_ _-
                                                                       R-419



                       JE         ORNEY'GENERAL
                                OIF 71'EXAS

PRICE   DANIEL
ATTORNEY GENERAL

                                        June 30, 1947

          Honorable George B. Butler, Chairman,
          Board of Insurance Commissioners,
          Austin, Texas                     Opinion No. V-279
                                                    Re;     Whether specimen
                                                            aoplos OT elioy
                                                            forms of 1lefe and
                                                            health and aoci-
                                                            dent  Srsuramoe are
                                                            aonslstent  with
                                                            and n&t prohibited
                                                            by Seotioa 31 ef



                         Psur request     ipar an spinian    ie as r0ihs8
                           "Southern Medical Hospital &e~%i,oe is
                   licensed    undsr the xo~i$i03m of Chapter 8a
                   Title, 78 as qmlendefi and Article   5063*3, te'
                   5 inclusiv.,    ef Ve&n's  Tpxaa Civil Stat-
                   utt)so
                           @Will y)u )lsaas advise me whs$her the
                   attached feWa of pbl$&y prQpa&%d by &uth*
                   emI MediQal E#apb?Al samios     i,a aend#tont
                   wi;h2::   net proh;Gbited by Soot&o* 11 OP Chap*

                      Southern Msdioal Hos@.*al SaxMe* is a state-
         wide mutual assessmsnt corn any irauing lhfs,  health and
         accident policies,   &word Eng to the shartor (bf the oom-
   i,    pany,, as amended in lW3,W the purpose is stated as fol-
         low:
                          *The purporb Bf the corporation     is and
                   shall be the craa%iem, eperation and main&
                   tenance of a nut-1    Wiurancr association,
                   on what is knewn aa the statswide assessment
                   plan, for the p'roteotion,  indemnification,
                   and insurance of the lives of its members and
                   against loss to thsr by rsaaan ef ill health
                   and/or aacidentd"
:


                                         The 43rd ,Legfslature     in 1933 passed House
                                ‘. ~3Q3, Chapter 245, page 856, which regulates
                              -:-a$sessieent’“ar,sso,ciatibns engaged in issuing pol-
                                         t$ficates    of Life insurance,       This bill has
             ,.,                          +w &ftik$Za &3SSf, V, C. 3. The 46th Leg-
                                        ,i.(D@Qp&Wed Gnate Bill No, 135 e Chapter 6,
                                    ~Mi&& %,$.raQrn    i+&d 4s &rtiole 5068,-l, V,C,S.
                                   .’rjrt %~hi@-~~+$t&&@raoed ‘,al:l mutual assessment
                                   ‘,@xd ~sfsmoiatierm issuing oertifioates             br life
                                  trrbalth and accident         certificates,       Section
                  Q ~~:A&+%$cLe&W-:1, contains the Poll.owing provisions:
                        ,:,,
                                        “All certificate     forms hereafter
                             ,+wod ptst be ,i,d ao,o’ord with the provis-
                        ,, Jhaq nf this ‘Act and with all other Laws
                     : ; a’%#&&m4&ig8uch assoo&atiemB as are am-
    ,.
                      ., ,.lcra&#a ia th$s AOil.”
                     ,. “I
                 .Ji&#&4~ 5O@+l do,eg not repeal any laws relating                       to mu-
                              $&a@e,s,        eqoept those in oonfl.ict       svith it,    Ob-
                              g$i’,$he ~Arti,cle is an effort       by the Legi~sJature to
                              $ ~Wd harmC@.se the laws governing mutual assess-
                              osagetiies.      The above quoted provision         of Article
                               &9~MIt6 Secti,on 15 of Artic~le 4859f to cover not
                  eniy ii,fe policies             but health and accident as well,
                            The pertinent           part of Section         11, Article
         :



               4!M%W, provides:
                              “No corporation    hereunder shall is-
                       sue any certifica,te   or policy upon a lim-
                       $ted payment plan, nor kuarantee or prem-
                       $*e t,o par any type of eh4oment     or anfin-
                       $6~ benefits,    but shall confine its oper-
                       Btdon to the issuance of certificates
                       P+k&ng to oontinuous payment premiums or
                                       rine: the life time of the
                                         And provided further that
                                      @&io@ shall i5su% any certi-
                                       6i$C 4grbWng to Fag any ben-
                       WLtis uptil a copy of such cert#icate       or
                       po~licy has been filed with the Board of
                       Insurance Con&.slsionera and approved by
                       them a\$ being in cempliance with this Act.”
                              One of the policy for:cs submitted is entitled
              Yiospital,i~~ation,   biedical Care and Surgery riith 20 Year
              Pay Partloipating;    Rfvserve ,” which shall hereafter  be re-
              ferred to as health policy.        The other is entitled  “Fam-
haorablr    George B. ~Butler - Page 3        V-279




