. .

Hon. J. P. Gibbs

Casualty Insurance Commissioner Board of Insurance Commissioners State Office Building Austin 14, Texas

Dear Sir: Opinion No. O-5873 Re: Controlby Board of Insurance Commissionersover workman's compensationrates and specific questionsanswered in relation thereto.

In your letter addressed to Honorable Grover Sellers,Attorney General, under date of February 15, 1944# you submit twenty-two separatelynumbered questions you desire answered by an opinion of this department. The submissionof such questions grow out of a publicized notice issued relative to a puolic hearing held by the Board of InsuranceCommissioners in Austin, Texas, on November 19, 1943, at which time the InsuranceCarrierswere inf~ormed that the Board had under considerationthe followingmatters, 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 shouldnot: (a)Prohibit premium surchargewaiver agreementsunder retrospective ratingplans 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 InsuranceCommissioner 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 resolutionnot specificallyprescribed or authorized by the Board."

As pointed out in your letter, the Board contemplatedtaking 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 statutoryauthority.
Further in connectionwith your request,you submit certain facts pertaining to the practices and methods of various insurance carrierswriting workmen's compensation insurance in this State in the form of exhibits and other data relating to grouping of insureds,payment of dividends and certainagreements entered into between these carriers and particular insureds. In addition you call our attention to eight former opinionsheretofore rendered by the Attorney General'sOffice 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 individuallymust be considered in the light of the authorities incorporatedherein as applicable to the power and authority of the Board expressly given inArt. 4915, K.C.S. of Texas,which reads:
"The Commission (Board)is hereby empowered to make and enforce all such reasonable rules and regulationsnot inconsistentwith the provisions of this law as are necessary to carry out its provisions."
The matter of payment of premiums by the subscriberor the correctness of theapplicable premium rate payable is one solelybetween the insurer and the insured, once the contract is entered into and with which the Board of InsuranceCommissioners is not concerned,having fixed and promulgated the rate under the authority of the statutes. Nor is any questionherein considered interpreted as affecting the reasonablenessoradequacy of any particular rate schedulepromulgatedunder the 8oard's rate making power, it being clear that the questionsdeal not with "control" as might 'be

applicable to the reasonablenessor adequacy of the rates applicable to all classificationsof hazards but solely to indirectcontrol as **by** contract and side agreementswith insureds, such rates fixed and promulgated by the Board and accepted by the insurers on the face of the policies, are abrogatedand 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 classificationsof' 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 interpretationand construction of the statutes,
'The material statutes,vestin,gin the tioardof Insurance Commis-, stonerspower and authority to classifyhazards,promul,satepremlum ratess and prescribe stanor;rd and uniiorm policy contract f'orms, deemed necessary to cite, read:

"Art. 4907 R.C.S. 1~25. "The said tommission ('board) shallmake, estaolishand promulgate all classificationsof hazards and rates of' premiums respectively appiicaeie to each, contemplatedand provided for by Title 139, known as the yjorkmen's CompensationLaw and/or by the"Longshoremen~sand Ha&or ulorkers' CompensationAct" as enacted oy the Congress of the United States. Said Gemmission shallpublish 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. 1'711."

"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".5compensation insurance in this State shall, except as hereinarter provided f'or,

use an'yclassiT'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 122jy p0 408."

"Art. 4909, 'The

Commission (hoard)shall assemule all necessary data for its use in estaolishing classiilcationsof hazards and making and promulgatingpremiun rates."

