### HEA~ORNEY GENERAL

Hon. 0. P. Lockhart Chairman Board of Insurance Commissioners Austin, Texas

Dear Sir: Opinion No. O-3185 Re: The authority of the Board of Insurance Commissioners to advise members of afraternal benefit scciety as to their rights under their original certificates issued to the members of the society, andwhether so advising such memberswould be in violation of the provisions of Qrticle 4855, Revised Civil Statutes*

Wequote from your letter of November 6, containing your amended request for anopinion of this de artment in lieu of your original request under date of August c91941, as follows:

“ii fraternal benefit socLety incorporated under the laws of Texas andnowoperating under the provisions of Chapter 8, Title 78, R.C.S. 1925 as amended, for manyyears issued benefit certificates atwholly inadequate premium rates, andin agreat manyinstances these policies were what is commonly known as atwenty payment life certificate, that is, premiums, in accordance with the terms of the contract, were to be paid for twenty years only. Such society by recently enacted amendments to its constitution, charter, andby-laws, effected without the consent of the existing certificate holders (unless such general consent thereto in advance is validly provfded bythe certlffcate provisions hereinafter quoted) 9is purporting to alter substantial andmaterial terms andprovfsions of the preexfsting contracts by rerating certain members of the society designated as Class iiandClass Cmembers andforcing such memberswithout their present assent either to pay very greatly higher dues andassessments or by reducing the amount of insurance granted by the certificates or by forcing such members to transfer from one class to another, accepting in lieu of their original certificates newand other certfficates or benefits of substantially less value and advantage to the members than their original certificates; the weapon of coercion being their assertion that the classes to which the members originally belonged are insolvent or threatened with insolvency andthat the existing certificates will be virtually valueless unless the members accede to the demands of the society.

“Such origi,nal certificates contain substantially the following provisions:. .

.

Hon. 0. P. Lockhart, page 2 to-31851

“Provided that this Order shall not be liable for the payment of any sumhereunder, unless said memberhas fully complied with all the terms and conditions of its Constitution andLawsnow in force or which mayhereafter be adopted andhas not untruthfully answered any question or madeanyuntruthful statement in the application, or untrue statements to the medical examiner of the Order upon the faith of which this certificate is issued (said Constitutim, Laws, application, statements and Charter of the Order being expressly madeapart thereof). It is expressly agreed that if all dues or assessments (payments) herein shall be paid when due, for afull term of twenty years from date, this certificate shall become anobligation against the Order upon the death of said memberwithout further payments thereon, subject to the terms and conditions of said Constitution.

“Weinvite your attention to the provisions of Articles 4834 and4839 especially and ask you to give us your opinion in the above stated circumstances upon the following points:

“1. Does the society have lawful authority to make substantial andmaterial changes in the original benefit certificates without the present assent of the members, especially where such changes are disadvantageous or otherwise unacceptable to the members (a) by materially increasing the dues and assessments, (b) by restoring dues andassessments where the contracts have been paid out as per original terms, (c) by reducing the amount of benefits payable, (d) by arbitrarily transferring or forcing transfers from one class to another or from one form of certificate to another?

“2. If you answer in response to anybranch of Paragraph 1, supra, that such attempted action is unlawful and invalid, then state whether or not this Board has any authority, and if sowhat authority, andunder the provisions of what statutory enactments, to correct such abuses.

“3. Maythis Board lawfully advise members of such societies that they donot have to accept such proposed changes or reductions in benefits but that they maystand upon and enforce by legal process if necessary their original certificate benefits or recover from the society all amounts paid upon sametogether with legal interest from date of payment?

“4. In so advising members of such society, would the Board violate anyprovision of Article 4855, R.C.S., or any other legal provision?” Asto your first question, this department cannot. .

Hon. 0. P. Lockhart, page 

### 3 (O-3185)

categorical1 answer same. 

### (a), (b)
, (cy and Cd), and all relating to certain original Being divided into several parts,


### benefit certificates of afraternal benefit society, fromthe provisions of which the society seeks to makesubstantial and material changes, we donot have before us acopy of the Constitution, By-laws, the original certificate, or the financial condition of any society with which your department is chiefly concerned, rendering it necessary to makeany one or more of the mentioned material changes inquired about. In this connection it would appear that the question of any such society’s right to subsequently, by by-law, materially increase the dues and assessments of original benefit certificates would be affected bywhether the by-law was adopted in amanner constituting awaiver onthe part of its members to be bound by such increase, andfurther in this connection, it would be proper to place before us the Board’s conclusions or findings and such facts uponwhich sameare based.