               The health policy oalls for an adg;vazrre-
miwn payment by the rirst insured or
and a like amount on the                 day or           thereafter
for  a period     of 20 conseciiZFZ      years fmte         of issue”
The Service agrees to create and maintain an,amount not
to exceed                  dollars    as a 20 year participating
reserve.     The certificate       contains provisions     concern-
      the manner of esteblishiq          the Value Of the reserve
3     further provides under “Cafiditions ant! Privileges”
for extended insurance s a schedule of 20 year pay par-
ticipating     reserve,and      the mnner in which the assured
play with&raw the amount of the participating             reserve,
The funds of this reserve may be withdrawn in a lump
sum at any time while the policy           is in force,    or extend-
ed aa retirement inao~ for a period of 120 months,                  The
bwb withdrawn is Lees indebtedness,            which’ according to
the polioy shall inalude any obligation            of the insured
on the palicy or reserve;          all benefits   pai& during the
term of the poliOy; all premium paylaents made by the Ser-
vice on. behalf bf the assured for extended insurance;               and
all unpaid due prc@ums.            Another feature contained in
this policy is that after the expiration            of 20 years, if
continuaus premiums have been paid. by the insured, the
policy may remain In force with a further premQum payment
of $A,00 per year,         If the assured withdraws ,the cash in
the participating        reserve fund, it shall be in lieu of
all other benefits        and all liability     of the Service shall
cease,     This policy further provides that no extra as-
sessments will be made upon the assured, and that the pol-
icyholder’s     liability     is to the extent of the premium
rates shown on the race of the policy,
               The life polioy form oalls first     for the pay-
ment of an advanoed premium and a like amount on or be:
fore          day of each month thereafter   for           full
yearsTii?Ta rurtber     psymnt   or $l,OO a year  ‘EEiGfter
so long as the poliog is in Poroe,       The policyholders    s
l$.rb;l&it  !t%r.pr8riums is the same as that contained in
the heel t b pol$~~     TJds policy carries proM.sions re-
lating ta settlelrieuegt; cgsh withdrawal value; loan value;’
cash value or the reseYve, and extended insurance.          con-
aernj.ng cash withdrawal value, the company agrees to pay
in cash not later than 60 days after legal surrender of
the policy,    the matured reserve shown under “Schedule of
Cash Value df the Reserve A less indebtedness       (not ae-
rind    by thie polioy).     This payment is made subjeot to
Honorable   George B. Butler   - Page 4    V-279


a deductiOn   of death bemflts   paid LIB&N the policy,
The Service further agrees to advance to the Last sur
vlvlng Insured, if he so deslree~, a loa,? of all or any
part of the sum shown by~the Jckeaul'e ,o,f Cash Value of
t4n Reserve, aubjeot to awh~tiom        of all ina8bfea-
SoISr Th& Urn shall bear intsrest         at the rat& of 6%
per swam payable    in odnp8qqo?, Failure    to repay such a
lo911 will  mot void the policy  until ,the indebtedness
shall equal of exceed Its loan value,        Under dh3nd0a
Insurance, the 3ervice agrees to pay any premiums
which the inmurea does not pay, such.~payments to be
made .out of the cash value of the reserve;      anrl.wi~ll be
made for the insured ,until the funds in the cash:vaiur
of the reserve are exhausta,$g,
               In the case of 3ankerO.s Life and Loan Asps
soclation   vs. Chase (Court of Civil Appeals),   114 S-W‘
  (2a) 374, writ aim,, we have found the only construo,~
 tlon of Section 11, Article   4859f, made by any of .the
 Courts In Tezas.    The Court said, after quoting the
.:ffSst part of Section 112,
               lithe limitation  contained lSn this
       section,    we think, is a limitation    on the
       time and method of payment rather than on
       the amount the insurer must pay under the
       policy;    a restriction  confining   it to the
       Issuance of certiflcortes     of ordinary in-
       surance."
The Court then defines limited payment plan,       endowmcnr
insurance and annuity insurance as follows:
                "37 c. J,, page 362, par: 6i is as
       follows:     sEndowment insurance is a con
       tract to pay a certain sum to insured      if
       he lives a certain length of time, or, if
       heCdis.e, before th$t*t$ie.    to some other
       person ihaicatea.
              "*Annuity insurance is a contract
       tc pay the. Insured or the beneficiary   a
       sum for a certain period or during llfeGf
       Couch, Cyclopea,la of Insurance Law, Vol.,
       1, page 38, par, 25,
             "A policy upon a limited payment
       plan, as we understand, is a paid-up pox-
       lays and insurance upon which no further
       Homrable   George B. Butler - Page 5     v-279



