                                                        R-191




                            March 20, 1947

Hon. J, Alton York,
Chairman. Insurance Committee
The Senate of the State of Texas
Austin, Texas
                            Opinion No., V-98
                                Re:   Whether S. B. Nos. 183
                                      and 213, authorizing
                                      oooperative    rate making
                                      praotioes,   exempt such
                                      activities   from the
                                      antitrust   laws of Texas.
Dear Sir:
             Your request    is as follows:
               "The Committee on Insurance voted yes-
      terday in its meeting to submit S. B. Nos.
      183 and 213 to your Department to see if
      they (S, B. MO. 183 and No, 213) would, if
      enaoted as Texas statutes,    exempt any of the
      activities    iA connection with the insurance
      business,    affected by such bills, from the
      Anti-Trust    or monopoly laws of Texas."
            We have made a study of these two bills
which were submitted to this office along with Commit-
tee Amendments and will confine our opinion and disous-
sion to Committee Amendment No, 1 and Committee Amend-
ment No. 1 to Committee Amendment Noo. 1 to S. B. 183,
and to S. B, 213,,
              It is also noted that Sec. 17 of the amend-
ed S. B. 183, designed to repeal oertain laws, leaves
blank the acts or articles    of our statutes which are by
it repealed.    We will therefore  assume that no speoific
reference  will be made in Sec. 17 to any of the acts or
articles  of our statutes specifically    dealing with anti-
trust matters.
              We will,   in this opinion, usually refer to
"the 1egislatiorP     or "the bills"  and our remarks will
be applicable    to either of the bills   unless reference
                                                                                 .


Hon. J. Walton York L Page ,J     (V-98)


to ,onlg one of them is.inqlioated.  This is beoause the
theme and arrangement of the ,two pleotiis of legislation
are, for praotiohl. purposes, the s&~e~         “~

                At the ~outnet, we wish to say that ~the sub-
ject, of insure+nee and the’ complicated methods in use to-~
day in the-formulation      of rates, pns      dohedules, man-
uals, et&, are eubjeots of1 lifot        me &dy   byexperts.
Therefore,    we. are nboessarlly   restrigted  to an analysis
of the, broad eoope’pd      p&an of the proposed legislation
ins an eflort,.to   deteraim   whether or not saeh lan Op-
erates to exupt any aotlvitleq         therein author ! zed rrom \,,
the operation of the antitrust       statutes.
              The purpose    of the 1eglsLation       is atayod      to
ben
              “To promoto the publio       welfare   by




      tent neoes&ary to’a~oaPlpllsh    the above men-
      tloned purposes, un$formlty In lnsuranoo
      rat4.6, rating syatome,~ rating plans ore
      praotioor,    This aot she.11 be 15berallY in-                      ‘. .
      trrpreted   to carry into effeot   the preris-
      Ions or thi,s seotioneR    (Emphasis supplied.)
             The le&slation      provides that
not be exoo’asivo. inadequate or unfairly
    1 gi 1 t1         id     that due
gi&n4’to*t~e   &%&~?of         the InduatrJ. as to,       los.444,
and other pertinent   statistioal     data.
              Provisions are then made hqulrlng    the fil-
lng by the insuranoe 001npemi44,   or by rate-making organ-‘~
izat$ona authorized by them, of rate~sohedules     with the
Boards of Insuranoe Comnissionors whiohh in’ turn,, ~1s di-,
rooted to review the rates proposed~. Provision’is      mado
for the, rate ,to become etfeotive  unleaa
the Board within certain time limitationso
event e should the .Board fail to automatioally   revlow ,a
rate or rate plan, a review by the Board may be i@tia-
ted id one of several ways by the Board or othsr $nter-
Hono J, Alton York - Page 3       (V-98)


ested   parties,
             Rating organizations   ar4 authorlzod,   and
oertain paners are given to the Board of Insuranoe Com-
missioners  to sup4rvlse suoh organizations.     Prmirlone
are mad4 for exoeptlonal   oiroumstan048, whore deviations
are allowed as to oertain type4 of ineurano4, from filed
schedules and rats plan&      Other provisions  regulate the
activities  and operations  of these rating organizations.
             Certain penalties   are provided for violation
of the provisions   of the statutes and the orders of the
Board, and judicial   review is authorizedo
               We will first     oxen&no our antltruat   laws to
determine the acts prohibited        in oonnection with'tho mak-
ing of insurance rates,        By Artiole  7429, R.C.S.,   it is
provided that *any and all trusts, mnopolies           and oon-
spiraoies    in rsatraint    of trade, a4 hsrein defined,     are
prohibited    and ~deolared to bs 1114g&4        The Art1014 re-
fers to the Aot of 1903, which ia partlp,containod           in
Articles   7426, v&s*,       derining 4trusts4,   1427, V.CoS.,
derlning wm0n0p01.i4sw~ and~7422 v.C,S.,         doaliag with
oonsplraciss'agqlnst      trade;    C&ml     statutes are to
similar effeot.
             Artiole  9426, V.&S,,   provldss that a *trust*
is a oombination of capital,   skill or acts by .two orm~re
persons, firms, oorporations   or ae8ooiations    or persons,
or either two or more of them for either,      any or all of
the follwing   purposes8
               ".    0 D0
               "2e    To fix, maintain, increase or re-
        au44 oka D the     oost or insurance. ., o o