In 

### our o edDecember 18, 2: 

### inion No. O-3387, rendered to you and approv19 1, weheld that the right of abenevolent or
amutual assessment insurance association to increase its rates is limited to the extent that such increase must be reasonable andnecessary. Ofcourse, this is afact question uponwhich your department maypass only in determining whether the society has exceeded its powers, or is conducting business fraudulently

or is not carrying out its contracts in good faith in accordance with the statutes hereinafter set forth. The only authority we find in the statutes for the Board of Insurance Commissioners to question such action onthe part of the society is where the Board has uncovered sufficient evidence to showthe officers acted arbitrarily, or the by-law authorizing such increase was passed without the assent of its members andthese andmanyother acts onthe part of the officers of the society must go to sustain afinding by the department that the society “has failed to comply with anyprovisions of this chapter (Chapter 8, Title 

### 781,or is exceeding its powers, or is not carrying out its contracts in good faith, or is transacting business fraudulently.” (Article 4852 andkrticle 4856, Revised Civil Statutes1

In the above opinion, we cited the case of E~icson v. Supreme Ruling of Fraternal Mystic Circle, 

### 146S.W. 160, wherein the Supreme Court of Texas held under the facts of that case that where the assessment of amemberwas increased from $3*30 to 

### $23*16per monthwithout his consent, such act was arepudiation of the contract andthe memberwas entitled to ajudgment against the society for all assessments paid with interest. Alsb, citing in this opinion Wirtz v. Sovereign CampW.O.U., 268 S.W. 438, wefollowed this case andheld that astipulation in the contract with its members that the insured would comply with and be bound by all future regulations or by-laws of the association. .

Hon. 0. P. Lockhart, page 4 

### (O-3185)

does not meanthat the benefits stated in the certificates can be legally reduced without the consent of its members. Although fraternal benefit societies ,operating under the provisions of Chapter 

### 8,Title 78, Vernon’s hnotated Civil Statutes, are expressly excluded from Senate Bill 

### 135s46thLegislature (Article 

### 5068-lin Vernon’s), their rights under contract with its members are similar to those of mutual assessmen,t companies in respect to the questions raised by you andtherefore opi.nl,on No. 

### 0-3387is applicable.

Wedonot construe Arti.:::le 

### 4834,Revised Civil Statutes,
as furnishing authority to afraternal benefit society to materially change the amount payable Ianthe certiffcate issued to its memberswithout their consent 0 *n;zillo Mutua.1Benefit %ssociation v. Franklin, et al, 

### 50S.W.(2d) 

### 265,

It seems quite Jpparent -,hat all four subdivisions of your question No. 1 arise by reason of conclusions drawn from, a state of fact or facts not before this department, Consequently,

were it possible for us to state odr -Vii?J regw.rd~inganyphase of the question other than as pointed ov,t, weare of the opinion such would serve no useful purpose, likely to create @onFusion tindharmrather than be helpful. AcareOu1 andable digest of olur Texas court decisions relating to this subject appears to have been furnish.ed you byyour Sen,ior Exan~irrer~MrO.id.fred M.Scottz. review of the authoriti:s thirej.r; 66e,,~..e I.,~--+ ddiscloses each case decided solely as to t,hep~ticular facts before the court. A

mere conclusion by theBo?.rd of Insurance Commissioners thdt a societv is coercing its ze:nbers wl.thout a,fin.dicg or report by the Bo:,:rd based upon the submitted facts showing acts of coercion andthat by such ~.:oercion, t;z~zsociety i.s not carrying out its contracts in good fhith or :s crsnsactlag business fraudulently would be insufficient for enabl,ing thi.s department to render anopinion, categorically answering your first questionProceeding to your questions 2, 

### 3and,%,above set forth, you point out Article 

### 4855,Revised Civil Statutes, which prohibits certain publications by the Board of Insurance Conmissioners as to any society, either domestic or foreign,, of any financial statement
, report or finding except under certain conditions. This article is to be construed with A:rticles 

### 4852, 4854and

### 4856of the statutes, each in part hereafter set out and providing :

“Qrticle 

### 4852. ‘C;l.tCoumis,sioner (ZBo;Lrd~ of Insurance Commissioners) or anyperson he mayappoint 9shall have the power of visitation and ex;,;l-ination into the &fai,rs of an,y domestic society. Hemayemploy assistants for tne purpose of such examination, andhe, or anyperson he mayappoint, shall have free access to all the books, papers and documents that relate to the business of the society, andmay. -

Hon. 0. P. Lockhart, page 

### 5 (O-3185)

summonand qualify aswitne,sses under oath and examine its officers, agents andemployes or other person in relation to the affairs, transactions and conditions of the society. The expense of such examination shall be paid by the society examined, upon statement furnished by the Commissionand the examination shall be madeat least once in Eiee years D Whenever after examination the Commissioner is satisfied that any domestic society has failed to comply with any provisions of this chapter, or is exceeding its powers, or is not carrying out its contracts in good faith,

or is transacting business fraudulently; aD0safd Commissioner maypresent the facts relating thereto to the Attorney General, who shall, if he deemthe circumstances warrant, commence anaction in quowarrant0 in acourt of competent jurisdiction, and if it shall then appear upon the trial that such society should be closed, said society shall be enjoined from carryfng onany further business and

someperson shall be appointed receiver of such socfety and shall proceed at once to take possession of the books papers, moneys and other assets of the society, and shall

‘* forthwith, under the direction of the court, proceed to close the affairs of the society, andto distribute its funds to those entitled thereto* Nosuch proceedings shall be commenced by the Attorney General against any such society until after notice has been duly served onthe chief executive officers of the society and areasonable opportunity given to it, on adate namedin said notice, to show

cause whysuch proceeding should not be commenced.

