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DAN MORALES                              August 23.1991
 Al-rmNEY
       GENERAL

    Honorable Carl A. Parker                      Opinion No.    DM-33
    chairman
    Senate Subcommittee on Insurance              Re: Construction of House Bill 2,72d
    P. 0. Box 12068                               Legislature, amending the Insurance
    Austin, Texas 78711                           Code (RQ-116)

    Honorable John Montford
    chairman
    Senate Piice   Committee
    P. 0. Box 12068
    Austin Texas 78711

    Honorable Eddie Cavaxos
    chairman
    House Committee on Insurance
    P. 0. Box 2910
    Austin, Texas 78768

    Honorable Mark Stiles
    cllahman
    Local and Consent Calendars
    P. 0. Box 2910
    Austin Texas 78768

    Gentlemen:

          You ask about the construction of House Bill 2, which was enacted by the
    72d Legislature and effects substantial revisions to the Insurance Code. Acts 1991,
    72d Leg., ch. 242, at 939, Vernon’s Sess. Law Serv. Specifically you ask:

              1. Will the provisions of House Bill 2, in particular Section 2.82,
              deregulate Uoyds and reciprocal insurance companies as to rate
              or form for automobile insurance?

              2. Will the provisions of House Bill 2 preclude the State Board
              of Insurance from allowing insurers to utilize experience rating
              for automobile insurance?

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Honorable Carl Parker, et al. - Page 2          (DM-33)




We answer both of your questions in the negative. We conclude that section 2.02 of
House- Bill 2 applies to Lloyd’s plans and reciprocal or interinsurance exchanges.
We further conclude that House Bill 2 does not preclude the State Board of
Insurance [hereinafter the board] from allowing insurers to utilize experience
ratings in fixing rates for premiums for automobile insurance. We turn to your first
question.

       Chapter 5 of the Insurance Code governs rating and policy forms that are to
be used by those companies, corporations, or associations providing certain kinds of
insurance regulated by the code. Subchapter A governs the rating and policy forms
for motor vehicle insurance. Prior to the enactment of House Big 2, article 5.01 of
the code, which governs the fixing of the rates for automobile insurance, provided in
pertinent part:


              (4 Everyirfmnmce      company, copomtioq        in&-e
          exchange, mutual, reciprocal, aswckation, Lloyd’s or other innuer,
          hereinafrer called insurec wridng any form of motor vehicle
          imumnce in this State, shall annually file with the State Board of
          Insurance-, hereinafter called Board, on forms prescribed by the
          Board, a report showing its premiums and losses on each
          classification of motor vehicle risks written in this State.

              (b) The Board shall have the sole and exclusive power and
          authority, and it shall be. its duty to determine, fix, prescribe, and
          promulgate just, reasonable and adequate rates of premiums to
          be charged and collected by all inwws writing any form of
          inrumnce on motor vehicles in thir Stute . . . . In promulgating any
          such rating plans the Board shall give due consideration to the
          peculiar haxards and experience of individual risks, past and
          prospective, within and outside the State.. . .

              . . . .


               (e) Motor vehicle or automobile inswrmce as referred to in
          this subchaptershdl be taken and comtrued to mean every form of
          Lrnrmnce on any automobile or other vehicle hereinafter
          enumerated. . . .

Ins. Code art. 5.01 (emphasis added).



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        Section 2.02 of House Bill 2, the section about which you ask, amends article
5.01 of the Insurance Code by adding a subsection (f), which provides:

               Notwithstanding Subsections (a) through (d) of this article,
          on and after September 1, 1992, rates for motor vehicle
          insurance in this state are determined as provided by the flexible
          rating program adopted under Subchapter M of this chapter.1
          This subsection expires December 31.1995.

Acts 1991, 72d Leg., ch. 242, 0 2.02, Vernon’s Sess. Law Serv. at 955. You ask
whether subsection (f) applies to Lloyd’s plans and interinsurance exchanges.