"Art. 4910, The Commission (aoard)may require sworn statements from any insurance company or associationaffected oy this law showing,the payroll reported to it ana incurred lossesby classii'ica.tions and such other informationwhich in the judgement of the Commissionmay be necessary in determining proper classifications,rates and f'orms. 'I'heSommission shall prescribe tne necessary forms forsuch statements and reports,having due regard to the methods and l~ormsin use in other States for similar purpose in order that uniformity of statisticsmay not be disturbed,"Hon. J. P. Gibbs, Page 4 G-5873

“Art. 4911. The Commission (doard) shall determinehazards by classes and fix such rates of premium applicable to the payroll in each of such classesas shall be adequate to the risks to which they apply and consistentwith the maintenance of solvencyand the creation of adequate reserves and a reasonable surplus, and for suchpurpose may adopt a system of schedule and experience rating in suchmanner as to take account of the peculiar hazard of each individualrisk, provided such rate shall ‘befair and reasonable and not confiscatory as to any class of insurance carriers authorizedby law to write workmen’s compensation insurance in this State. ‘Toinsure the adequacy and reasonaolenessof rates, the Commission shall take into considerationan experiencegathered from a territory sufficientlybroad to include the varying conditionsof the industries in which the classificationsare 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-makingbodies of other States and shall consultany national organizationor associationnow or hereafter existing for the purpose of assembling data for the making of compensation insurance rate.”

“Art. 4912. Any policyholder, insurance company or association shallhave the right to a hearing before the Commission on any grievance occasionedby the promulgation of any classification, rate or policy form by the Commission; such hearing to **be** held in conformitywith 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 shallhave the right to apply to any Court of competent jurisdiction to obtain redressm 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 insuranceand no company or association shall thereafter use any other fo'rminwriting workmen’s compensation insurance in this State, provided that any company or associationmay 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 shallbe 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 insurancewithin this State.". .

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

"Art. 4914. Nothing in this chapter shallAbe constructed to prohibit the operationhereunder of any stock company, mutual company, reciprocal or inter-insuranceexchange, or Lloyd's association, to prohibit any stock company,mutual company, reciprocalor inter-insuranceexchange or Lloyd's association, issuingparticipatingpolicies, provided no divident to subscribersunder the Norkmen's CompensationAct shall take effect until the same has been approved 'bythe Commission. (doard). No such dividend shall be approved until adequate reservehas 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 InsuranceCommission (Board) **with regard**  **to the**  fixing and promulgation of rates for fire insurance or the prescribing of fire insurancepolicies and forms shall **'be** applicaole to the fixing of compensation insurance classificationsor the making of compensation insurance rates or the prescrioing of compensation insurancepolicy forms; but the provisionsof this Act shallbe construed and applied independentlyof any other law or laws, or parts of laws, having to do with the matter of insurancerates and forms or of fixing theduties of the State InsuranceCommission."

"Art. 4917. The **words** rCompanytand 'Association'used in this iict

mean the Texas Employers InsuranceAssociation, or any stock company, or any mutual company, or any reciprocal, or any inter-insuranceexchange, or **Lloyds** association

a, authorized to write Workmen's Compensation Insurance in this'

State."
The Board of Insurance Commissioners can exercise only the autnority conferredupon 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 statutesconferringsuch authoritywill be strictly construed,Commercial Standard Ins. Co. vs. ijoardof Insurance Commissioners, 34 S.W. 2d, 345, 24 Texas Jurisprudence, paragraph 443,-this rule has been extended to those necessarily impliedand such statutes and orders promulgated thereunder will 'beliberally construedto carry out the intent of the Legislature, Railroad Commissionvs. 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 Commissionersto determinewhether they are conferredunder statutory or constitutionalauthority, the iourtswill 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 clearand unmistakable legislative terms, Board of Insurance Commissionersvs. Guardian Life Ins. Co. of Texas, et al, Vol. 12, Ray's Supreme Court He- ;;rt;z& page 495; Scanlanvs. Home Insurance Company, 79 S.W.

, l The law appears settled that applicable State laws and by-laws of such insurance corporationsare read into every contractmade on behalf of the corporationand neither the presidentnot 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 contractsof insurance issued **by** such corporations. Home Life Accident Insurance Companyvs. barron, 4'1S.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 concernand therefore **subject to**  strict regulation and controlby the State. Hence the rights of the parties to contractwith respect to insurance are limited ~bythe laws of the Statewhich are a **part** of every contract. And any stipulation in an insurance policy which contravenes the statute isvoid."