“Article 

### 4854. The Commissioner, or any person whom he mayappoint, mayexamine any foreign society transacting
or apply~lrig_for admission to transact business in this State, The said Commissioner mayemploy assistants, z~.dhe, OPany person he mayappoint, shall have free access to all the books, papers and documents that relate to the business of the society, andmaysummonand qualify aswitnesses under oath and examine its officers, agents, and employees and other persons in relation to the affairs, transactfons and conditions of the society. Hemay, in h1.sdiscretion, accept in lieu of such examination the examination of the Insurance Department of the State, territory, district, province or country where such society is organized. Do

. 0

“Article 

### 4855. Pending, during, or after anexamination or investigation of any such society, either domestic
or foreign, the Commissioner shall makepublic nofinancial statement, report or finding, nor shall he permit to become public any financial statement, report or finding affecting the status, standing or rights of any such society until a copy thereof shall have been served upon such society, at its homeoffice, nor until such society has been affordedHon. 0. P. Lockhart, page 

### 6 CO-31851

areasonable opportunity to answer any such financial statement, report or finding, andto makesuch showing in connection therewith as it maydesire.

“Article 

### 4856. Whenthe Commissioner on investigation is satisfied that anyforeign society transacting business under this law has exceeded Its powers, or has failed to comply with any provision of this chapter, or is conducting business fraudulently, or is not carrying out its contracts in good faith, he shall notify the society of his findings and state inwriting the grounds of hf.s dissatisfaction, and after reasonable notice require said society, on adate named, to show cause whyits license should not be revoked* If,

on the date namedin said notice, such objections have not been removed to the satisfaction of said Commissioner, or the society does not present good and sufficient reason why its authority to transact business in this State should not at that time be revoked, he mayrevoke the authority of the society to continue business in this State, Al.1decisions andfindings of said Commissioner madeunder the provisions of this article maybe reviewed by proper proceedings in any court of competent jurisdiction.”

It will be noted that by the provisions of the foregoing articles the Board of Insurance Commissioners has the right of visitation andexamination into the affairs of anyforeign o: domestic society for determining whether any such soci.ety has failed to comply with any provisions of Chapter 8, Tic1.e 78, Revised Civil Statutes, or whether it is exceeding its powers, or is not carrying out its contracts in good faith, or is transacting business fraudulently0 kssuming you have determined any such society has exceeded its powers, or is not carrying out its contracts in good faith, or is unlawfully increasing the dues and assessments
, or unlawfully doing the acts mentioned in your first question, youwould be required under the law to reduce such findings to writing, serve acopy thereof upon such society at its homeoffice andafford such society areasonable opportunity to beheard.

Theprinciple underlying the organization and operation of such societies is one of equality andmutuality among its members, The advising of its members of aviolation of its contracts bythe society would not meet the requirements that a copy of such findings of the Board of Insu,rance Commissioners be first served upon the society at its homeoffice andaffording it areasonable opportunit visions of Articles 

### 4852,t to beheard prior there,toO 

### 854,4855 and4856 above set %t gfo ford to the Board the necessary procedure andauthority within the scope of its official duties in dealing with afraternal benefit society which is transacting business fraudulently or S.sHon. 0. P. Lockhart, page 7 (O-3185)

not carrying out its contracts with its members in good faith. The giving of such advice as outlined in your question No. 3 previous to following the procedure outlined in Article 

### 4855, Revised Civil Statutes, would be outside the official scope and duties of the Board of Insurance Commissioners.

Fromwhat has been said, wehave reached the conclusion andit is the opinion of this department that the advising of members of afraternal benefit society by the Board of Insurance Commissioners as to their individual rights under the original certificate issued them bythe society to the effect that they donot have to accept proposed changes or reductions in benefits but that they mayenforce by legal process, if necessary, their original certificate benefits or recover from the society all amounts paid upon sametogetherwith legal interest from date of payment, would be prohibited by Article 

### 4855, Revised Civil Statutes, as calculated to affect the status, standing or rights of such corporate society andnot in compliance with said statute.

Yours very truly

ATTORNEY

GENERAL

OFTEXAS
By/s/ Wm.J. R. King Wm.J. R. King, Assistant

APPROVED

JUL29, 1942 /s/ Grover Sellers FIRST ASSISTANTATTORNEY GENERAL

This opinion considered and approved in limited conference.

WJRK:GO

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