       Chapter 18 of the Insurance Code governs the operations of Lloyd’s plans in
Texas. The amended version of article 18.23 of the code, as set forth in section 2.46
of House Bill 2, exempts underwriters at a Lloyd’s from the operation of Texas
insurance laws unless specifically provided:

              (a) Underwriters at a Lloyds’ shall be exempt from the
          operation of all insurance laws of this State except as in this
          Chapter specifically provided, or unless it is specifically so
          provided in such other law that same shall be applicable.
              (b) In addition to such Articles as may be made to apply by
          other Articles of this Chapter, underwriters at a Jloyds’ shall not
          be exempt from and shah be subject to all of the provisions of
          Article 1.15A and of Article 2.20 and of Article 5.35 and of
          Article 5.38 and of Article 5.39 and of Article 5.40 and of Article
          5.49 and of article 21.21 of this Code.

Id 0 2.46 at 977.




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        Chapter 19 of the Insurance Code governs the operation of reciprocal
exchanges and contains an article substantially identical to article 18.23. The
amended version of article 19.12 of the code, set forth in section 2.47 of House Bill
2, provides:

               (a) Reciprocal or inter-insurance exchanges shall be
          exempt from the operation of all insurance laws of this State
          except as in this Chapter specifically provided, or unless
          reciprocal or inter-insurance exchanges are specifically
          mentioned in such other laws.

              (b) In addition to such Articles as may be made to apply by
          other Articles of this Code, reciprocal or inter-insurance
          exchanges shag not be exempt from and shah be subject to all of
          the provisions of.Section 5 of Article 1.10 and of Article 1.15 and
          of Article 1.15A and of Article 1.16 and of Article 5.35 and of
          Article 5.36 and of Article 5.37 and of Article 5.38 and of Article
          5.39 and of Article 5.40 and of Article 6.12 and of Article 8.07
          and of Article 21.21 of this Code.

Id 9 2.47 at 977.

        It is suggested that the fact that the newly added subsection (f) of article 5.01
of the code fails to mention specifically Lloyd’s plans or interinsurance exchanges, as
required by the provisions set forth above, indicates legislative intent that that
subsection not apply to those carriers and precludes the application of that
subsection to those carriers. We reject this argument for two reasons.

       First, an amendment will be construed and harmonized with the act that it
amends or to which it is added, and of which it forms a part. American Szuefy Co. of
New York v. Axtell Ca, 36 S.W.2d 715 (Tex. 1931), answer conformed to, 38 S.W.2d
1110; Shipley v. F&@da Zndep. School Dir& 250 S.W. 159 (Tex. Comm’n App.-
1923, judgm’t adopted). Specifically, a new section, added by amendment, will be
construed in view of the original statute as it stands after enactment of the
amendment, and it and all sections of the new law must be regarded as a
harmonious whole with all sections mutually acting on each other. ScMcUzirg v.
Texas Boani of Medical Exam., 310 S.W.2d 557 (Tex. 1958); Gmnt v. United Gas pipe
Line Co., 457 S.W.2d 315 (Tex. Civ. App.-Corpus Christi 1970, writ refd n.r.e.).




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        Subsection (f), added to article 5.01, refers to “rates for motor vehicle
insurance” and provides that such rates are determined notwithstanding the other
subsections of the article. Subsection (a) of the article already includes by its terms
Lloyd’s plans and interinsurance exchanges. Subsection (b) empowers the board to
set rates “charged and collected by all insurers writing any form of insurance on
motor vehicles in this State.” Even though neither type of carrier is mentioned
specifically in subsection (b), it is beyond cavil that subsection (b) of article 5.01
applies to Lloyd’s plans and interinsurance exchanges.

       If we were to conclude that the newly added subsection (f) did not apply to
those types of carriers merely because it failed to list them specifically, we would
perforce conclude that subsection (b) did not apply to those carriers either, a
construction that would have the effect of removing Lloyd’s plans and interinsurance
exchanges from the rate-making authority of the board altogether. This we are
unwilling to do; such a construction clearly is at variance with the evident legislative
intent of making all insurers writing any form of motor vehicle insurance in this state
subject to the flexible rating program set forth in the newly added subsection M of
chapter 5.