In the light of the aforegoing authorities,we proceed to discuss the questions submitted. The first 7 questions read as follows:
"1. Can any insurerplace each subscriber in a separate e-p p regardless of hazards, subscriber in such group? such subscriberbeing 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 subscriberwill pay to the insurer's certainpercentage of the prescribed premium for administrativeexpense, without such agreement or resolution beingmade a part of the policy of insurance and approved 'bythe Board of Insurance Commissioners?
"3. Can any insureragree with each subscriber that a certain percentage of the prescribedpremiumsmay be used for the purpose ofpaying losses, and the saving to be returned to the subscriber?

a. As returnedpremium
**'b.** As excess a'boveexpense and losses, or c. As a dividend?. .

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

"4. Can any insurer return to its individual subscribersas dividends in proportion to its

a. losses, or b. amour+ of premiumpaid?
"5. If you have answered in the affirmative any of the inquiriesmentioned in Questions 3 or 4, than does such agreement have to be approvedby 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 Commissionerswould 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 connectionwith 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 applicationsdisclosedno methods of making the disbursementsnor 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 subscribersof the associationare divided into groups and the examination of the records of the association revealsthat all subscribersare not paid the same rate of dividend. You further point out instanceshave revealedonly 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 .Boardof 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 percentagesvary 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 determinedby loss ratios and size of premium paid.

Art. 830tf,

Sec. 13, K.C. S., lY25, provides:
"The board of directorsmay distribute the sucscrioers into groups for the purpose of segregatingthe experience of each such group as to premiums and losses, and for thepurpose of determiningdividendspayable to and assessments **payable**.

Hon. J. P. Gibbs, Page Ei

by the subscriberswithin 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-arrangeany of the groups by withdrawing any suoscriberand 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 experienceof each group as to premiums and losses. Since the Act of 1923, Ch. 182 (includingArticles 4907 through 49191, the Board of InsuranceCommissionershas had imposedupon it, the duty, among other things, to determinehazards by classes and fix such rates of premiums applicable to thepayroll in each of such classes as shall **‘ be**  adequate to the risks to which they apply. In order to insureadequacy and reasonablenessof rates, the Board is required to take into considerationanexperience gathered from a territory sufficientlybroad to include the varying conditionsof the industries in which the classificationsare involvedand over a period sufficiently long to insure that the rates determined from such experiencewill be just, reasonableand adequate. In this connection, of the Board isconcerned, in so far as the ratemaking power having establishedand fixed a rate of premium, the question arises as to whether there has been a disregard of hazards in connectionwith any suoscriber so grouped.
The word "hazard" is broad inmeaning andscope. accepted asconnotating "risk" It is generally and is so defined by **iiebster ’** **s** New InternationalDictionary. The work hazard isnot 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* InsuranceAssociation", created thereby,were permitted to distribute the subscribers into groups "in accordancewith the nature of the businessand the degree of hazard incident thereto." tion 16, following, It is significentto 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 accordancewith the nature of the business and the qdegreeof hazard' incident thereto‘! ,were omitted Andy-in lieu thereof the followingwas inserted:. .

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

"For the purpose of segregating the experienceof each such group **as to**  **premiums** and losses, and for the purpose of determining dividendspayable to and assessmentspayable by the subscriberswithin each group,"
Section lrjc

was added in the Act of 1917, providing that the Board of Directors shall "determinehazards **‘ by**  classes, and fix the rates of premiumswhich shall be applicaule to the payroll in each of such classesat the lowest possible rate consistent with the maintenance of solvency and the creation of adequate reserves and a reasonable surplus,and I'orsuch purposemay adopt the system of scheduleand experience rating in such a manner as to take account of the peculiar hazard of each individualrisk."
**Section** 17 provided that any proposed **rate** of premium, assessment or dividend, or any distribution of subscribers shallnot take effect until approved my the Commissioner. 'Thesesectionsof the 191'1 Act, Sections lbc and 17, were repealed by the 1923 Act hereinaoovementioned.

