JIM MATTOX Attorney General

Supreme Court Building P. 0. BOX 12548 Austin. TX. 78711. 2548 512l475.2501 Telex 910/874-1387 Telecopier 512l475.0286

714 Jackson. Suite 700 Dallas, TX. 752024508 2141742.8944

4824 Alberta A”.%, Suite 160 El Paso, TX. 79905.2793 915/533-3464

hW Texas. Suite 700 .mston, TX. 77002.3111 ?13/2234666

606 Broadway, Suite 312 Lubbock, TX. 79401-3479 8061747-5233

4309 N. Tenth. Suite S k&Allen, TX. iS501-15S5 512f682.4547

200 Main Plaza. Suite 400 San Antonio, TX. 782052797 512,225-4191

An Equal Opportunity/ Affirmative Action Employer 

# The Attorney General of Texas

Auj:Ist13, 1984

Mr. Lyndon L. Olson, Jr. Chairman StateBoard of Insurance 1110 San JacintoBoulevard Austin, Texas 78786 Opinion NO. JM-187

Re: Reconsideration of JM-88: Whether the Insurance Code per se prohibits certain financial arrangementsbetween a life insurance company and its subsidiarywhich is compensated on a percentage of annual premiums written

Dear Mr. Olson:

You have reque!;ted a reconsiderationof ~~-88 regardingwhether all financingarrangementsbetween a parent life insurancecompanyand
an affiliate which are based on a fee computed on a percentage of annual premiums written are per se prohibited by article 3.68, or whether they are su>ject to the fair and reasonable test set out in article 1.29 and article 21.49-1, section 4, of the Texas Insurance Code. You have no':raised any question about the reasoning of JM-88 thatarticle 3.68 applies to arrangementsbetween foreign corporations regarding out of si:atebusiness, and we reaffirm the conclusion of JR-88 as to that matter. However, upon reconsideration,we withdraw those portions of the reasoning and conclusions of JM-88 which hold that any arrangement by which a life insurance company pays a fee based on the number of policies sold, to a subsidiaryhaving the same president and secretaryas the parent companyper se violates article 3.68 of the Texas lr,surance Code.

The question addressed by JM-88 asked whether a life insurance companywas permitix!dto compensateanother corporationwith officers in common for the provision of certain services, when such compensationwas bar,ed on a percentage of net premiums receivedby the insurance company from non-Texas business. You advised that it was the long-standing construction of your agency that article 3.68 prohibited certain "officers" of a life insurance company from receiving any com)+?nsationbased on a percentage of the business producedby their cx~mpapany. Our attentionwas called to a letterdated MY 29. 1926, fron an assistant attorney general regarding article 4745. V.T.C.S.,whL:h was later transferredunchanged to article 3.68 of the Insurance Code. See Attorney General Letter Opinion Book 281 (1926).page 106. -

p. 816Mr. Lyndon L. Olson, Jr. - :?.ige 2 (m-187)

The only other applic;;tion which we found of article 3.68, also in its prior codification 8s article 4745, is contained in Attorney General Opinion O-5913 (19!,[).Neither of those opinions dealt with the meaning of the prohibic:orylanguage in the statute as applied to the situationat issue iny','lr equest.

No legislativehistory statutory languagewhichwa other than the 1909 title, "making it unlawful to pay (Emphasisadded). Acts 190 .?rovides guidanceas to themesning of the ,3originally section 7 of a 1909 enactment, which indicates that the statute was one :ertainpersons forprocuring insurance." 3, 31stLeg., 2d C.S., ch. 25, at 448. Nor does the subjectmatter of the remainder of that act give any further indication as to its purpose. Hence, we must ascertain the meaning and intentionof the legislature from the language of article 3.68 as it has existedunchanged fcr over seven decades. See 53 Tex. Jur. 2d - Statutes 5130 (1964).

The language in ques:ion prohibits the payment to certain "officers"of "any commissi~~:~ dr other compensation"ifpayment is (1) contingentupon thewriting l)r procuring ofs policy of insurance in such company; or (2) [ccntingent upon] procuring an application thereforby x personwhon.eoever; or (3) contingentupon the payment ofx renewalpremium; or (,i)[contingent]upon the assumptionof 9 life insurance risk by suC1 company. Excluded from this prohibition of payment resulting from the listed actions are agents and solicitors. We think this exclusion is significantand is indicative of the objective of this seatute. An insurance agent is routinely compensatedby commissions '>,%sed on his rates. Article 3.68 obviously prohibits payments to certstn specified non-sales personnel -- i.e. "president, vice president, secretary, treasurer, actuary, medical director

. . . or . . . any officer of the company" -- for the types of activities listed above, all of which constitutediscrete steps in the sale of life insurance .?,,licies.

We think these references to specific steps 1~ the process of life insurance sales clarify the meaning of the use of the otherwise ambiguous word "any" in thl:enumeration of each action. See Black's Law Dictionary 86 (5thed. 1379). The nature and contextofhis list indicate that the prohibition is directed at particular, individual transactionsand was intentiazd to prevent only conflicts of interest between those persons who I'l'oduce applications for insurancebusiness in order to receive commissions therein, and those persons who have the responsibilityto appruJz the applications for insuranceon behalf of such companiesand ther&,:r bind them on thepolicy.
Indeed, two other Insul:ance Code provisions adopted in 1971 and otherwise unnecessary or :onflicting support this result. Both article 1.29, a broad conflict of interest statute, and article 21.49-1. a comprehensive l,egulatoryscheme for insurance holding company systems test the Ill'opriety of transactionswithin insurance holding company systemsby standards of fairness, reasonableness,and

p. a17Mr. Lyndon L. Olson, Jr. - Page 3 (JM-187)

other equitable bases. For example, section l(c)(S) of article 1.29 allows:
(A) Any tranciactions within an insurance

holding company r%:%temby insurers with their holding companies, subsidiariesor affiliates that
are not prohibitetl by law, that meet the test of being fair and pr#,:,er, and that are regulated by other statutes; ;nld (B) other transactions or arrangements not pxohibited by law that meet the test of being fa:.?. and proper as prescribed by rules and regulat:ions adopted by the State Board of Insurance.
Likewise, section 4. subsections (a)(l), (a)(2), and (d)(Z)(iii) of article 21.49-1 establishes that such transactions as "rendering of services on a regular or systematicbasis" are governed by standards including "fair and equit%,Le" terms and "reasonable" charges and fees. Neither statute prohL)its,per se, payments to the subsidiary servicecorporationbased on theamount of annualnet premiums issued, this being a measure of thr value of work done by the affiliate for theparent company.

We see no basis for concluding that article 3.68 ever prohibited payments such as those at ir;rue here. Transactions such as those you have inquired about which are based on the volume of business transactedare not prohibitedby article 3.68.

SUMMARY

A life insurance!company may base its payment to a wholly own1~11 subsidiary corporation, for servicesrenderedby the affiliate corporation,on the net premiums received by the parent life insurance companyrrithout violating article 3.68,
so long as the arrangement is consistent with article 1.29 and z,rticle21.49-1, section 4, of the InsuranceCode.

JIM MATTOX Attorney General of Texas

TOM GREEN FirstAssistantAttorney General

p. alaMr. Lyndon L. Olson, Jr. - 'hge 4 ~(JM-187)

DAVID R. RICHARDS ExecutiveAssistantAttorrq General
Preparedby Colin J. Carl AssistantAttorney General

APPROVED: OPINION COMMITTEE
Rick Gilpin, Chairman David Brooks Colin Carl Susan Garrison HenryRobinson Nancy Sutton BruceYoungblood

p. 819