Commission shall take into consideration an experience gathered 

from a territory sufficiently broad to include the varying 

conditions of the industries in which the classifications are 

involved, and over a period sufficiently Long to insure that 

the rates determined therefrom shall be just, reasona'ble and 

adequate rates. The Commission shall exchange information 

and experience data with the rate-making bodies of other 

States and shall consult any national organization or association now or hereafter existing for the purpose of assembling data for the making of compensation insurance rate.” 

“Art. 4912. Any policyholder, insurance company or association 

shall have the right to a hearing before the Commission on 

any grievance occasioned by the promulgation of any classification, rate or policy form by the Commission; such hearing 

to be held in conformity with rules to be prescribed by the 

Commission. No hearing shall suspend the operation of any 

classification, rate or policy form unless the Commission 

shall so order. Provided that any party aggrieved shall have 

the right to apply to any Court of competent jurisdiction to 

obtain redress m As amended Acts 1943, 48th Leg., p& 614, ch. 

355, 1.” 

"Art. 4913. The Commission (Board) shall prescl;ibe a uniform 

policy for workmen's compensation insurance and no company 

or association shall thereafter use any other fo'rm in writing 

workmen’s compensation insurance in this State, provided that 

any company or association may use any form of endorsement 

appropriate to its plan of operation, if such enforsement 

shall be first submitted to and approved Dy the Commission, 

and any contract or agreement not written into the application and policy shall be void and of no eSfect and in violation of the provisions of this chapter, and shall be sufficient cause for revocation of license to write workmen’s compensation insurance within this State." 
. . 

Hon. J. P. Gibbs, Page 5 O-5&13 

"Art. 4914. Nothing in this chapter shall Abe constructed to 

prohibit the operation hereunder of any stock company, 

mutual company, reciprocal or inter-insurance exchange, or 

Lloyd's association, to prohibit any stock company, mutual 

company, reciprocal or inter-insurance exchange or Lloyd's 

association, issuing participating policies, provided no 

divident to subscribers under the Norkmen's Compensation Act 

shall take effect until the same has been approved 'by the 

Commission. (doard). No such dividend shall be approved until adequate reserve has been provided, said reserves to be 

computed on the same oasis for all classes of companies or 

associations operating under this chapter, as prescrioed under the insurance laws of the State of 'Texas." 

"Art. 4916. No provision of the Act creating the State Insurance Commission (Board) with regard to the fixing and 

promulgation of rates for fire insurance or the prescribing 

of fire insurance policies and forms shall 'be applicaole to 

the fixing of compensation insurance classifications or the 

making of compensation insurance rates or the prescrioing of 

compensation insurance policy forms; but the provisions of 

this Act shall be construed and applied independently of any 

other law or laws, or parts of laws, having to do with the 

matter of insurance rates and forms or of fixing the duties 

of the State Insurance Commission." 

"Art. 4917. The words rCompanyt and 'Association' used in 

this iict mean the Texas Employers Insurance Association, or 

any stock company, or any mutual company, or any reciprocal, 

or any inter-insurance exchange, or Lloyds association 

a, 

authorized to write Workmen's Compensation Insurance in this' 

State." 

The Board of Insurance Commissioners can exercise only the autnority conferred upon it by law. Certain acts of the doard in excess 

of powers conferred are not official acts and it is not necessary 

that the exercise of the powers be negative in order to restrain 

the scope of their exercise. State vsa Robinson, 30 S.si. 2d, 292, 

Nhile it appears the statutesconferring such authority will be 

strictly construed, Commercial Standard Ins. Co. vs. ijoard of 

Insurance Commissioners, 34 S.W. 2d, 345, 24 Texas Jurisprudence, 

paragraph 443, -this rule has been extended to those necessarily 

implied and such statutes and orders promulgated thereunder will 

'be liberally construed to carry out the intent of the Legislature, 

Railroad Commission vs. High Underwriters, 124 S.;i. 2d, 413; See 

Railway kommission of P. v/. and D. C. Hailway Company, et al, 161 

S. v/i. 2d, 560. In passing upon such orders made by the Board of 

Insurance Commissioners to determine whether they are conferred under statutory or constitutional authority, the iourts will examine 

the language of the authority to see that it is free from doubt, 

and that it admits of no other reasonable interpretation. Humble 
. . 

Hon. J. P. Gibbs, Page 6 O-5873 

Oil and Refining Company vs. Railroad Commission, 12d S.UV. 2d, 

9, paragraph 5; that it is conferred in clear and unmistakable 

legislative terms, Board of Insurance Commissioners vs. Guardian 

Life Ins. Co. of Texas, et al, Vol. 12, Ray's Supreme Court He- 

;;rt;z& page 495; Scanlan vs. Home Insurance Company, 79 S.W. 

