                HEA~ORNEY                         GENERAL




Hon. 0. P. Lockhart                Opinion No. O-3185
Chairman                           Re:     The authority     of the Board of In-
Board of Insurance                 surance Commissioners        to advise members
Commissioners                      of a fraternal      benefit    scciety     as to
Austin,  Texas                     their rights      under their     original    certi-
                                   ficates     issued to the members of the
                                   society,      and whether so advising        such
                                   members would be in violation            of the
                                   provisions      of Qrticle   4855, Revised
Dear Sir:                          Civil    Statutes*

           We quote from your letter               of November 6, containing
your amended request    for an opinion             of this de artment in lieu
of your original   request  under date             of August c 9 1941, as follows:

             “ii fraternal      benefit      socLety     incorporated       under the
     laws of Texas and now operating                  under the provisions            of
     Chapter 8, Title          78, R.C.S.       1925 as amended, for many years
     issued benefit         certificates        at wholly      inadequate       premium
     rates,     and in a great many instances                 these policies        were
     what is commonly known as a twenty payment life                          certificate,
     that is, premiums, in accordance                  with the terms of the con-
     tract,     were to be paid for twenty years only.                      Such society
     by recently        enacted amendments to its constitution,                     char-
     ter,    and by-laws,       effected      without      the consent       of the ex-
     isting     certificate       holders      (unless     such general       consent
     thereto     in advance is validly              provfded     by the certlffcate
     provisions       hereinafter        quoted) 9 is purporting           to alter      sub-
     stantial      and material        terms and provfsions            of the preexfst-
     ing contracts        by rerating        certain     members of the society
     designated       as Class ii and Class C members and forcing                       such
     members without         their     present      assent either       to pay very
     greatly     higher dues and assessments                or by reducing         the
     amount of insurance            granted by the certificates                or by forc-
     ing such members to transfer                 from one class to another,               ac-
     cepting     in lieu of their           original     certificates        new and 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 in-
     solvent     or threatened        with insolvency           and that 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 sum hereunder,           unless  said member has fully
       complied with all the terms and conditions             of its Consti-
       tution     and Laws now in force       or which may hereafter      be
       adopted and has not untruthfully            answered any question      or
       made any untruthful         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 be-
       ing expressly      made a part thereof).        It is expressly      agreed
       that if all dues or assessments            (payments)  herein    shall be
       paid when due, for a full          term of twenty years from date,
       this certificate        shall become an obligation       against    the Or-
       der upon the death of said member without             further    payments
       thereon,     subject    to the terms and conditions       of said Con-
       stitution.

             “We invite your attention   to the provisions   of Articles
       4834 and 4839 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      and material     changes in the original        benefit
       certificates       without  the present    assent of the members, es-
       pecially     where such changes are disadvantageous             or otherwise
       unacceptable       to the members (a) by materially          increasing     the
       dues and assessments,         (b) by restoring     dues and assessments
       where the contracts        have been paid out as per original            terms,
       (c) by reducing        the amount of benefits      payable,     (d) by arbi-
       trarily     transferring    or forcing   transfers     from one class to
       another or from one form of certificate             to another?

              “2.  If you answer in response      to any branch of Para-
       graph 1,   supra,  that   such attempted   action   is unlawful and
       invalid,   then state whether or not this Board has any au-
       thority,   and if so what authority,      and under the provisions
       of what statutory     enactments,   to correct    such abuses.

               “3.   May this Board lawfully        advise members of such so-
       cieties     that they do not have to accept         such proposed
       changes or reductions         in benefits    but that they may stand
       upon and enforce      by legal    process    if necessary    their   origi-
       nal certificate      benefits    or recover    from the society      all
       amounts paid upon same together           with legal    interest   from
       date of payment?

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




        Hon.   0.   P. Lockhart,     page    3     (O-3185)

        categorical1       answer    same.       Being   divided   into   several   parts,
        (a), (b) , (cy and Cd), and all relating    to certain   original
        benefit  certificates of a fraternal   benefit  society,    from the
        provisions      of which the society       seeks to make substantial            and
        material      changes, we do not have before             us a copy of the Con-
        stitution,      By-laws,  the original        certificate,       or the financial
        condition      of any society     with which your department             is chiefly
        concerned,      rendering   it necessary       to make any one or more of
        the mentioned material         changes inquired          about.     In this con-
        nection     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 af-
        fected     by whether the by-law was adopted in a manner constitut-
        ing a waiver on the part of its members to be bound by such in-
        crease,     and further   in this connection,           it would be proper to
        place before      us the Board’s      conclusions       or findings      and such
        facts    upon which same are based.