t .i         premium is to be paid.    37 C, J.,   page
             364, par. 11."
                      Under the Court's definition    of endowment
       insurance,   we conclude that neither of the policies
       &tempts to *promise or guarantee the paylaent of en-
       dowment benefits.*     The definition   makes It plain that
       the amount to be paid shall be certain and th&t the
       ooatraat rest be for a certain Length of time,        Nal-
       tker of these pelioi4s contracts ta pay a oertain sum;
       rather, the sum is lndefidte       and uncertain,   Thb
       health policy establishes    the value of the reserve by
       setting aside a sup not to exoead 5% of the earned in-
       oome during the preoo$ing year. The income of the
       oomoy    will,   by the very nature of the business, vary
       fTen year to year. In some years there may net be any
       rarmii 11104~e, In which bvent, it Is stated in the
         eliof  that the deficit  shall be prorated to each pol-
       5 cy holder's  sche@de of the value of the reserve as
       hls Interest appears,     And If the oompany~ls unable to
       establish   the value within 5 years after a deficit     oc-
       curs or within the 20 years, the Service shall be re-
       lieved of the liability     to make adjustments,   This man-
       ifestly   renders the sum to be paid the Insured from
       the participating    reserve fund indefinite   and uncer-
       tain and cannot be said to constitute      endowment lnsur-
       ame m
                    The same reasoning answers an objsotion
       that the life policy   is a type of annuity insurance.
       But the health poIlcy, wherein it provides for the pay-
       remt of whatever sum has accumulated in the reserve
       fund as a retirement Income for a period of 120 months,
       :zvz type of annuity Insurance under the definition      a-
               We hold that this policy violates   the prov$,sions
       of &lotion 11 prohibiting   the issuanoe~of pollcfes   with
       a premise to pay mny tJba of aMuity insurance.
                   Aside from the questions raised by the pro-
       visions of the policy   relating   to endowment and annuity
       insuranoe, the provision    of Section II of the statute
       which more strongly indicates    the intention  of the Leg-
       islature In the regulation of mutual companies Is:
                    " * 0 D but shall confine Its op-
             eration to the issuance of certificates
             104Me     to continuous payment premiums
             or assessments during the lifetime    of the
             pollcyh41der.n
                                              “.
.‘;,~   .,                                         ..~
                                   ”




                  Hwiomble         Oecrg$eBr Butler        - Page B         t-219


                  he the Court seid            In thd: Chars ottse l supra:




                 Aocording         to   the. defl@ijA.oa   of   "ordinary      Onsuraacen
                  f0una      in   44 c. J. s,,,page 487, s0ean                b, par, 27,
                  it   is:
                                  %kslr bs l*sum@ca is on 1 Lev-
                           el, or i&i-at m3;15 plan, that is, where
                           for a fixed p.t?eaium payable, without
                           ~oon8lt,isfi, at stated loterva1s,   a sum
                           cer$+l8 is to Se paidl m Bteatk.without
                           oe@dklbXss, it is lmmn va~V.au$ly .as
                           'general insurance', *brdipary insurance @)
                           *olbLLne im8usancev, or qleVeL-predum
                           insunace ' , e?ea though insurer fs doing
                           busfgess on the asses&eat      plan, and pay-
                           me&& to be We by iuwred         em dasig-
                           Bltod au tm3ee.sm~u.”
                              MeaauE'ed by this sta$Cm-d, these policies
                not only contraot to pay death and health benef~ta,
                but also aontract to pay the assured the amount acc~-
                ulated ik the special~reserve        fund, even though the
                assured has dot sustained a loss under the policy,
                These prooislons    settfnE up the partScipatinC        reserve
                'fund on the basis of a 20 year pay‘prograiv,         cash with-
                drawal value, loan value and extended Insurano~, are
                in additioh to a cQntra0t of ordj.&q           insyranee~.    In
                other worda, by the creation        of this speoYa.& reserve
                fund, in addition ix co~Wia~ the assured for either
                life or health, the policies        have not remained wi'thfn
                th boupds of the lititatFQh$         prescribed    by the &e&s-
                lature . Neitker can suck previsions          bs W.?onciled
                with tke puraWe sf the company as is stated in tke
                ohart,*@ q&d     bbeter     Tha life ~p~oU#yitself      is ek-
                titgod e           year pay lifen,     and the Ualth pslfof
                0aMes    i#X?#T%a twiskty year pay patiticfpatihir: re-
                serve on (I gremium Plan exactly as the life plpey,
                It is true that ordinary polioies         of life ihaugance
                he,&pp schedules of reserve values relatix            to cash
                Surrender valuee, and some of then may possibly            pro-
                vide for similar features carried by the Wealth and
             S’ k&W poMc%es,      T!itere is a fundameatal clffleredca;
                hmmftm, between.an ordinary policy of life insurance
                and these policies    in the mamer of establishing          the :
                 ,'~   :
               Homerable George B. Jhat1.r -       FaSe 7     v-210