, l 

The law appears settled that applicable State laws and by-laws of 

such insurance corporations are read into every contract made on 

behalf of the corporation and neither the president not the Board 

of Directors of Insurance Corporations can exceed the limitations 

placed upon.them by the laws effecting such corporations. Edwards vs. Keller, 133 S.W. 2d, 823. This rule, it seems, also 

applies to contracts of insurance issued by such corporations. 

Home Life Accident Insurance Company vs. barron, 4'1 S.W* ad, 380; 

29.Amer. Juris., Par. l'ig-160, p. 196 and 19’7. In Scanlen vs. 

Home Ins. Co., supra, the Court said: 

'*The 'business of insurance is of public concern and therefore 

subject to strict regulation and control by the State. Hence 

the rights of the parties to contract with respect to insurance are limited ~by the laws of the State which are a 

part of every contract. And any stipulation in an insurance 

policy which contravenes the statute is void." 

In the light of the aforegoing authorities, we proceed to discuss 

the questions submitted. The first 7 questions read as follows: 

"1. Can any insurer place each subscriber in a separate 

e-p p regardless of hazards, 

subscriber in such group? 

such subscriber being the only 

"2. Can any insurer agree with a suoscrioer, oy way of resolution of its Board of Directors, or in any other manner, 

that such subscriber will pay to the insurer's certain percentage of the prescribed premium for administrative expense, without such agreement or resolution being made a 

part of the policy of insurance and approved 'by the Board 

of Insurance Commissioners? 

"3. Can any insurer agree with each subscriber that a certain percentage of the prescribed premiums may be used for 

the purpose of paying losses, and the saving to be returned 

to the subscriber? 

a. As returned premium 

'b. As excess a'bove expense and losses, or 

c. As a dividend? 
. . 

Hon. J. P. Gibbs, Pao;e ',j O-5673 

"4. Can any insurer return to its individual subscribers as 

dividends in proportion to its 

a. losses, or 

b. amour+ of premiumpaid? 

"5. If you have answered in the affirmative any of the inquiries mentioned in Questions 3 or 4, than does such agreement have to be approved by the Board of Insurance Commissiomers before such agreement becomes legally operative? 

"6. If you have answered in the negative any of the inquiries 

mentioned in Questions 3 and 4, then would the Board of Insurance Commissioners exceed its authority in approving such 

agreement? 

"7. If you have answered that the Board of Insurance Commissioners would exceed its authority in approving such a plan 

as mentioned in Questions 3 and 4, then would such plan be 

illegal even though approved by the Board of Insurance Commissioners?" 

In the memorandum and data submitted in connection with your request, it is disclosed that under the annual applications submitted to the Board on the part of certain insurers, for approval 

of dividend disbursements, certain applications disclosed no 

methods of making the disbursements nor do they contain any stipulations as to the manner of disbursement. Referring to Art. &3& 

Sec. 13> of the Revised Civil Statutes of lY25, you point out 

that subscribers of the association are divided into groups and 

the examination of the records of the association reveals that all 

subscribers are not paid the same rate of dividend. You further 

point out instances have revealed only one subscriber comprising 

a "groupT1. You also state that your examinations further reveal 

agreements relating to the percentages concerned in questions 2, 

3 and 4, also involving questions l'? and 18, made by special resolutions , passed by the .Board of Directors, su~osequent to a previous resolution oy the Directors of the Company, placing such 

su’bsCriOeR3 in a particular group, and that it is found that these 

percentages vary and that a factor disclosed with reference to 

the association's general or largest group is that the varying 

dividends paid in this group is determined by loss ratios and 

size of premium paid. 

Art. 830tf, Sec. 13, K.C. S., lY25, provides: 

"The board of directors may distribute the sucscrioers into 

groups for the purpose of segregating the experience of each 

such group as to premiums and losses, and for the purpose 

of determining dividends payable to and assessments payable 
. 

Hon. J. P. Gibbs, Page Ei 

by the subscribers within each group, but for the purpose of 

determining the solvency of the association, the funds of 

the association shall oe deemed one and indivisible. The 

board of directors shall have power to re-arrange any of 

the groups by withdrawing any suoscriber and transferring 

him wholly or in part to any group and to set up new groups 

at its discretion." 

Generally speaking, any insurer authorized to write workmen's 

compensation insurance in this state is authorized to distribute 

and place its subscribers into ,groups for the purpose of segregating the experience of each group as to premiums and losses. 

Since the Act of 1923, Ch. 182 (including Articles 4907 through 

49191, the Board of Insurance Commissioners has had imposed upon 

it, the duty, among other things, to determine hazards by classes 

and fix such rates of premiums applicable to the payroll in each 

of such classes as shall ‘be adequate to the risks to which they 

apply. In order to insure adequacy and reasonableness of rates, 

the Board is required to take into consideration anexperience 

gathered from a territory sufficiently broad to include the varying conditions of the industries in which the classifications are 

involved and over a period sufficiently long to insure that the 

rates determined from such experience will be just, reasonable and 

adequate. In this connection, 

of the Board is concerned, 

in so far as the rate making power 

having established and fixed a rate of 

premium, the question arises as to whether there has been a disregard of hazards in connection with any suoscriber so grouped. 