It is apparent from the foregoing legislativehistory that the association or any other compensation carrier cannot segregateor classify assureds in accordancewith the nature of their business or according to the degree of hazards. Such classificationsfor the purpose of grouping is inconsistentwith the power vested solely in the board and peculiarly confined and limited in use to the fixing of rates of premium.

Insurersandtheir subscribers, contract with each other with reference to anticipated losses. The hazards in connectionwith the operation or any pcrtion of the operations of **SLIDSCriberS,**
**are,** as far as practical to **be** taken intoaccount, considered exclusively 'bythe board in fixing the rate of premium and deemed acceptable to both insurersand 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 dis**  tributed into ,groups **'by the**  insureds, for thepurpose of segreF-atine,

the experience of each such group **as to**  nremium and losses, andfor theb**w-pose** ofdeterminin.adividendspava'bleto an assessments **payabh ’** **by** the subscriberswithin 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 inwriting Norkmen's Compensation Insurance is prohibitedfrom using any classificationof hazards as abasis for setting up groups for segregating experience and paying dividends. Such is inconsistent with theprovisions of Article 4908, supra.. .

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

It will be noted thatArt. t3308, Sec. 20, provides the procedure for, determinationas a subscriberunder his contract or **policy on**  or before the date of its expiration. Present regulation,promulgated **by** the Board, (TexasCompensationManual, page R12, effective March 1, 19431, provides that the compensationpolicy 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 considereda proper subject for endorsement,there is no prohibition against its inclusion in an endorsement authorized~bythe Board of Directors of a company and attached to and made a part of thecontract, where it is first submitted to and approved 'bythe Board.

In Art. 830&, Sec. 13, the considerationby 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 Legislatureused the termpremium 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 indesignating the basis for permissiblegrouping, viz: the relation of premium to losses or the ratio between the two. This statute furthermoredoes 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 promulgatedand dividends paya'ole,

resulting in discrimination,from any other interpretation of the statutes as a whole.
While the word trgroupTt connotesmore than one subscriber,and is defined by Webster as meaning two ormore figures forming a design or taken togetheras a distinct unit in a more complicateddesign, it is not believed that the Legislature used the word in a limited or strict sense, 'butsolelyas a unit to distinguish that which **is segregated,**  **i.** e., one group from another. One subscri**ber** properly segregatedmay 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 aswould expressly make that sectionapplicable to other insurers, while certain other sections, such as 10, 17, ltia and 21 were specifically designated. The intentionof the Legislature is expressed in controlling terms, to the effect that any insurancecompany, which term includesmutual and reciprocal companies, lawfully trans**acting 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 createdhereby,**"stibject** to a limitation imposedupon. ,

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

mutual or reciprocal organizations requiring them to have at ieasr, 50 subscriberswho have not less .than2,000 employees. We further point out that not only section I.'? of,the lYl7Act was repealed ny the 1923 Act (Arts.4907 through 4918, mcJ.usive),but all other provisions of the 1917Act inconsistentwith 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 insurermay distrioute a suoscrioer into a group to itselfprovided it is done so upon a reasonanle loss ratio basis for segregating it fromother ,groups,
2. An agreementmade bv any insurerwith any suoscriber concerning the prescribed-premium,not attached to the policy of insuranceand approved by the doard isvoid.
3. An agreement hstweenany insurer and each subscriberproviding that a certainpercentage of the prescribedpremium may be used for thepurpose of paying losses, the saving to
**be** returned to the subscriber, isnot prohibited or illegal so long as same is incorporated inor 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 dividendscan 'be returned to any ~suoscriber on **the** basis of individual losses or amount nf premiumpaid, Trovided in **the** payment of same3 there is no discrimination betweensuoscrlbers of the same class of group.
5. No agreement between insurers and their suoscribersas 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 endorsementdoes 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 ofdividends, approval of same **by** the board ~wouldbe unauthorized. 'Thefact that the hoard igored such discriminationand approved such dividends for payment would not affect the illegality of theplan.