               retiomo . An srdimry     life pclioy establidwn         fib8 FQI-
               EO~Y~up08 the barni8 of the aohrral premium paid by the
               lr su r e4There
                           , poliairr        establirh    the ratverve by sat-
               ting arida eaoh year a o er taamount    in of the 'earmd ln-
               ooaa Sr o aall af the policiar       conta5aing suoh provis-
               la8gr   Tho value ti;LbLaorbatrd my, 4eprnding up68 the
               aaount OS ramad law&e, far bxa604, @r ba mch 1~08
               tha8, a nra4r     nlua est#bliahrd upon ths babir or an
               indf*idnal~ I roalum. The polie~hhclders are’ .&Gwin(c
               in the pro&se a P derived Irma NOmr polioles         aa8 in this
               way taka ea ssme of the eharaateristica         df tantine in-
               auraace, which is not nepessary to discuss here.             In
               any event, thsse foras are differehtfror           ordinary in-
               s~tansa and additional    evidr~~ea that the'company has
               erse$dad the limitation      declared by the Legislatum         in
               Seotien 11 of Article    4@591, and by tha Court in the
               chase ease, aupra.
                             It is ebvious       that befars this eompaay
               oould be iiaa~alally     able     to artablish    ruoh a ms~rvr
               fund as eohteaplatad by these poliolea,            it would, ar
               nemssity,     be forced to,oharge a premium in excess of
               a grbsllrll on an ordipery pelioy,          This must have bden
               carefully    oonsidared by the oompany when provision           was     ;
               aade to charge the assuredonly            $1.00 per year after he       i'
               bad paid regular pre53iums for twenty years and atill
 .             aarry the palicy ia f'orcpe. The solvenoy of the ooapany                 :,
1,             eeuld not aurvivr otherwise.           This is doing nothihg Bore
               tbaai~suhg       a pclioy    on what is kmwn aa a twenty year
:_-.           plan,     For all praetieal      purposes the assured has corn-
               plated the payment of what can be tsrned regular prom-
               iusle at the end of twenty years, and his obligation              to
               pay $l.,OO per year after        auah tiae does hot meet any
               standard af pretaium charge based upon losses.              Certain-
               ly this is true if the preonium paid for twenty years be
               considered an adequate premiwn to meet losses Rna em-=
               pawma during such period.            It amounts to nothing more
               than a token.payment $-+.a flacoid          attempt to meet the
               statutory raquiremnt         of noolatinuous colleotion      0r pram-
               irpats or assessments during the lifetim           of the pelioy-
               holder. n Were it hot for this requirement in the stat-
               ute, there would be ao need whatever under this plan of
               imurame      to,eall    for~furthar    sellaction    of $laQO prem-
               ium at the lxpi.ratlon of tba ~gaxtiaipatily           pariod.    The
               p~lieias,    then, are aotually        paid up" polioiss     at thr
               end of the partioipating         period; and, come within the
               definition    of "limited     payaent plan** adopted in the Chase
               oafm, supra.      They are in violation        of the express pro-
               hibiticn    a&againstirruing any cartl?ioate         or policy on a
       .. .,
                   Honorable   George B. Sutler     - Fage 8     V-279