The word "hazard" is broad in meaning and scope. 

accepted asconnotating "risk" 

It is generally 

and is so defined by iiebster’s 

New International Dictionary. The work hazard is not used in the 

above Section 13 of Article 8308. 'The Legislature used in the 

word in the original workmen's compensation law, Acts of 1913, 

33rd Leg., Ch. 179, wherein Part 3, Sec. 13, the hoard of Directors of the "Texas Employers* Insurance Association", created 

thereby, were permitted to distribute the subscribers into groups 

"in accordance with the nature of the business and the degree of 

hazard incident thereto." 

tion 16, following, 

It is significent to note that in Secthe Act provided that all premiums, assessments 

and dividends shall, by the Board of Directors, ‘be fixed by and 

for groups as above provided, "in accordance with the experience 

of such group." 

In 1917, the 35th Legislature, Chapter 103, amended the entire 

1913 Act, and in Sec. 13, Part 3 of the 1917 Act, the words "in 

accordance with the nature of the business and the qdegree of 

hazard' incident thereto‘! , were omitted Andy-in lieu thereof the 

following was inserted: 
. . 

Hon. J. P. Gib'bs, Page 9 G-5873 

"For the purpose of segregating the experience of each such 

group as to premiums and losses, and for the purpose of determining dividends payable to and assessments payable by 

the subscribers within each group," 

Section lrjc was added in the Act of 1917, providing that the 

Board of Directors shall "determine hazards ‘by classes, and fix 

the rates of premiums which shall be applicaule to the payroll 

in each of such classes at the lowest possible rate consistent 

with the maintenance of solvency and the creation of adequate reserves and a reasonable surplus, and I'or such purpose may adopt 

the system of schedule and experience rating in such a manner as 

to take account of the peculiar hazard of each individual risk." 

Section 17 provided that any proposed rate of premium, assessment 

or dividend, or any distribution of subscribers shall not take 

effect until approved my the Commissioner. 'These sections of the 

191'1 Act, Sections lbc and 17, were repealed by the 1923 Act hereinaoove mentioned. 

It is apparent from the foregoing legislative history that the 

association or any other compensation carrier cannot segregate or 

classify assureds in accordance with the nature of their business 

or according to the degree of hazards. Such classifications for 

the purpose of grouping is inconsistent with the power vested solely in the board and peculiarly confined and limited in use to the 

fixing of rates of premium. 

Insurers and their subscribers, contract with each other with reference to anticipated losses. The hazards in connection with 

the operation or any pcrtion of the operations of SLIDSCriberS, 

are, as far as practical to be taken into account, considered exclusively 'by the board in fixing the rate of premium and deemed 

acceptable to both insurers and subscribers at the time the ckntract is entered into. 

Art. 8308, Sec. 13, supra, authorizes subscribers, as to their entire operations, or any part of the operations of each, to be distributed into ,groups 'by the insureds, for the purpose of segreF-atine, the experience of each such group as to nremium and losses, 

and for the b w-pose of determinin.a dividends pava'ble to an assessments payabh’by the subscribers within eachArso_uq. Segregating 

the experience of each group is to be distinzulshed from the classification of a subscriber according to hazards, wholly or inpart. 

Every insurer engaged in writing Norkmen's Compensation Insurance 

is prohibited from using any classification of hazards as a basis 

for setting up groups for segregating experience and paying dividends. Such is inconsistent with the provisions of Article 

4908, supra. 
. . 

Hon. J. P. Gibbs, Page 10 o-5S73 

It will be noted that Art. t3308, Sec. 20, provides the procedure 

for, determination as a subscriber under his contract or policy on 

or before the date of its expiration. Present regulation, promulgated by the Board, (Texas Compensation Manual, page R12, effective 

March 1, 19431, provides that the compensation policy shall be 

written or issued for a term of one year. It is commonly recognized that policies expire and new ones are issued, necessitating 

the latter to be placed within certain groups in the event the 

assurer has adopted this plan of operation. While the subject 

or plan of grouping is not necessarily to be considered a proper 

subject for endorsement, there is no prohibition against its 

inclusion in an endorsement authorized ~by the Board of Directors 

of a company and attached to and made a part of the contract, 

where it is first submitted to and approved 'by the Board. 

In Art. 830&, Sec. 13, the consideration by the insurer of the 

particular experience of certain subscribers or a group is permitted as well as limited to premium and losses. It is believed 

that the Legislature used the term premium and losses as a unit 

as would prohibit the segregation solely on the basis of the premium paid or on the losses sustained, the first estimated and the 

latter anticipated. In other words, the statute is clear and unambiguous in designating the basis for permissible grouping, viz: 

the relation of premium to losses or the ratio between the two. 