                "Co To fix or maintain any stmidard
        or figurs whenby D o o the oost of ., D e
        insurance o e o shall be in any manner afr
        feeted,   oont,rolled or establlehed.
               "5, To make, enter into, maintain,
        exeoute or carry out a   oontlaot , obliga-
        tion or agrwmnt   by w3 ch the parties
        thereto bind, or have bound themselves
        o o O or by which they shall agree in any
Hon. J. Alton York - Page 4      (V-98)'


      manner to keep the D ., O charge for
             insuranoe       o' ata fixed'or
      i&did   figure,   0; iy whioh they
      shall in any manner affeot or main-
      tain the . o o '00.9t 0r o o o ~NJW-
      an04 O o ., between them or, them-
      selves and ,othera to preolude a free
      and unrestricted    competition among
      themselves or others in the ; ..buaineSa
      of 0 0 0 insurance D O O or by which
      they shall agree to pool, combine or
      unite any interest    they may have in
      oonneotion with the o O o charge for
      D Q D insurance o o O whereby its
      price or auoh charge might be in any
      manner affected."
             Article   7427, V. C. S.,     providosa
              "A moaopoly is a combination or
      consolidation   of two lr Yro oarper8-
      tiona when lffeoted   in either of the
      follewing   methods!
              "1,   When the direotion   of the
      affairs    of two or more oorporationa
      is in any manner brought undmr the
      same menagament or oontrol D + O
      where auoh oommon msnagamant or eon-
      trol tends to create a trust as de-
      fined in the rirat Artiole      of thi8
      statutoo"
             It is manifest by those statute8 that if
the u oae of the oombination desorlbod is to fix, or
aif&'%%-cost      of inwranca,   the oomblnation is prehib-
ited    It is ala4 manifest' that ii a oorpente~~oomblna-
tion tends to oreate a trust as dafi,med it is prohibited.
             We will now examine the proposed legislation
to determine whether practioea    are authorized whioh are
inconsistent  with the prohibitions   of our mtitre8t   laws
as pointed out in the above exoorpta~fram the erbatuteao
               The obligation  to file ita rates with the
Board of Insurance Commissioners aaiy be satisfied     under
this legislation    by any insurer by ebecoming a member of
or a subscriber    to, a licensed rating organization   which
makes such filing     and by authorizing  the Board to aooapt
Hon. J. Alton York - Page 5         (V-98)


such filing .on its behalf,”  it being provided          that mem-
bership or subscription   is not compulsory.
                The legislation    then provide’s that a “oar-
poration,     an unincorporated    association,     a partnership
or an individual,n      may be lioenaed by the Board as a
rating organization.        The legislation     provides that each
rating organization       shall promptly notify the Board of .
any changes in. its. constitution,
                               .       . . its
                                            -. artiolra
                                                     - . of agree-.
ment or associatloa,       or its oertlrloate      or incorporation,
and its by-laws, rules and regulations            governing the con-~
duot of its business,       thereby lndloating       that operations
of the rating bu’reaus ehall be the subjeot of binding a-
greement between it and its various members or aubacrib-
ers.    The legislation     then provides Woo-operation among
rating organizations       or among rating organizations        and
insurers in rate making . . . is hereby authorized.”                The
legislation     further provides “every member of or aubaorib-
er to a rating organization        shall adhere to the filing
made on its behalf by such organiza~tionW with dertain pro-
visions    for exceptions    where allowed by the Board,
               This legislation,     then, obviously authorizes
acts whioh, in the absenoe of such legislation,           would be
directly    contrary.to   the antitrust    laws., If the purpose
of any rating organization       is to establish    a standard by
which the cost of ineuranoe is to be in any manner af-
feoted,   its operation is prohibited       by existing   antitrust
laws. Manifestly, no rating organization          could exist with-
out some type of agreement or understanding,           nor would its
services be of any value if they did not in some manner
affect   the ultimate rate or premium which is charged by
its subsoribers     or members.
                It would be impractioal      for us to speoulate
on the various ways in which auoh organizations            might op-
erate in violation      of other provisions      of our antitrust
laws.     We do wish to point out, however, that ,in addition
to authorizing      the rating aotivities      mentioned, the leg-
islaticn    tends to make the rasult of the aotivities          of
the rating organizations       binding upon its members and sub-
scribsrs.     Certainly in an antitrust. action in which the
charge is that of fixing rates, an adequate defense would
be presented to the effect        that the activities     are speci-
fically    authorized by this proposed legislation.           To that
extent the insurers and rating organizations           would be im-
mune from prosecution,        The legislation,     in effeot,   at-
tempts to make the Board of Insurance Commissioners a
Hon. J, Alton York - Page 6   (V-98)


