honorable   0. P. Lockhart,  Chairman
Boerd of Insurance   Commissioners
Austin,   Texas

Zear    Sir:                              Opinion NO. O-3387
                                          Re:   Insurance - Mutual assessment
                                                companies - increese  of rate:
                                                Reduction of benefits

              Your request  for opinion has been received    and care-
fully    considered.    We quote from your request  as follows:

                “Section     17 of Senate     Bill   135, passed by
        the    Forty-sixth     Legislature,      reads as follows;

                “‘Payments   on Certificates      Alreedy    in Force.
        If the oa.mnents of tf                       any associa-
        tion co&i&g within the scope of thi.s-Act,               on
        certificates     Issued and in force       wh$n this Act
        takes effect,      or the relnsurance      or renewals
        of such certificates,       shall    prove insufficient
        to pay matured death and disability            claims in
        the maximum amount stated         in such policies        or
        certlflcates,      and to provide     for the creation
        and maintenance      of the funds required        by its
        laws, such association       may with the approval           of
        the Board of Insurance        Commissioners      and after
        proper hearing before       said Board provide         for
        meeting such deficiency        by additional,      increas-
        ed or extra rates of payment,           or by reduction
        in the maximum benefits        stated    in such pOliCi8S
        or certificates      then in force,      or by both such
        increased     payments and reduced       maximum benefits,
        or the members may be given the option             of agree-
        ing to reduced maximum benefits,           or of making
        Increased     payments .I

              “After  this      lew was in effect,     several
        mutual assessment         insurance  companies    subject
        to Its provisions        made application     to the Board
Honorable    0.   P. Lockhart,   Page 2



      to Increase    rates    charged for their      policies
      or to decrease     pollcg    benefits    under Section
      17. Cases in point are the Underwriters                Life
      Insurance   Company of Waco, which was author-
      ized by the Board in Its order,           dated July 24,
      1939, to increase       rates;   and the Provident
      insurance   Company of Dallas,        which was author-
      leed by the Board in its order,           dated November
      29, 1939, to revised        benefits   in certain      poli-
      cies.    Copies of the orders are attached.

             “Will you please    advise if,     In your opin-
      ion, the action    taken by these companies In
      increasing   rates    and revising   policy   benefits
      under Section    17 of Senate Bill      135, following
      the Board’s   orders,    was legal?”

                inion No. 0-3763 of this department held Sec-
tion 17 of 3 enate Bill       135, Acts of the 46th Legislature,
unconstitutional.       Because of the Importance      of the ques-
tion,   the matter was reconsidered        by this department,    and
upon reconsideration       w8 again held said Section      17 un-
constitutional,      in limited   conference   opinion  No. O-3763-A.
Copies of these opinions        have already   been furnished   you.

            As pointed  out in opinion     No. 0-3763-A, the
courts  of Texas have r8COgnis8d a clear        distinction     be-
tween the reduction    of benefits   and the increase       of rates
with reference    to mutual assessment     insurance     companies.
We quote from said opinion     as follows:

             “The raising   of rates aside,    we are bound
      by the law in T8xaS that the reduction         of bene-
      fits   in a mutual insurance   contract    constitutes
      an impairment of the obligations        of such con-
      tract.    In Supreme Council American Legion of
      Honor v. Batte,     79 S. W. 629, it was said:

                     “‘In    our opinion,   however,  the enact-
             ment of this by-law constituted          a substan-
             tial    repudiation     of the contract.    The bene-
             fit    certificate     upon its face provided    for
             the payment of the sum of $5,000 out of the
            benefit     fund of the order.      The by-law was,
             In effect,        an announcement that the ap-
             pellant      would only pay $2,000 out of the
Honorable   0.   P. Lockhart,     Page 3



            benefit   fund, and would only pay the
            remaining    $3,000 provided   that amount
            could be paid out of the emergency fund
            of the order * l *.      The by-law itself
            was, In our opinion,     unauthorized,   and
            appellee   might have treated     it as void
            * * .*I

            “Wirtz v. Sovereign   Camp, W. 0. W., 268 S.W.
      438, by a special    Supreme Court,  expressly recog-
      nized and reaffirmed    the doctrine  of the Batte
      case as follows:

                    “‘It   does not appear to us that
            the Batte case, 34 Tex. Civ. App. 456,
            79 S. W. 629, militates           against   what
            has been said above.            That case did not
            directly      involve    the question     of the
            right     to increase     rates;   but the asso-
            ciation      had issued a policy       upon which
            they had agreed to pay, upon the death
            of the insured,         $5,000,   but it subse-
            quently      changed the contract        so as to
            make It liable        for only $2,000,      and the
            Court of Civil Appeals held -- and we
            think properly        -- that there was a
            repudiation       of the contract.       * * *

                     “‘That the stipulation           or promise in
            p. contract,         such as Is the basis       of this
            action,      that the insured        will   comply
            with and be bound by all future               regula-
            tions      or by-laws     of the association,        does
            not mean that the society             may Interfere
            with the essential           purpose    of the con-
            tract,      viz.,     the payment of the indemnity
             promised,        or, in other words,       cannot be
             construed        as authorieing     the society     to
            repudiate        a plain contract       is clearly
             settled     there is no doubt.         * * *I

                  “‘The distinction    between reducing   by
            means of a by-law or an amendment the
            amount stipulated     in the most unqualified
            terms to be paid,     and merely increasing
Eon,rable   0.   P. Lockhart,    Page 4



            by a by-law dues or assessments     to such
            extent as is necessary    to meet the exi-
            gency ensuing out of the changed finm-
            cial condition   of the association   brought
            about by decrease    of membership by death
            or other causes,   is obvious.