This statute furthermore does not use the word experience in a 

retroative sense, but it is used in a present sense and we can 

readily foresee the breakdown in the rates promulgated and dividends paya'ole, resulting in discrimination, from any other interpretation of the statutes as a whole. 

While the word trgroupTt connotes more than one subscriber, and is 

defined by Webster as meaning two or more figures forming a design 

or taken together as a distinct unit in a more complicated design, it is not believed that the Legislature used the word in a 

limited or strict sense, 'but solely as a unit to distinguish that 

which is segregated, i. e., one group from another. One subscriber properly segregated may constitute one "group". See Hope vs. 

Flentge, 41 S.N. 1002, Words and Phrases, Vol. lb', Per. Ed. Page 

780. 

We can attach no significance to the fact that in Sec. 2, Art. 

8309, R.C.S., lY25, Sec. 13, was not included as would expressly 

make that section applicable to other insurers, while certain 

other sections, such as 10, 17, ltia and 21 were specifically designated. The intention of the Legislature is expressed in controlling terms, to the effect that any insurance company, which 

term includes mutual and reciprocal companies, lawfully transacting a liability and accident business in this State "may have 

and exercise all the rights and powers conferred by this Act 

(Arts. 8306, 7,g, and 9, R.C.S., 1925, and as amended) on the 

association created hereby, "stibject to a limitation imposed upon 
. , 

Hon. J. P. Gibbs, Page 11 O-5673 

mutual or reciprocal organizations requiring them to have at ieasr, 

50 subscribers who have not less .than 2,000 employees. We further 

point out that not only section I.'? of,the lYl7 Act was repealed 

ny the 1923 Act (Arts. 4907 through 4918, mcJ.usive), but all 

other provisions of the 1917 Act inconsistent with the provisions 

of the 1923 Act were by it expressly repealed, 

Answering the first five questlons, in the order presented, it is 

the opinion of this department: 

1. Any insurer may distrioute a suoscrioer into a group to 

itself provided it is done so upon a reasonanle loss ratio 

basis for segregating it fromother ,groups, 

2. An agreement made bv any insurer with any suoscriber concerning the prescribed-premium, not attached to the policy 

of insurance and approved by the doard is void. 

3. An agreement hstween any insurer and each subscriber providing that a certain percentage of the prescribed premium 

may be used for the purpose of paying losses, the saving to 

be returned to the subscriber, is not prohibited or illegal 

so long as same is incorporated in or made a part of the 

policy contract and does not discrimih::te between suoscrioers 

of the same class or group. 

4. Any savings, excess or return Frcmium as dividends can 'be 

returned to any ~suoscriber on the basis of individual losses 

or amount nf premium paid, Trovided in the payment of same3 

there is no discrimination between suoscrlbers of the same 

class of group. 

5. No agreement between insurers and their suoscribers as 

referred to in question 3, or any return as dividends oecomes 

legally operati.ve or in effect until approved by the doard 

of Insurance Commissioners. The approval of a policy form 

endorsement does not oonstitute an approval of the dividends 

authorized to be distributed to the policy holders. 

Answering questions 6 and 7, it is our opinion that where discriminatlon is disclosed under any plan for the payment of dividends, 

approval of same by the board ~would be unauthorized. 'The fact 

that the hoard igored such discrimination and approved such 

dividends for payment would not affect the illegality of the plan. 

Your questions number 8 through 11, specially relating to dividends, read as follows: 

"6. Does the tioard have authority to control dividends? If 

30, to what extent?" 
. . 

Hon. J. P. Gibbs, Page 12 o-5g73 

'lg. Does the Board have authority to approve dividends for 

;;;;V;,grouP 1 as referred to under Section 13 of Article 

"10. Does the Commission have the authority to require any 

insurer to submit the rate of dividend or formula used by 

groups or individual risks?" 

"11. Can an insurer arbitrarily pay one percentage of dividend to one policyholder and a greater or lesser amount to 

other policyholders.?ff 

Art. 830d, Sec. 16, unchanged from its original enactment, expressly provides that dividends and assessments shall be fixed 'by 

and for groups and that the entire assets of the association shall 

be subject to the payment of any approved claim for compensation 

against the association. This provision of the statute is mandatory and is not inconsistent with the writing of participating 

or participation and assessment policy contracts on the part of 

certain insurers other than the Texas Employers. Here again 

we are reminded that the law is designed to operate uniformly as 

to all insurers. There is no prohi~bition against any insurer, 

whether it 'be Texas Employers, Insurance Association, a stock 

company, mutual, reciprocal or inter-insurance exchange or Lloyds, 

following the ;Y$;azE grouping as authorized by Sec. 13, Art. 

d3Oi?, supra. as to dividends, we may presume that certain participating poiicies written are 'by companies following 

this plan, with Art. 4914, supra, recognizing the right of said 

companies to issue participating policies, expressly providing 

that no such dividends shall be approved until adequate reserve 

has been provided, said reserves to be computed on the same 'basis 

for all classes of companies or associations operating under 

Chapter 10, Title 78, R.C.S., 1925, as prescribed under the insurance laws of the State of Texas. 