                      In our o inion No. O-3387, rendered              to you and approv-
        ed December 18, 19 2:1, we held that the right                of a benevolent       or
        a mutual assessment         insurance     association    to increase        its rates
        is limited      to the extent that such increase             must be reasonable
        and necessary.         Of course,     this is a fact question          upon which
        your department may pass 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     on the part of the society           is where the
        Board has uncovered         sufficient      evidence   to show the officers
        acted arbitrarily,        or the by-law authorizing           such increase      was
        passed without       the assent of its members and these and many oth-
        er acts on the part of the officers               of the society       must go to
        sustain     a finding    by the department that the society               “has failed
        to comply with any provisions             of this chapter       (Chapter 8, Title
        781, or is exceeding         its powers,       or is not carrying        out its con-
        tracts    in good faith,       or is transacting       business     fraudulently.”
         (Article    4852 and krticle        4856, Revised     Civil   Statutes1

                     In the above opinion,     we cited    the case of E~icson v.
        Supreme Ruling of Fraternal        Mystic Circle,     146 S.W. 160, wherein
        the Supreme Court of Texas held under the facts            of that case
        that where the assessment        of a member was increased     from $3*30
        to $23*16 per month without        his consent,    such act was a repudia-
        tion of the contract       and the member was entitled      to a judgment
        against   the society    for all assessments      paid with interest.     Alsb,
        citing   in this opinion     Wirtz v. Sovereign     Camp W.O.U., 268 S.W.
        438, we followed     this case and held that a stipulation         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 mean that 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 ex-
pressly    excluded   from Senate Bill        135s 46th Legislature       (Article
5068-l in Vernon’s),        their   rights    under contract   with its mem-
bers are similar      to those of mutual assessmen,t companies in re-
spect to the questions         raised by you and therefore        opi.nl,on No.
0-3387 is applicable.
            We do not construe    Arti.:::le 4834, Revised      Civil Statutes,
as furnishing   authority   to a fraternal     benefit    society    to mater-
ially  change the amount payable      Ian the certiffcate       issued to its
members without   their   consent 0 *n;zillo     Mutua.1 Benefit       %ssocia-
tion v. Franklin,    et al, 50 S.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~ing any phase of
the question     other than as pointed           ov,t, we are of the opinion
such would serve no useful          purpose,       likely      to create     @onFusion
tind harm rather     than be helpful.           A careOu1 and able digest             of olur
Texas court decisions        relating     to this subject            appears to have
been furnish.ed     you by your Sen,ior Exan~irrer~ MrO .id.fred M. Scottz.
   review of the authoriti:s          thirej.r;    6 I.,~--+
                                                       6e,,~..ed discloses     each case
decided   solely    as to t,he p~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 coer-
cion and that by such ~.:oercion,           t;z~z society        i.s not carrying     out
its contracts      in good fhith      or :s crsnsactlag             business   fraudu-
lently   would be insufficient         for enabl,ing thi.s department to
render an opinion,       categorically        answering your first            question-

             Proceeding    to your questions       2, 3 and ,%, above set
forth,    you point out Article         4855, Revised Civil Statutes,       which
prohibits    certain    publications      by the Board of Insurance       Conmis-
sioners    as to any society,        either   domestic   or foreign,,   of any
financial    statement , report       or finding    except under certain     con-
ditions.     This article      is to be construed       with A:rticles   4852,
4854 and 4856 of the statutes,            each in part hereafter       set out and
providing :
             “Qrticle     4852. ‘C;l.t Coumis,sioner (ZBo;Lrd~of Insurance
       Commissioners)       or any person he may appoint 9 shall have the
       power of visitation       and ex;,;l-ination    into the &fai,rs    of an,y
       domestic    society.     He  may employ     assistants    for tne purpose
       of such examination,        and he, or any person he may appoint,
       shall have free access to all the books,               papers and docu-
       ments that relate       to the business      of the society,     and may
.   -