                 “‘The first  Is a violation          and repudia-
            tion of an unambiguous contract,           while
            the other is not, 1

             “The doctrine   of the Wirtz case was expressly
      recognized   and reaffirmed   in Supreme Lodge Ancient
      Order of Workmen v. Kemper, ljj      S. W. (2d) 64,
      Pehearlng   denled October   8, 1941.   Before quoting
      with approval     the above quoted language in the
      Wlrte case,   the Beaumont Court of Civil Appeals
      said:

                     “rThe law will    enforce   the contra-
              tual right     of a life  insurance    corpora-
              tion to increase      the amount of its
              monthly assessments      against   Its members.
              Supreme Lodge K. of P. v. Mims, Tex. Civ.
              APP., 167 s. w. 835. But the right to
              Increase    assessments   dqes not authorize
            . the corporation     to diminish    the amount
              payable    under its certificate.      . .I

             “Therefore,    Section     17 of Senate Bill 135
      In its express      authorization     to mutual Insurance
      associations     to reduce benefits        authorizes   the
      Impairment of obligations          of contract,     Is vlo-
      lative    of Section    16, Article     1, of the Texas
      Constltution,      and cannot,     under the pronounce-
      ments, of the Supreme Court of Texas, be upheld
      as a valid and constitutional           exercise    of the
      police    power of this State.”
            We quote    from    the Wlrtz   case,   supra,   as follows:

             “That the stipulation       or promise in a
      contract     such as is the basis     of this action,
      that the insured      will   comply with and be bound
      by all future     regulation3    or by laws of the
      association,     does n.ct mean that the society
Honorable   0.   P. Lockhart,    Page 5



      may interfere     with the essential      purpose of
      the contract,     vie.,    the payment of the in-
      demnity promised,       or, in other words, cannot
      be construed    as authorizing       the society     to
      repudiate    a plain    contract   is clearly     set-
      tled there is no doubt.          Xorton v. Sunreme.
      etc.,   loo MO. App. 76, 73 s. W. 264, i9               .
      S. W. 629; Erlcson       v. Supreme, etc.,       105 Tex.
      170, 146 s. w. 16~.
             “Such hoiding,    however,   is equally    sound
      in law and in morals,      but it is, however,
      also settled     law that benevolent    societies
      may increase     their rates   within reasonable
      limits    In order to enable them to meet their
      obllgatlons,     and in doing so they violate       no
      contract,    ”

               The right   of a benevolent     or a mutual assessment
insurance      association   to increase    its rates  is, of course,
limited     to the extent    that such increase     must be reasonable
and necessary.         For example,  in the case of Ericson      v,
Supreme Ruling of Fraternal         Mystic Circle,    146 S. W. 160
(Supreme Court of Texas),         where the assessment     of a member
yo;s;;;reased       from $3.30 to $23.16 a month, without his
              the Supreme Court held under the facts         of that
case th;t this was a repudiation           of the contract    and that
the member was entitled        to a judgment against      the society
for all assessments        paid with interest.

              In answer to your question,         you are respectfully
advised    that it is the opinion        of this department that
since   Section    17 of Senate Bill      135, 46th Legislature        of
Texas,   is unconstitutional,        orders    of the Board of Insur-
ance Commissioners       based thereon      are of no force     and effect.
It is our further       opinion   that mutual assessment        insurance
companies     cannot legally     reduce benefits      promised its mem-
bers in its policies        without   the consent     of such members
and policyholders.         It is our further      opinion   that mutual
assessment     Insurance     companies have the right       to increase
their   rates to the extent that they are reesonable               and
necessary.       The question    of reasonableness       and necessity,
of course,      is a fact question      to be determlned     by the facts
in each case.
Honorable    0.   P. Lockhart,     Page 6



              This opinion     Is not to be construed       as specifically
passing    on the legality      of the acts of the insurance         companies
named in your letter,        in raising     rates or reducing     benefits,
as we have not been furnished           with copies    of their policy
contracts,     nor  have  we   been  furnished    information    as to whether
such reductions      of benefits     were made with the consent          of the
policy    holders   of the company, and we have not been Informed
whether the increased        rates are reasonable       and necessary.        In
other words,      the legality     or Illegality     of the acts of the
insurance     companies In raising       rates   or reducing    benefits    will
not be determined       by Section     17 of Senate Bill      135, but will
be determined      by the policy     contracts    In each case and by all
the facts     in each cask.        -

            Trust lng    that    this   sat isfactorlly       answers    your   ln-
qulry,   we are

                                                          Very truly    yours

                                                ATTORNEYGENERALOF TEXAS


                                                BY


WJF:GO


APPROVEDDEC. 18, 1941
/s/ Grover Sellers
FIRST ASSISTANT ATTORNEYGENERAL


APPROVEDOPINION COMMITTEE
By: /s/ B. W. B., Chairman