One of the foremost and expressed duties commanded by law of the 

Board of Insurance Commissioners if t% see that all laws respecting insurance and insurance companies are faithfully executed. 

Art. 4662, Subdivision subject dealt with in our laws respecting 

both insurance i;nd insurance companies. 

Art. 576, Penal Code, incorporated under Chapter 2, entitled 

"Insurance", in part, provides: 

"No insurance company doing business in this State,,..nor 

shall any such company or agent thereof make any contract 

of insurance or agreements as to such conI:ract other than 

as expressed in theplicy issued thereon, nor shall any 

such company or any officer, agent, solicitor or representative thereof, pay, allow or give, or offer to pay, allow 
. . 

Hon. J. P, Gibbs, Page 13 

or give, directly or indirectly as an inducement to insurance, 

any rebate of premium payaole on the policy, or any special 

favor or advantage,in the dividends or other benefits to 

accrue thereon or any paid employment or contract for service 

of any kind, or any valuable consideration or inducement 

whatever, not specified in the nolicy contract of insurance; 

or give, sell or purchase, or offer to give, sell or purchase, 

as an inducement to insurance or in connection therewith, 

any stocks, 'bonds or other securities of any insurance company or other corporation, association or partnership, or 

any dividends or profits to accrue thereon, or anything of 

value whatsoever not specified in the policy, or issue any 

policy c0ntainin.g any special or board contract or similar 

provision 'by the terms of which said policy will share or 

participate in any special fund derived irom a tax or a charge 

against any portion of the premium on any other policy. Any 

officer or agent of such company violatinS any provision of 

this article shall be fined not less than one hundred nor more 

than five hundred dollars." 

Article 580 of the Penal Code, also codified under the general suoject of "Insurance", provides: 

"Any officer or representative of any insurance company or 

association authorized to write workmen's com?ensation insurance in this State, who shall violate any nrovision of the 

laws relating to such business conMined ;n ci:apLer 10, 'Etle 

"Insurance" of the Revised Stiitutes, relatins to tile State 

Insurance Commission and such business, si-iall be i'inec, not 

less than one hundred nor more than t'lve hundred c~ollE.rs. 

Acts 19.23, p. 411." 

Construing the above articles of the Penal Code, they present a 

definite and fixed public policy on the part of the Legislature, 

which public policy is clearly defined and applicaole to those 

enga,ged in writing .rJorkmen's compensation insurance in ti>is State. 

The making of any contract of insurance or agreement by an)' company or ag,ent thereof, other than expressed in tile policy; the 

allo;+ing or giving or offering to pay, allow or give directly or 

indirectly as an incucenent to insurance, 

payaole or any special favor 

any redate or premium 

or advantage in the dividends or 

other oenefits or profits to accrue thereon, or paid employment or 

contract for service of any kind or any valuable consideration or 

inducement whatever, not specified in the policy; the issuance of 

any nolicy containing any special or tioard contract or similar 

provision tihereov the policy .will snare or participate ?~n any 

special fund derived from a charge against the premium on any other 

policy; to knowingly write insurance at any lesser rate than the 

rate promulgated by the doard of Insurance Commissioners, all these 

and others relating principally to agents, are prohibited under 
Hon. J. P. Gibbs, Page 14 O-5873 

the foregoing statutes; and any company doing any of the acts prohibited is expressly deemed guilty of unjust discrimination. 

In connection with the statutes declaring the public policy, it 

is material to note that a company sharing its profits with its 

policy holders by agreement as to profit sharing placed on or in 

the face of the policy, provided such is uniform and does not 

discriminate between individuals or between classes, is permitted. 

This expression of profit sharing is recognized in Art. 4914, 

R.C.S.) 1925, which provides that nothing in Chapter 10 shall 'be 

construed to prohibit any stock company, mutual, reciprocal, 

inter-insurance exchange or Lloyd's Association, issuing participating policies , provided no dividend to subscribers under the 

'i/orkmen's Compensation Act lvill take effect until the same has 

been approved by the Board of Insurance Commissioners. 

Referring again to Art. 8308, Sec. 16, it requires dividends to 

subscribers to be fixed by and for groups where such grouping as 

herein discussed is followed by the insurer and Art. 4914 provides 

that no dividend to subscribers shall take effect until same has 

been approved by the Board. The act of approving payment of 

dividends is not to be construed as a merefbrmality on the part 

of the Board. It is charged with seeing that all insurance laws 

of the State are complied with and to this extent, proposed dividends should not only be disapproved, payment of which would result in insolvency of the insurer, but no dividend, whether it be 

called savings or otherwise, should be approved which discriminates 

between subscribers of the insurer or between members of groups 

into which they may be properly segregated. 