        Second, in construing a statute, whether or not the statute is considered
ambiguous on its face, a court may consider, inter a&z, the statute’s legislative
history, including legislative debates. Gov’t Code 0311.023(3). See N&nal
Corbadiq Cop. v. Phoenir-El Paso Express, Inc. 178 S.W.2d 133 (Tex. Civ. App.-
El Paso 1943). afd, 176 S.WJd 564 (Tex. 1944). cert. denied, 322 U.S. 747 (1944).
In the senate debate on House Bill 2, the senate sponsor of the bill declared the
purpose of the bill to be, inter alia:

          We have created some innovative ideas on rate regulation
          begin&g with deregulation of general liab&y and commetcial
          property insumnce, more or less as an experiment, and we have
          created in this bii a so-called flex rating plan for reg&ted lines
          0fP#~cancalry             insurmce. This would allow the State
          Board to set a benchmark and allow companies to compete
          within a parameter set by the State Board above or below that
          benchmark to promote competition and hopefully low rates
          based on those persons who purchased insurance who are
          careful and who are good risks. (Emphasis added.)

Debate on Tex H.B. 2 on the Ploor of the Senate, 72d Leg. 1 (May 24, 1991)
(transcript available from Senate Staff Services Off&). We conclude that the


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Honorable Carl Parker, et al. - Page 6              (DM-33)




legislature intended, in enacting section 2.02 of House Bill 2, to make the newly
enacted subchapter M applicable to all insurers writing any form of insurance on
motor vehicles in Texas, including Lloyd’s plans and interinsurance exchanges. We
turn to your second question.

       You ask whether the provisions of House Bill 2 preclude the board from
allowing insurers to utilize experience ratings for automobile insurance. Article 5.04
of the code governs the use of experience as a factor in determining rates of
premiums and, prior to the enactment of House Bill 2, provided:

               (a) To imwe the adequaq and rear0Mblene.s~ of mtes the
          Board may take into consideration part andpmpective    fzqmieme
          within
               andoutside
                        thestate,andauotherrelevant
                                                 factm, within
          and outside the State. gathered from a territory sufficiently
          broad to include the varying conditions of the risks involved and
          the haxards and liabilities assumed, and over a period
          sufficiently long to insure that the rates determined therefrom
          shall be just, reasonable and adequate, and to that end the
          Board may consult any rate making organization or association
          that may now or hereafter exist.

              (b) As a basis for motor vehicle rates under this subchapter,
          the State Board of Insurance shall use data from within this
          State to the extent that the data is credible and available.
          (Emphasis added.)

Ins. Code art. 5.04.

       Section 2.05 of House Bill 2 amends article 5.04 of the code by adding a
subsection (c):

              Notwithstanding Subsection (a) and (b) of this article, on
          and after September 1, 1992, rates for motor vehicles are
          determined as provided by Subchapter M of this chapter. This
          subsection expires December 31,1995.


Acts 1991,72d Leg., ch. 242,g 2.05, Vernon’s Sess. Law Serv. at 956. Thus, we need
to examine the effect of subchapter M on the board’s authority under subsections
(a) and (b) to employ experience rating in order to fix rates for premiums.



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Honorable Carl Parker, et al. - Page 7                   (DE-33)




Accordingly, in order to answer your second question, we must turn to the
provisions of the newly enacted subchapter M, which amends chapter 5 by adding
article 5.101. Id at 952.

       Section 3 of article 5.101 requires that rates used by insurers in writing
property or casualty insurance for lines subject to article 5 be determined through
the application of “flexibility bands* to a “benchmark rate” and are implemented on
a Sle and use basis. Subsection (b) of section 3 imposes on the board the duty to
promulgate a benchmark rate and a flexibility band for each line subject to article 5.
In promulgating the benchmark rate and the flexibility band, the board may
consider, inter alia:

                 (1) past and prospective loss experience within the state
                 and outside the state if the state data are not credible;

                 (2) the peculiar hazards and experience of individual risks,
                 past and prospective, within and outside the state;
                 ....

                 (13) any other factor considered appropriate by the board.


        ?kction 2(3) of article 5.101 defines ‘flexiii   band” as fohvs:

                 Tludbility bad meaos a range of rates relative to the benchmark rates
            set by the board by line, within which aa insurer, during a set penod relative to
            a partMar lioq may iaaeau or deaease rate levels by cladicatioo without
            prior approvalby the board. The board shall set the tlcxibiity band as a
            pacentage above and Mow the. benchmark rate, which percentage need not
            be equal above and below that benchmark rate.