Your questionsnumber 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 dividendsfor ;;;;V;,grouP

1as referred to under Section 13 of Article

"10. Does the Commissionhave the authority to require any insurer tosubmit the rate of dividend or formula used by groups or individualrisks?"
"11. Can an insurerarbitrarilypay one percentage of dividend to one policyholderand a greater or lesser amount to other policyholders.?ff

Art. 830d, Sec. 16, unchangedfrom 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 approvedclaim for compensation against the association. This provision of the statute is mandatory and is not inconsistentwith thewriting 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 againstany insurer, whether it **'be** Texas Employers, InsuranceAssociation, a stock company,mutual, reciprocal or inter-insurance exchange or Lloyds, following the ;Y$;azE groupingas authorized by Sec. 13, Art. d3Oi?,supra. as todividends, we may presume that certain participatingpoiicieswritten are 'by companies following this plan, with Art. 4914, supra, recognizingthe right of said companies to issueparticipatingpolicies, expressly providing that no such dividends shall **be** approved until adequate reserve has been provided, said reserves to becomputed on the same **'basis** for all classes of companiesor associationsoperating under Chapter 10, Title 78, R.C.S., 1925, as prescribed under the insurance laws of the State of Texas.
One of the foremostand expressedduties commandedby law of the Board of Insurance Commissioners if t% see that all laws respecting insurance and insurance companies are faithfully executed. Art. 4662, Subdivision subjectdealtwith in our laws respecting both insurance **i;nd** insurance companies.

Art. 576,Penal Code, incorporatedunder 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 asto such conI:ractother than as expressed in theplicy issued thereon, nor shall any such company or any officer, agent, solicitoror represen**tative** thereof, pay,allow or give, or offer to pay,allow. .

Hon. J. P, Gibbs, Page 13

or give, directly or indirectlyas an inducementto 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 employmentor contract for service of any kind, or any valuable considerationor 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 securitiesof 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 specialor board contractor similar provision 'bythe terms of which saidpolicywill 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 companyviolatinS any provision of this article shall be fined not less than one hundrednor more than five hundred dollars."
Article 580 of the Penal Code, also codifiedunder the general suoject of "Insurance",provides:
"Any officer or representativeof 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:apLer10, 'Etle "Insurance"of the Revised Stiitutes, relatins to tile

State InsuranceCommission 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 fixedpublic 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,entthereof, other than expressed in tile policy; the allo;+ingor giving or offering to pay, allow or give directly or indirectlyas 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 employmentor contract for service of any kind or any valuable considerationor inducementwhatever, not specified in thepolicy; the issuanceof any nolicy containingany special or tioardcontract or similar provision tihereovthe policy .willsnare or participate ?~n any special fund derived from a charge against the premium on any other policy; to knowinglywrite insurance at any lesser rate than the rate promulgated by the doard of InsuranceCommissioners,all these and others relatingprincipally to agents, are prohibitedunderHon. J. P. Gibbs, Page 14 O-5873

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

In connectionwith the statutesdeclaring the public policy, it ismaterial to note that a company sharing its profitswith its policy holders by agreement as to profit sharingplaced on or in the face of the policy, provided such is uniform and does not discriminatebetween 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-insuranceexchange or Lloyd'sAssociation, issuingparticipatingpolicies,provided no dividend to subscribersunder the 'i/orkmen's

CompensationAct lvilltake effect until the same has been approved by the Board of InsuranceCommissioners. 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 shalltake effect until same has been approved by the Board. The act of approvingpayment of dividends is not to be construed as a merefbrmality on the part of the Board. It is chargedwith seeing that all insurance laws of the State are compliedwith and to this extent,proposed dividends should not only be disapproved,payment of which would result in insolvencyof the insurer,but no dividend, whether it be called savings or otherwise, shouldbeapproved which discriminates between subscribers of the insureror betweenmembers of groups into which theymay be properly segregated. Answering your questions 8,Y,lO and 11, it is our opinion that the Board of InsuranceCommissioners is authorizedand required to approve dividends fixed by and for groupswhere such plan of operation is disclosed and followed 'by an insurer. Regardless of uniform endorsementsdisclosing the plan and approved by the doard, said Board may be regulation requireall insurerselecting to group its subscribers in accordancewith Art. 8308, Sec. 13, R.C.S., 1925, to present to the Board its basis for payment of said dividendsby groups at the time same are submitted for approval. No insurer can arbitrarilypay 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 sufficientdefinitenessand meaning for this department to give you any specificanswer thereto. Ne therefore omit these questions and their considerationherefrom and request that you re-submit same seperately, specificallyadvising 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 questionNo. 