Answering your questions 8,Y,lO and 11, it is our opinion that 

the Board of Insurance Commissioners is authorized and required 

to approve dividends fixed by and for groups where such plan of 

operation is disclosed and followed 'by an insurer. Regardless of 

uniform endorsements disclosing the plan and approved by the 

doard, said Board may be regulation require all insurers electing 

to group its subscribers in accordance with Art. 8308, Sec. 13, 

R.C.S., 1925, to present to the Board its basis for payment of 

said dividends by groups at the time same are submitted for approval. No insurer can arbitrarily pay one percentage of dividend to one policy holder and a greater or lesser percentage to 

others. 

Your questions, numbers 12 and 13, are too, broad in scope and 

without sufficient definiteness and meaning for this department 

to give you any specific answer thereto. Ne therefore omit these 

questions and their consideration herefrom and request that you 

re-submit same seperately, specifically advising us of the type 

or types of agreement you refer to, or have in mind. Otherwise, 

we will consider that our answers to the other questions propounded by you render these questions of material importance to the 

i3oard. 
Hon. J. P. Giobs, Page 15 O-58,/3 

Your question No. 14, reads: 

"Does (Plan of Operation' as referred to in Art. 4913 mean 

the plan peculiar to a c,ertain type of company; that is, a 

stock company, mutual company, reciprocal exchange or Lloyds 

organization, or doe3 it mean that a carrier within any particular type may use an individual plan of operation?" 

bfe find no definition given in the statutes nor language particularly limiting the meaning of "plan of operation" referred to. 

Answering this question, therefore, it is our opinion that "plan 

of operation" referred to in Art. 4Yl3, K.C.S., means any plan 

authorized by the laws of this State, and consistent with any 

reasonable regulations of the board which may De adopted and used 

by any company or class of companies authorized to write Workmen's 

Compensation Insurance. 

Questions 15 and lb contained in your request, read: 

"15. Can a stock insurance company legally issue a policy 

with an assessment provision against a policyholder? 

“lb. Would a charter issued by the Secretary of State to a 

stock insurance company prior to the passage of the rating 

laws, authorizing such stock company to issue participating 

and assessment policies, and amendments approved Dy the 

Attorney General after the passage of the rating laws, permit 

sucn stock company to issue an assessment policy? 

As hereinDefore stated, the law recognized the right of stock 

companies to issue participating policies. Art. 4Y14, K.C.S., was 

considered in an opinion of this department rendered to Hon. 

J. J. Timmons, Secretary of State Insurance Commission 'Dy Honorable H. B. Cousins, Jr., Assistant Attorney General, under date 

of Decemoer 18, 1926, wherein he stated that the word Darticipating in this connection includes the idea of participating in 

losses as well a3 participation in profits. We further note that 

this opinion passed specifically upon an endorsement form proposed oy a company operating under the Lloyds' plan, the provisions of which would characterize the policy as one of participation and assessment. 

A "participating policy" or one of "participating premiums" is 

construed generally to mean one that is entitled to dividends or 

which shares in all the profits arising from the premiums paid ‘by 

the insured. <fords and Phrases, Vol. 31, Permanent Addition, 

page 135. kqhile the words 'fassessment" has varied meanings in 

insurance parlance, 

or "dues", 

and under the mutual plan may mean "premium" 

the statutes, charter, laws and contract have to be 

looked to for determining the meaning of the term. 
Hon. J. P. Gibbs, Page 16 O-5873 

We know of no law, statutory or otherwise, that would authorize 

a stock company to issue strictly an assessment policy. While 

the act of sharing the profits may also include by contract, the 

idea of sharing the losses, it does not necessarily mean that one 

who shares in the profits, independent of contract, will share in 

the losses, nor does it necessarily mean an additional premium 

rate in violation of the rate making powers of the Board is contracted for. 

Where a stock company writing Workmen's Compensation Insurance 

Policies, on a participating or profit-sharing basis, incorporates 

an assessment provision in its contract, it is presumed to be 

operating under the mutual plan for writing such insurance. There 

is no statutory prohibition against a stock company operating under such plan. Nothing contained in the charter or by-laws of a 

stock company, however, can authorize it to write strictly assessment policies or policies containing any assessment provision 

without likewise providing for participation on the part of the 

subscriber. The rule appears applicable as applied to strictly 

mutual companies to the effect that any regulation of such matters 

by its charter or by-laws must be consistent with express statutory provisions, mandatory or prohibitory in nature. 

As to the above questions, Nos. 15 and 16, it is our opinion that 

same be and they are each answered in the negative. 

Questions 17, 18, and 19, read: 

"17. Can any insurer issue a 'stop-loss' contract; that is, 

a contract guaranteeing that the maximum premium will be a 

lesser amount than the premium produced at rates prescribed 

by the Board? 

