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 

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El Paso, TX. 79905.2793 

915/533-3464 

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.mston, TX. 77002.3111 

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Lubbock, TX. 79401-3479 

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k&Allen, TX. iS501-15S5 

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San Antonio, TX. 782052797 

512,225-4191 

An Equal Opportunity/ 

Affirmative Action Employer 

The Attorney General of Texas 

Auj:Ist 13, 1984 

Mr. Lyndon L. Olson, Jr. 

Chairman 

State Board of Insurance 

1110 San Jacinto Boulevard 

Austin, Texas 78786 

Opinion NO. JM-187 

Re: Reconsideration of JM-88: 

Whether the Insurance Code 

per se prohibits certain financial arrangements between a life 

insurance company and its subsidiary which is compensated on 

a percentage of annual premiums 

written 

Dear Mr. Olson: 

You have reque!;ted a reconsideration of ~~-88 regarding whether 

all financing arrangements between a parent life insurance company and 

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 

that article 3.68 applies to arrangements between foreign corporations 

regarding out of si:ate business, 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 subsidiary having the same 

president and secretary as the parent company per se violates article 

3.68 of the Texas lr,surance Code. 

The question addressed by JM-88 asked whether a life insurance 

company was permitix!d to compensate another corporation with officers 

in common for the provision of certain services, when such 

compensation was bar,ed on a percentage of net premiums received by 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)+?nsation based on a percentage of the business 

produced by their cx~mpapany. Our attention was called to a letter dated 

MY 29. 1926, fron an assistant attorney general regarding article 

4745. V.T.C.S., whL:h was later transferred unchanged to article 3.68 

of the Insurance Code. See Attorney General Letter Opinion Book 281 

(1926). page 106. - 

p. 816 
Mr. 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:ory language in the statute as applied to 

the situation at issue in y','lrequest. 

No legislative history 

statutory language which wa 

other than the 1909 title, 

"making it unlawful to pay 

(Emphasis added). Acts 190 

.?rovides guidance as to the mesning of the 

,3 originally section 7 of a 1909 enactment, 

which indicates that the statute was one 

:ertain persons for procuring insurance." 

3, 31st Leg., 2d C.S., ch. 25, at 448. Nor 

does the subject matter of the remainder of that act give any further 

indication as to its purpose. Hence, we must ascertain the meaning 

and intention of the legislature from the language of article 3.68 as 

it has existed unchanged 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" if payment is (1) 

contingent upon the writing l)r procuring of s policy of insurance in 

such company; or (2) [ccntingent upon] procuring an application 

therefor by x person whon.eoever; or (3) contingent upon the payment 

of x renewal premium; or (,i) [contingent] upon the assumption of 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 significant and is indicative 

of the objective of this seatute. An insurance agent is routinely 

compensated by 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 constitute discrete 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 (5th ed. 1379). The nature and context ofhis list 

indicate that the prohibition is directed at particular, individual 

transactions and was intentiazd to prevent only conflicts of interest 

between those persons who I'l'oduce applications for insurance business 

in order to receive commissions therein, and those persons who have 

the responsibility to appruJz the applications for insurance on behalf 

of such companies and ther&,:r bind them on the policy. 

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,egulatory scheme for insurance holding 

company systems test the Ill'opriety of transactions within insurance 

holding company systems by standards of fairness, reasonableness, and 

p. a17 
Mr. 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%:%tem by insurers with their 

holding companies, subsidiaries or 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 systematic basis" 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 

service corporation based on the amount of annual net premiums issued, 

this being a measure of thr value of work done by the affiliate for 

the parent 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 

transacted are not prohibited by article 3.68. 

SUMMARY 

A life insurance! company may base its payment 

to a wholly own1~11 subsidiary corporation, for 

services rendered by the affiliate corporation, on 

the net premiums received by the parent life 

insurance company rrithout violating article 3.68, 

so long as the arrangement is consistent with 

article 1.29 and z,rticle 21.49-1, section 4, of 

the Insurance Code. 

JIM MATTOX 

Attorney General of Texas 

TOM GREEN 

First Assistant Attorney General 

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

DAVID R. RICHARDS 

Executive Assistant Attorrq General 

Prepared by Colin J. Carl 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Rick Gilpin, Chairman 

David Brooks 

Colin Carl 

Susan Garrison 

Henry Robinson 

Nancy Sutton 

Bruce Youngblood 

p. 819