### 14, reads:

"Does (Planof Operation' as referred to in Art. 

### 4913mean the plan peculiar to a c,ertain type of company; that is, a stock company,mutual company, reciprocal exchange or Lloyds organization, or doe3 itmean that a carrierwithin any particular type may use an individualplan of operation?"
bfefind no definition given in the statutesnor languageparticularly 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 consistentwith any reasonable regulationsof the board which may De adopted and used by any company or class of companies authorized towrite 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 assessmentprovision against a policyholder?

**“ lb.**  Would a charter issued by the Secretary of State to a stock insurance companyprior to the passage of the rating laws, authorizingsuch stock company to issue participating and assessmentpolicies, and amendmentsapproved Dy the Attorney General after the passage of the rating laws, permit sucn stock company to issue an assessmentpolicy?

As hereinDefore stated, the law recognized the right of stock companies to issue participatingpolicies. Art. 4Y14, K.C.S., was considered in an opinion of this department rendered to Hon. J. J. Timmons, Secretary of State InsuranceCommission 'DyHonorable 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 furthernote that this opinionpassed specifically upon an endorsement form **pro** posed **oy** a companyoperating under the Lloyds' plan, theprovisions of which would characterizethe policy as one of participation and assessment.

A "participatingpolicy" or one of "participatingpremiums" is construedgenerally 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. kqhilethe words 'fassessment" has varied meanings in insuranceparlance, 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 assessmentpolicy. While the act of sharing the profitsmay also include by contract, the idea of sharing the losses, it does not necessarilymean that one who shares in the profits, independentof contract,will share in the losses, nor does it necessarilymean an additionalpremium rate in violation of the rate making powers of the Board is contracted for.
Where a stock companywriting Workmen's Compensation Insurance Policies, on a participating or profit-sharingbasis, incorporates an assessmentprovision in its contract, it is presumed to be operatingunder the mutual plan for writing such insurance. There is no statutoryprohibitionagainst a stock company operating under suchplan. Nothing contained in the charter or by-laws of a stock company,however, can authorize it to write strictlyassessment policies or policies containingany assessmentprovision without likewiseproviding 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 suchmatters by its charter or by-laws must beconsistent with express statutory provisions,mandatory or prohibitory innature.

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 premiumwill 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 issuedby any other insurer licensed to do business in this State, without such agreementbeing made a part of the policy contractandapproved 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 i3oardof Insurance Commissionerson 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 additionpurport to protect the employeragainst 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 certainpercentage 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 savesmoney because he does not pay all of the premium, and if the losses exceed the premium, the employermust pay them, or if the carrier has undertakenpayment, reimburse the carrier. In other words, you submit the view that the employerpays all losses and in addition pays the carrier for expenses.
From theabove views, we are unable tohold that such a contract, presumed to be incorporatedas a part of the policy 'byendorsement, issued 'bythe carrier to all employersalike, without discrimination, contravenes the rate making power of the Board. In short, it is nothingmore than a participatingform policy whereby the parties, subject to the provisions of the law, read into every policy contractwith reference tothe experienceor the anticipated loss ratio of the employer or group intowhich he is properly placed. The percentage as to "expense" cannotvary between subscribersof 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 inpayment of dividends.