1'18. Can any insurer agree, by resolution of its Board of 

Directors, or in any other manner, to cause a 'stop-loss' 

contract to be issued by any other insurer licensed to do 

business in this State, without such agreement being made a 

part of the policy contract andapproved by the Board of Insurance Commissioners? 

"19. Can any insurer licensed to do business in this State 

issue a 'stop-loss' contract guaranteeing that the maximum 

premium will be a lesser amount than the premium promulgated 

by the i3oard of Insurance Commissioners on policies of workmen's compensation issued by another insurer?" 

You point out that the "stop-loss" plans in use in Texas, while 

differing in detail, the principles are essentially the same. 

That they embody the ,"cost-plus" plans and in addition purport to 

protect the employer against losses in excess of 10% of the 

standard premium. 
Hon. J. P. Gibbs, Page 1'7 

The principle of *cost-plus ' is described 'by you as an agreement 

between the carrier and employer that a certain percentage of the 

premium is to be paid to the carrier for "expenses", and the losses 

are paid out of the remainder of the premium. Further, you conclude that if the employer can prevent losses, he saves money 

because he does not pay all of the premium, and if the losses exceed the premium, the employer must pay them, or if the carrier 

has undertaken payment, reimburse the carrier. In other words, 

you submit the view that the employer pays all losses and in addition pays the carrier for expenses. 

From the above views, we are unable to hold that such a contract, 

presumed to be incorporated as a part of the policy 'by endorsement, issued 'by the carrier to all employers alike, without 

discrimination, contravenes the rate making power of the Board. 

In short, it is nothing more than a participating form policy 

whereby the parties, subject to the provisions of the law, read 

into every policy contract with reference to the experience or the 

anticipated loss ratio of the employer or group into which he is 

properly placed. The percentage as to "expense" cannot vary between subscribers of the same class or group, nor can it in anywise affect or bind the Board as to the reserve required or dividends authorized to be paid. Any return of premium or savings 

are subject to approval of the 'Board as in payment of dividends. 

In answer to questions Nos. l'i, lb, and 19, it is our opinion 

that no insurer writing Workmen's Compensation Insurance in this 

State can contract with the subscriber by guaranteeing that the 

maximum premium will be a lesser amount that the premium produced 

at rates prescribed and promulgated by the Board. The character 

of such agreements from the description furnished and termed 

"stop-loss" contracts do not amount to such guarantee. The matter of reinsurance is purely a matter of contract between the 

carrier and its reinsuring company for the protection of its reserves and surpluses and while there is no prohioition against 

its being incorporated in the particular endorsement adopted 'by 

the company, to be uniformly done without discrimination, such 

endorsement should be attached to all standard form policies of 

such insurers. 

With reference to your question No. 20, it is not shown that such 

appointment is incorporated in any endorsement to the standard 

policy approved or before you for approval., vie cannot assume the 

same participating endorsement attached to all policies from your 

Question No, 21, and should we do so, we are not furnished sufficient facts from which it can be determined whether a proper 

grouping of subscribers will permit the distinction pointed out. 

These questions arp placed in the same category along with your 

Question No. 12 and 13. It has long been the practice of the Insurance Department to submit particular endorsements proposed to 

-be adopted by the insurer to this department where any question of 
Hon. J. P. Gibbs, Page 18 O-5873 

the Board are raised by you. We therefore, omit sai d questions 

from this opinion, subject to resubmission, if desired, in accordance herewith. 

Your last question, No. 22, reads as follows: 

"22. If a workmen's compensation insurance policy written on 

a so-called 'cost-plus' plan, is insurance insofar as the 

employee is concerned under the Act, in accordance with the 

Comillion vs. Union Piridge decision 100 Fed. (2) 937, is the 

net premium realized ‘by the insurance company (that is, the 

gross premium less the amount returned to the assured under 

such 'cost-plus' plan) legal premium and authorized bytie 

iuorkmen's Compensation Insurance Hating Law?" 

In the Gomillion vs. Union Bridge case, referred to, the court 

had before it apparently the identical participation form endorsement as presented in "Exhibit C" attached to your request. The 

material provisions of this endorsement read: 

11 . . . ..It is agreed between the Company and the Assured that: 

"(1) The Assured will pay the Company the manual or experience 

rates of premium applicable to this policy, as promulgated 

by the Board of Insurance Commissioners of Texas, 

“(2) If the premium so paid are insufficient to provide for 

the payment of 

(a) All paid and incurred losses, including legal and 

other expenses incidental thereto arising under this policy; and 

(b) Such per cent of all premiums as may be agreed upon 

oetween the Assured and the Company, which per cent shall 

be retained by the Company; 

the . 

Assured will pay to the Company, upon demand, such additional amounts as may be necessary to provide adequate reserves computed as prescrioed by the Board of Insurance Commissioners under the insurance laws of the State of Texas. 