        Hon.   0.   P. Lockhart,      page    5     (O-3185)


               summon and qualify            as witne,sses     under oath and examine its
               officers,       agents and employes or other person in relation
               to the affairs,          transactions       and conditions        of the society.
               The expense of such examination                  shall be paid by the so-
               ciety     examined,      upon statement        furnished     by the Commission-
                     and the examination           shall be made at 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;        a D 0 safd Commis-
               sioner may present            the facts     relating     thereto     to the Attor-
               ney General,        who shall,      if he deem the circumstances               war-
               rant,     commence an action          in quo warrant0 in a court of com-
               petent jurisdiction,            and if it shall then appear upon the
               trial     that such society         should be closed,          said society
               shall be enjoined           from carryfng        on any further       business      and
               some person shall be appointed                 receiver     of such socfety         and
               shall     proceed     at once to take possession             of the books pa-
               pers, moneys and other assets                 of the society,        and shall
          ‘*   forthwith,       under the direction           of the court,       proceed to
               close     the affairs       of the society,        and to distribute          its
               funds to those entitled             thereto*       No such proceedings            shall
               be commenced by the Attorney                General against         any such so-
               ciety     until    after notice       has been duly served on the chief
               executive       officers      of the society       and a reasonable          opportun-
               ity given to it, on a date named in said notice,                         to show
               cause why such proceeding               should not be commenced.
                      “Article    4854. The Commissioner,          or any person whom
               he may appoint,      may examine any foreign          society     transacting
               or apply~lrig_ for admission       to transact    business      in this State,
               The said Commissioner        may employ assistants,          z~.d he, OP any
               person he may appoint,         shall have free access to all the
               books,   papers and documents that relate             to the business        of
               the society,      and may summon and qualify          as witnesses       under
               oath and examine its officers,           agents,    and employees and
               other persons      in relation    to the affairs,        transactfons      and
               conditions      of the society.      He may, in h1.s discretion,            ac-
               cept in lieu of such examination           the examination          of the In-
               surance Department of the State,           territory,       district,     prov-
               ince or country where such society             is organized.          D o . 0

                      “Article     4855. Pending, during,        or after   an examina-
               tion or investigation         of any such society,      either  domestic
               or foreign,      the Commissioner      shall make public     no financial
               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 home office,        nor until    such society   has been afforded
Hon.   0.   P. Lockhart,     page 6       CO-31851


       a reasonable   opportunity        to answer any such financial state-
       ment, report   or finding,        and to make such  showing in con-
       nection  therewith   as it       may desire.

               “Article     4856. When the Commissioner on investigation
       is satisfied        that any foreign        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       in writing     the grounds of hf.s dissatisfaction,              and
       after    reasonable      notice    require     said society,      on a date nam-
       ed, to show cause why its license                 should not be revoked*         If,
       on the date named in 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 may revoke the authority
       of the society         to continue      business    in this State,       Al.1 de-
       cisions     and findings       of said Commissioner         made under the
       provisions        of this article      may be reviewed by proper pro-
       ceedings      in any court of competent jurisdiction.”

              It will    be noted that by the provisions          of the forego-
ing articles      the Board of Insurance       Commissioners      has the right
of visitation       and examination     into the affairs     of any foreign      o:
domestic    society    for determining      whether any such soci.ety      has
failed    to comply with any provisions          of Chapter 8, Tic1.e 78, Re-
vised Civil     Statutes,     or whether it is exceeding        its powers,     or
is not carrying       out its contracts      in good faith,     or is transact-
ing 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,     you would be required       under the law to reduce
such findings       to writing,   serve a copy thereof       upon such society
at its home office        and afford    such society    a reasonable     oppor-
tunity    to be heard.

              The principle     underlying     the organization     and opera-
tion of such societies        is one of equality       and mutuality     among
its members,       The advising    of its members of a violation          of its
contracts     by the 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 home office      and affording
it a reasonable      opportunit      to be heard prior      there,toO
visions    of Articles    4852, t 854, 4855 and 4856 above set %t gfo
ford to the Board the necessary            procedure   and authority     within
the scope of its official         duties    in dealing with a fraternal
benefit    society   which is transacting        business   fraudulently     or S.s
Hon.   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.

             From what has been said, we have reached the conclu-
sion and it is the opinion            of this department that the advising
of members of a fraternal            benefit     society     by the Board of Insur-
ance Commissioners         as to their       individual      rights    under the
original    certificate       issued them by the society             to the effect
that they do not have to accept proposed                   changes or reductions
in benefits     but that they may enforce             by legal process,         if ne-
cessary,    their    original     certificate       benefits     or recover     from
the society     all amounts paid upon same togetherwith                   legal    inter-
est 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     and not in compli-
ance with said statute.

                                                  Yours   very    truly

                                                  ATTORNEYGENERALOF TEXAS

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

APPROVEDJUL 29, 1942
/s/ Grover Sellers
FIRST ASSISTANT ATTORNEYGENERAL

This   opinion    considered      and approved       in limited      conference.


WJRK:GO: wb