policing organization with powers to oensure the results
of the activities of such combinations. Should it be
contended in an antitrust action that those insurersM&cb
participate in the co-operative rate making activities
are in faot restraining trade, or aocompllshing other re-
sultmary       to the antitrust laws, en obvious answer
would be presented that at least part of such faot issue
was predetermined by the Board of Inburance Comlssion-
ers, when it is determined that the rates promulgated
were not excessive, inadequate or unfairly disarlmlnatory.
The only basis then for an antitrust action which might
have any hope of success would be one wherein the charges
go behind the action of the Board of Insurance Commlssion-
ers and in effect assert that a combination exists to pre-
vent a fair hear&g or determination by the Board orddch
assert other matters over whiah the Boar6 is given no
control by the proposed legislation.
              With the mantle of legality established by
 the proposed legislation for the aotlvities therein reoog-
 nized, authorized, and encouraged, we next look to the
 provisions of the Aot to see whether or not the Board of
 Insuranoe Comai~sloners is given sufficient authority to
 effect the crnsureshlp nsoebsary to prsvrnt monogollstlo
praotlces. In considering this netter, we are conoerning
 ourselves with both the powers given to the Board andwith
 the .means provided by the Legislature to carry out those
powers. Obviously, a grant of power to the Board would
mar little if it were not also provided with the means
to procure adequate personnel; sufficiently trained in
investigation and rate making, to acoompllsh a thorough
 consideration of every rating plan or system filed with
ft. It will be noted that this legislation places the
burden upon the Board or any person objeotlng to a filed
rate rather than upon the insurer or rating organization
whioh files the rate. The implications and oonsequences
of such a shift of burden are Immense, in practical ap-
plioation. In aaPition thereto, we see nothing in this
legislation to prohibit prolific filings, the volume and
variety of which might easily swamp the Board of Insur-
ance Commissioners, thereby rendering practloally impos-
sible a thorough and careful consideration of each.rate
or plan filed with the Board. In addition thereto, the
legislation places a time limit of 15 days, with certain
provisions ,for extension, for oonsideration by the Board,
which appears to be an extremely short period of time in
view of the fact that a rate plan or schedule may have
been the subjeat of investigation, study and considera-
tion by the proposing organization for a period of years.
Hon. J. Alton York - Page 7        (V-98~)


'The provision     for review by the oourt is couched in lab
 guage which would indicate        that the court can in effect
 overrule policies,      in specific   cases, which have b88n
 set by the Board.       To the extent that such provision      con-
 stitutes   a diversification      of responsibility,  there is'
 the poesibility      of a lack o f uniiormity, and confusion,
 whioh tight be vital to an effective         policing of anti-
 mot     tehaes0ies.
               You are thersror8 advised that in 6ur opin-
ion, this 18giSlatiOn,     if enaoted, wouldex6mptmany of
the activities    in connection with the insurance business
affected   by such bills,    Prom the antitrust laws br Terra.
              It Is our understanding,     and the emsrgenoy
olause of Senate Bill 213 ihdioates,       that this legisla-
tion is designed to 8ff8Ot the exenption of the insurance
coapanies and organizations     from the operation of the
Sherman Antitrust     Act after January 1, 1948, as contem-
plated by Public Law 15. This opinion should not be aon-
StXU8d as in any manner passing upon the d--ri0a0y or the
propesea legislation     to aeom llsh that purpose.       Thie
opinion is restricted     to the Bnterpretatitin   of the Texas
Antitrust   Statutes as requested in your letter and does
not 00~81' other matters suoh as the effect, if any or
this exea@tion on enrorcemnt       ef the antitrust   statutes
at! te other activities    net exmpt by this ~eginlatien,


      ,S. B. 183, as SIIiL8ndd, and S. B. 213, in
       the rorm presented,   authorizing    oo-opara-
       tive rate making praotiees     by insurance
       Oompanies, subjeot to osrtain oontrol and
       disapproval   of rates by th8 Board of In-
       suranae Commissioners, exempt many or the
       aotivitles   therein authorized iron the
       antitrust   laws 0r Texas,
                                      Yours very truly,
A2PROVEDMARCH20, 1947            ATTORNeYGENXFUU
                                               OF Tl5AS


                                 BY    $?i&dL&
                                      Ned McDaniel      &
                                      Assistant