Aeta 1991.l2d Leg., ch. 242,s 2.01, Vernon’s Sess. Law Serv. at 952.

        ‘se&a    2(l) of arti& 5.101 defines -benchmark rate”in the following fashion:




          Se&m z(6) of article 5.101 d&es      Watuhny rate IimitaW        to meam

            Statutory rate limitation’ means a minimum and maximum boundary on
            iaauraoce rates that is based on a benchmark rate set by line by the board.




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Honorable Carl Parker, et al. - Page 8           (DM-33)




Id. at 952-53.

        We note that the language of subdivision (2) is identical to the language of
article 5.01(b), which in our opinion reflects legislative intent that the board
authority to consider experience ratings not be impaired. Indeed, under subdivision
(2) the board itself may consider experience rating or, for that matter, any
information or data that it deems appropriate in determining the benchmark rate
and the flexibiity band.

        Subsection (d) of section 3 of article 5.101 authorizes insurers to impose any
rate by classification within the applicable flexibility band without the prior approval
of the board. The subsection further provides:

          Within 30 days of the effective date of the benchmark rate. for a
          particular line, each insurer which proposes to write that line of
          insurance in the state during the effective period of the
          benchmark rate shall file with the board its proposed rate by
          line, and by classification and territory under the board-
          promulgated rating manual, unless the insurer has obtained
          approval from the board under Subsection (g)(2) of this section
          to use its own rating manual. The insurer shall include in the
          filing any statistics to support the rates to be used by the insurer
          as required by board rule, including information necessary to
          evidence that the calculation of the rate does not include
          disallowed expenses.

Id at 935. Subsection (e) of section 3 provides that an insurer may not impose a
rate outside the upper and lower limits of the flexibility band without the prior
approval of the board.

       Subsection (g) of section 3 requires the board by rule to adopt a rating
manual, which shag be used by all insurers unless they receive approval to use their
own mamml pursuant to subdivision (2) of subsection (g). Subdivision (2) permits
an insurer to seek board approval for its own manual, but it does not enumerate
those factors that an insurer may consider in preparing such a manual and fixing
such a rate. Thus, subdivision (2) does not explicitly permit or preclude the use of
experience rating in formulating the manual. Therefore, we find nothing in House




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Big 2 that would preclude an insurer from considering experience ratings as a factor
in formulating a manual.

       Moreover, there is language in both subdivision (2) and subdivision (4) that
contemplates that experience rating be employed as a factor. Subdivision (2) of
subsection (g) provides in pertinent part:

               Following written application and board approval, an
          insurer may use a rating manual relative to clas~itications and
          territories of risks, different from that promulgated by the board,
          to calculate the rate used by that insurer foranindividuul     risk.
          (Emphasis added.)

Id at 254. Subdivision (4) of subsection (g) provides:

              The effect on the rate charged an i&it&al risk through
          surcharges and discounts under any such approved rating
          mamtal shag not be greater than plus or minus 10 percent, as a
          deviation from the insurer’s filed rate within the flexibility band
          or approved rate outside the flexibility band. (Emphasis added.)

Id We construe the use of the phrase “individual risk”to support the argument that
experience rating may be employed by insurers in formulating their own manuals
and in 6xing rates for premiums. Accordingly, we answer your second question in
the negative; nothing in House Bill 2 acts to preclude the board from utilizing
experience rating in determining the benchmark rates and flexibility bands or to
preclude insurers from utilixing experience rating in formulating their manuals.

                                   SUMMARX

               Section 2.02 of House Bill 2, which amends article 5.01 of
          the code by adding a subsection (f). applies both to Lloyd’s plans
          and to interinsurance exchanges. Nothing in House Bill 2 acts to
          preclude the State Board of Insurance from utilixing experience
          ratings in determining the benchmark rates and flexibility bands
          required by subchapter M of chapter 5 of the code or to pre-




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         elude insurers from utilizing experience rating in formulating
         their own manuals as permitted under subchapter M.




                                                    DAN      MORALES
                                                    Attorney General of Texas

WlLL PRYOR
Fit Assistant Attorney General

MARY KELLBR
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY (Ret.)
Special Assistant Attorney General

RENEAHIcKs
Special Assistant Attorney General

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Jii Moellinger
Assistant Attorney General




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