"(3) If the premiums so paid shall prove to be more than 

sufficient to so provide for the payment of the charges mentioned in the preceding sub-paragraphs (a) and (b) of paragraph 2 hereof, and the maintenance of adequate reserves 

computed on all policies as stated in paragraph 2 hereof, 

the Company will return the excess to the Assured as and 

when such return shall be approved by the Board of Insurance 

Commissioners of Texas." 
. . - 

hon, J. P. Gibbs, Page 19 O-5873 

In the Gomillion case involving a suit by the 'beneficiaries of a 

fatally injured employee against his employer for damages, the 

employer defended on the ground that it was a subscriber under 

the Workmen's Compensation Insurance Act. Answering this contention, the beneficiaries, appellanLs,contended no risk was assumed 

under the policy and that the employer was a self-insurer. 

The court apparently followed the weight of decisions which appear 

to be in favor of the Commission of Insurance or Board 'being invested with the power to determine whether or not policy forms 

conform to requirements under statutes requiring approval of such 

forms 'by the Commissioner or Board, All American Benevolent 

Society vs. Erickson, 3 N. IV. Zd, 821; Aetna Life Ins. Co., vs. 

hfardison, 85 N. E. 40'7; 29 Amer. Juris. page 63, note 19. 

It has further been held that the approval of a life policy Sorm 

involves an administrative ruling thtit such form met ,iffirmatively 

every requirement of the statutes prescribing its provisions. 

ivianhattan Life Ins. Co., New York, vs. <Wilson motor Co., Inc., 

75 Sod. 2d, 721 

Under paragraph (3) of' the above endorsement form, which apparently is the participating feature, the company agrees to return the 

excess "as and when such returns shall oe approved by the Board 

of Insurance Commissioners of Texas." Carrying this provision to 

a most favorable result, if the subscriber incurred no losses or 

expense, tne insurer has contracted to return, suoject to the approval of the board, 90% of its gross premium or a 90% dividend 

subject to the approval of the aoard. We see no conflict in this 

provision with the rating statutes aoove referred to, presuming 

adequate reserves are maintained as required by law. we are not 

to oe understood, however, as approving such endorsement form, a 

matter we do not consider necessary in order to answer the aoove 

question. 

It is therefore our opinion that the net premium realized from the 

participating clause (3) of the enforsement form involved in the 

case of Gomillian vs. Union Bridge, 100 Fed, Sec. 93'7, whether to 

oe considered premium or otherwise, is authorized and not in conflict with the bvorkmen's Compensation Insurance dating Law. 

In conclusion, we wish to state that among others, we have reviewed 

the following opinions of this department, suumitted along with 

your request: 

1. Exhibit W'* to Hon. J. J. Timmons, Secretary State Insurance Commission, 12/1d/26 

2. Exhibit "E" to Hon. ;v. S. Pope, Casualty Insurance 

Commissioner, 2/23/32 
Hon. J. P. Gibbs, Page 20 O-5873 

3. Exhibit "F" to Won. R. 0. Waters, Casualty Insurance 

Commissioner, 6/24/35 

5. Exhibit "H" to Hon. R. G, Waters, Casualty Insurance 

Commissioner 9/2d/38 

6. Exhibit Wf to Hon. R. G, jaters, Casualty Insurance 

Commissioner 12/16/3d 

In so far as the foregoing opinions, or portions of them, hold 

adversely to our answers given or in any wise conflict herewith, 

same are expressly overruled. iie expressly overrule that portion 

of the opinion, Exhibit "H", rendered to Hon. R. G. Waters,, 

Casualty Insurance Commissioner, 

by Hon. Richard Rrooks, 

under date of September 28, 1938, 

Assistant Attorney General, in answer to 

the seventh question propounded therein. 

No portion of this opinion is to be construed or interpreted as 

passing upon, upholding or disapproving any endorsement form or 

or plan of operation referred to in your memorandum, exhibits or 

opinions submitted in connection with this request. The only 

specific plan cf operation which could be construed sufficiently 

submitted for such purposes is that of the Texas Indemnity 

Insurance Company with its present endorsement form, according to 

your letter, set forth as Exhibit "Cl' attached. In view of the 

fact that your questions individually and in the main relate solely 

to specific phases of this or similar plans, without expressly 

requesting our review of the particular endorsement form or plan 

of any company, we deem it advisable to so limit this opinion as 

above stated. 

vte are returning herewith the data and exhibits belonging to 

your files which were furnished in connection with your letter. 

IYe desire to express our appreciation for the able assistance 

given by Mr. Vestal Lemmon, Actuary, who generously conferred 

with us from time to time at our request. 

Yours very truly 

A'l"i'OtiN&Y GENeHAL Ok' 'TtiXAS 

By Wm. J. H. king 

Assistant 

WJKK:rt 

sncls. 

APPKOVEB: Oct. 4, 1944 

Carlos Ashley 

First Assistant