In answer to questionsNos. l'i,lb, and 19, it is our opinion that no insurerwriting Workmen's Compensation Insurance in this State can contractwith the subscriberby guaranteeing that the maximum premiumwill be a lesseramount that the premium produced at ratesprescribed and promulgated by the Board. The character of such agreements from the descriptionfurnished and termed "stop-loss" contractsdo not amount to such guarantee. The matter of reinsurance is purely a matter of contractbetween the carrier and its reinsuring company for the protectionof its reservesand surpluses and while there is no prohioitionagainst its being incorporated in the particular endorsementadopted 'by the company, to be uniformlydone without discrimination, such endorsement should be attached toall standard formpolicies of such insurers.
With reference to your questionNo. 20, it isnot shown that such appointment is incorporated in any endorsement to the standard policy approved or before you for approval., viecannotassume the same participating endorsementattached to all policies from your Question No, 21, and shouldwe do so, we are not furnished sufficient facts from which it can be determinedwhethera proper grouping of subscriberswill permit the distinctionpointed 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 InsuranceDepartment to submitparticular endorsementsproposed to -be adopted by the insurer to this department where any question ofHon. 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 insurancepolicy written on a so-called 'cost-plus'plan, is insurance insofaras the employee is concernedunder the Act, in accordancewith the Comillion vs. Union Piridge decision 100 Fed. (2) 937, is the net premium realized **‘ by**  the insurancecompany (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 InsuranceHating Law?"

In **the** Gomillionvs. Union Bridge case, **referred** to, the court had before it apparently the identicalparticipation form endorsement as presented in "Exhibit C" attached to your request. The material provisions of this endorsementread: 11

.....It is agreed between the Company and the Assured that: "(1) The Assured will pay the Company the manual or experience rates of premiumapplicable to this policy, as promulgated by the Board of InsuranceCommissionersof Texas,

**“ (2)**  If the premium so paid are insufficientto provide for the payment of (a)All paid and incurred losses, including legal and other expenses incidentalthereto 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 computedas prescrioedby the Board of InsuranceCommissioners 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 chargesmentioned in the preceding sub-paragraphs (a)and (b)of paragraph 2 hereof, and themaintenance of adequate reserves computed on all policies as stated in paragraph 2 hereof, the Companywill return the excess to the Assured as and when such return shall **be** approvedby the Board of Insurance Commissionersof 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 itwas a subscriberunder the Workmen's Compensation InsuranceAct. Answering this contention, the beneficiaries,appellanLs,contendedno riskwas assumed under the policy and that the employerwas a self-insurer.
The court apparently followed the weight of decisionswhich appear to be in favor of the Commission of Insurance or Board 'beinginvested with the power todetermine whether ornot policy forms conform to requirementsunder statutes requiring approval of such forms 'bythe Commissioneror 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 thtitsuch formmet ,iffirmatively every requirementof the statutesprescribing itsprovisions. 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 "asand 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 incurredno losses or expense, tne insurer has contracted to return, suoject to the approval of the board, 90% of itsgross premium or a 90% dividend subject to the approval of the aoard. We see no conflict in this provisionwith 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 considernecessary in order to answer the aoove question.

It istherefore our opinion that the net premium realized from the participating clause (3)of the enforsement form involved in the case of Gomillianvs. Union Bridge, 100 Fed, Sec. 93'7, whether to oe consideredpremium or otherwise, is authorizedand not in conflictwith the bvorkmen's Compensation Insurancedating 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, 2/23/32Hon. 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 conflictherewith, sameare expressly overruled. iieexpressly 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, AssistantAttorney General, in answer to the seventh questionpropounded therein.

No portion of this opinion is to be construed or interpretedas passing upon, upholding or disapprovingany endorsement form or or plan of operation referred to in your memorandum, exhibits or opinions submitted in connectionwith this request. The only specificplan cf operationwhich couldbe construed sufficiently submitted for such purposes is that of the Texas Indemnity Insurance Companywith its present endorsement form, according to your letter, set forth as Exhibit "Cl' attached. In view of the fact that your questions individuallyand in the main relate solely to specificphases of this or similarplans, 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 returningherewith the data and exhibits belonging to your files which were furnished in connectionwith 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