                   “lid   ted payment plan” O
                                Where no express authority is to be found
                   im either the charter 0% the statutes-permitting    a
                   mutual assessment company to issue policies    of this
                   nature, the rule is that such policies   are ultra vires.
                   This rule is well expressed on page 635, par. 256,
                   Ceueb, cyclopedia  of Ihsurance Law:
                                   “The measure of the powers of mu-
                          tual companies or benefit        societies     to
.’                        contract whether they be voluntary or-
                          ganizatio4s     or incorporations     is foulla
                          in their charters or artioles         of asso-
                          ciation,    sinae these constitute       their
:     :                   fundamental and organic laww, the compact
    L.’   ,,                ~vering     their acts, subject tb the
                          8 oastitution     and law5 of the State. This,
                          or oourse, mesas that rmch companies and
                          societies     have only such powers as are
                          tierein    speCifically    enumerated, togeth-
                          or with such others as are incidental,
                          or n%oeasary, to oarry the express pow-
                          cays into effect,      and necessary to the
                          enjoyment of the rights and privileges
                          i~o~uded in the original       authorization.
                          And, of cou@e,       acts which do not fall
                          within &oh express or implied powers
                          are ultra vires and. void; and where an
               I          act is ultra vires,       the motive which
                          prc+mpWd it is not of great importance.”
                                We have found no cases either in or out of
                   Texas construing similar policy forms under statutory
                   prohibitions   such as we have here, However, in Vol, 128,
                   A. L. R., page 639, we find this general rule:

                                  *Provisions   for extended or baid-
                          up  insurahce or for loan or surrenzer
                          values or endowment provisions      doubt-
                          -cannot        be included in life policies
                          issued by coapanies operating strictly
                          ad exclusively      on the assessment plan,
                          beoause in such case. the asseasinents
                          i&g     kl.ted    to the ‘amount necessary to
                          pay death claims, no reserve fund can be
                          accumulated with which to fulfill       such
                          provisions.      Companies doing business
                          under this atriotlg      assessment plan
.




    Honorable   Deargo B. Butler   - Page 9    v-279


           possesa no power to require the pay-
           ment of fixed assesbments or’ premiums
           at stated periods,    regardless   of the
           current mortuary clalme against the
           obapany, and it is the lack of this
           power on the part of a life insurance
           company that precludes it from put-
           ting such provision    in its policies,
           There are, however, many assessment         ’
           plans of doing life insurance busi-
           Iiess, under some of which companies,
           dependent upon the statutes under
           which they are organized,     possess the
           power to fix a premium ‘that will cre-
           ate a reserve fund to pay for ex-
           tended or )ai,d-up in urnnce or?%Iow-
           m        and which wil+ si’ve to thaii-
           policies   a loan or su&nder     valw.n
           e&tuphsis ours. )
               Our statute contains no language, either exL-
grossly or implisdly,     giving such companies a right to
issue policies    with provisions   for loan or cash with-
drawal values or a participating       reserve fund.   The very
nature of the plan upon which this company operates is
founded upon the levying af’ assessments       limiter to the
amount required to pay losses and operating expenses,
Section 1,l of Article    5068-l apparent~ly recognized   this
vdry prinolple    when it provides:
                   “Each association    shall levy reg-
           ular and periodical     assessments by what-
           ever name they may be called,       These as-
           sessments must be in such amounts and at
           such proper intervals     as will meet the
           reasonable operating expenses of the as-
           sociation,   and pay in full the claims a-
           rising under its certificates.      0 c en
              We believe after a ~thorou@ examination of
both polioies  in the light of Section 11 of Article
4859f, Article   5068-1, and the charter purposes of this
company that both the life and health policies    are ultra
virsr ana prohibited    by Section 11, Article 4859f,

                  I
                                                           _.
                                                                 .- . .




Irnhhlt,    G~~a;~ I). Butler    - Pago 10     V-279




                 Where the certificates      or policies    of
         ,a,mutua,l insurance company operating en the
  2 #<';:~tual~assessment      plan fmr the protectisn,
 ""     'indemnification,    and insurance of the lives
          of its members and against loss to thea by
          r&,&an of i&l health and/or accident,          oon-
       "ta%:n,prbvisions    for the creation of a parti-
          cip@iapg xemerpe fund km the bW.e of a
     ,' twunty year period,       together with cash with-
          drawal value, loan value, and erten&ed in-
          surance features,    such policies    are inoon-
          sistdnt with and prohibited      by the provisions
                           Article   46591 and Article

                                      Yours very    truly
                                 ATTORRRY
                                        GENERALOF !I'RXAS




                                 ATI'ORRRYGEWRRAL



              ..:
