                              QEWce       of the Bttornep            @enera
                                            &date of Qexae
DAN MORALES
 ATTORNEY
       GENERAL
                                               January lo,1995

      Ms. Rebecca Lightsey                                Opinion No. DM-3 14
      Interim Commissioner of Insurance
      Texas Department of Insurance                      Re: Whether the Department of Insurance
      P.O. Box 149104                                    may, pursuant to Insurance Code article
      Austin, Texas 78714-9104                           3.50-6A license noninsurance entities that
                                                         offer via&al settlement agreements, and
                                                         related questions (RQ-663)

      Dear Ms. Lightsey:

               Your predecessor in office asked us four questions about Insurance Code (“code”)
      article 3.50-6A:

                 1. Does article 3.50-6A authorize the Department of Insurance (the
                 “department”) to license noninsurance entities that offer viatical
                 settlement agreements?

                 2. If the answer to the first question is afErmative, does article
                 3.50-6A authorize the department to charge a fee for such a license?

                 3. Does article 3.50-6A authorize the commissioner of insurance to
                 enforce, through the sanctions provided in code article 1.10,
                 subsection 7(a),’ rules the department would adopt under article
                 3.50-6A?

                 4. If the answer to the third question is negative, does article
                 3.50-6A authorize the department to report to the attorney general
                 violations of rules promulgated under article 3.50-6A and to request
                 that the attorney general file suit to enforce such rules?

             All four questions assume as a threshold matter that article 3.50-6A validly
     delegates authority to the department to regulate viatical settlements. For the following
     reasons, we are of the opinion that article 3.50-6A is invalid as an unconstitutional



              ‘Subsection7(a) authorizesthe commissionerof insuranceto ordersanctionsagainst “the hold-
     or possessor0F a “permit,license. ceticate of authority,certificateof registration,or otherauthotition
     issd or existing under [the Commissioner’s]authorityor the authorizationof th[e Iusmauw] code.”




                                                   p.   1668
Ms. Rebecca Lightsey - Page 2             (DM-314)




delegation of regulatory authority and therefore that the department has no authority
under this statute to regulate via&l settlements.

       The concept of a via&al2 settlement agreement

          is simple but controversial: An investor buys the life insurance policy
          of someone with AIDS for less than the face value, becomes the
          lxeiiciary and makes money when the person dies.

              In return, the AIDS suffbrer receives a large amount of cash-
          usually 50 to 80 percent of the policy depend@ on his or her life
          epxtang-to      pay off debts or just enjoy.

Housewright, .wqru note 2. “The viatical industry got started in 1989 because of AIDS,
although people with terminal illness such as cancer are also selling their policies.”
LeighHopper, AIDS Sufferers Swq In.wance for Ready Cash, HOUSTON POST,
Apr. 1, 1994, at Al, A15; c$ Miller, .w~prunote 2 (“The first viaticai company appeared in
19W). Cancer patients make up only ten percent of those now selling their policies but
are expected to become a majority in the near future. Quint, supru note 2, at Cl, C2.
Some viatical companies buy and hold policies, and others “are brokers that Snd buyers
and receive a fee for their service.” Housewright. zqoru note 2.

       Article 3.50-644 which was added to the code in the last legislative session, see
Acts 1993,73d Leg., ch. 918, provides as follows:

                                         Definitions

                 Sec. 1. In this article, ‘%atical settlement” means a contract,
           entered into by an insured with a terminal illness who owns a life
           insurance policy insuring the life of the insured, under which the
           insured assigns or transfers the insurance policy to another person or
           entity for valuable consideration.

                                   Regulation by Board
                Sec. 2. The board has exclusive jurisdiction in this state to
           regulate viatical settlements, regardless of form, other than
           transactions governed by The Securities Act (Article 581-1 et seq.,
           Vernon’s Texas Civil Statutes).


        zkWica/ dcrhea from UICLatin wordviaticum, which mfermdto “the meaey and sqqrites &en
to Rolnallo5eids bcfom risky journeys to far-nm.g legions of th unpin.” Micbacl Quint, Pre-Deuth
C&h: A Busim~ Grmvs,N.Y. TIMES,Nov. 14, 1994, at Cl. Vitical setUcmentsscmuium SE called
‘living bedi&,”   Ed Houscwri%t, Investors’ Purchase of AIDS Patients’ Insvroncc Policies Rakes
Ethical Qavtions, DALLASMxumm NEWS,Feb. 7.1994, at Al, or “deathfWu.m,*MarkMiller, Taking
on “‘Ded~Futws, ” NEWSWEEK.
                        Mar.2 1.1994, at 54.



                                           p.   1669
Ms. RebeccaLightsey     - Page 3          (DM-314)




The department is the %oard” to which article 3.50-6A refers.            See Ins. Code art.
l.OlA(c).

        It is settled law in this state that “some criteria or safeguards” are necessary to the
valid delegation of legislative power to administrative agexies. Texas Antiquities Comm.
v. Daub Gnot~ Communi~ College Dist., 554 S.W.2d 924, 927 (Tex. 1977) (plurality
opinion). The “criteria or safeguards” do not have to be found in the statutory delegation,
however: the separation of powers required by section 1 of article II of the Texas
Constitutions does not forbid that an administrative agency itself make rules estabMing
standards to guide its exercise of power in e&&ration of the legislative purpose, provided
that the rules are made pursuant to power delegated by the legislature and in accordance
with procedures that protect the rights of persons affected by the exercise of regulatory
discretion. See T-p v. Shell Oil Co., 198 S.W.2d 424, 438-39 (Tex. 1946) (on motion
for rehearing), see also Texus Antiquities &mm., 554 S.W.2d at 928 @hnality opinion)
(“We have, ln this case, no standard or criteria either by statute or rule which affords
safeguards for the at&cted parties”). Thus, to constitute a valid delegation of legislative
power, an organic statute that lacks meanin@ standards must at least have a discernible
general regulatory purpose.             See Trqp,      198 S.W.2d at 438; see also 1
KENNETHC. DAVIS, AD~~NISTIMIVELAW TREATISEp 3:15, at 209 (2d ed. 1978) (“a
delegation without stun&r& of power to make rules in accordance with proper rule-
making procedure and a delegation without stat&r& of power to work out policy
through case-to-case adjudication based on trial-type hearings should normally be
sustained, whenew?rthe general legidative puqxxe is hcemible”) (last emphasis added).
The legislature must set the public policy of the state, and the agency must exercise its
delegated r&making power within the limits of the primary standards prescribed by the
legislature or implicit in the public policy. See Brown v. Humble Oil & Refining Co., 83
S.W.2d 935. 940-41 (Tex. 1935). Analyzing under these principles, we find that article
3.50-6A has neither standards nor a discernible regulatory purpose.

         Article 3.50-6A does not express any standards or guidelines for regulation, nor
can we tier from readii the article in pari muteria with the rest of the code any
legislative intent as to such standards or guidelines. C’ Car&m v. Lrmdon, 342 U.S. 524,
544 (1952) (holding that Lntemal Security Act of 1950 was not unconstitutional
delegation of r&making authority because other statutes provided standards for
determming what aliens were subject to deportation and thus limited attorney general’s




                                           p.   1670
Ms. Rebecca Lightsey - Page 4              (DM-314)




authority under Internal Security Act of 1950 to detain such aliens without bail pending
deportation proceeding).     For instance, we cBMot read code article 1.lOA, which
authorizes the commissioner of insurance to issue a cease and desist order in certain
circumstances against a person “engaging in the business of insurance,” as being applicable
to a viatical company unless that company in fact engages in some act in Texas that
con&utesthebusinessof~                asde6nedincodeartick.1.14-1.4       Thesameistrue
of code article 21.21, which prohibits certain “u&r methods of competition or unfair or
deceptive acts or practices [m the business of insurance].”




               2.Thcmakingofol        ~mmalrc,~guarpntoro~~,aoY
          contmztdguamntyorsurdysbipasavocationandaotmerelyincidentaltoany
          otlmlegitimatcbusiwmnr~tydtbcgwmatnrnrmrcty.
               3.TlEtakiagorraxivhgofanyapplicatiorlforiaarrana.
               4. The mwiviug or cdlaXion of any pmndum, commission,membership
          fccs,asscsrmcnts,duesorotkrmnsidcrationforanyinwam        M pny part
          tkreof.
               5.Thcimuwceordeuverynfwnuaclsofhuanawe                 tolwidemaofthia
           dateMlopcmma-to&buaiwasintldastate.




               7.coouaaingteprwidcindc~Mcapenscrcimburacmnththis
           ~topersonsdomiciltdinthisstattorforridrslocatcdinthisgatc....
                8.l%edoiq~ofaaykindofircam~x            bmiincm~~aa
           mnstitutiagthedoingefaninsurancc busincsswithiaIhemcaningoftllestahnes
           mlatingloia&umwc.
                9. T&e doiag or pmposipsfoQany           iwurawebusinessin~
           ~knaay           of the foregomgm a mawcrdmi~tocvadethcpmvisioas

                10. AnyotkrbanmaionsofbusinCmillthisstatebyanirlaucr.
Ins. Cc& art. 1.14-l. 5 2(a). You do not Cite,nor baw wc fou@ any pmvision in the oxk pmdating
article3.50-6A tbat wudd anthoriz the liccnsurrof Compani~to Cngagein ViatiCalservim.



                                            p.   1671
Ms. RebeccaLightsey       - Page 5           (DM-314)




         Furthermore, there is no well-established case law, administrative practice, or
background of custom that the legislature could have intended the department to rely on
as standards of practice or policy guidelines for the inthnt viatical industry. We have
found in our research no reported case dealing with viatical settlements.’ The department
has no existing regulatory scheme with crystallii           standards of practice that the
legislature could have intended to extend to viatical settlements. C’ Kent v. Lhdles, 357
U.S. 116, 127-28 (1958) (administrative practice prior to enactment of standardless
statute granting secretary of state discretion to grant passports had crystallized into two
grounds for passport denial, citizenship [or allegiance] and unlawful conduct, which were
“the only ones which it could fairly be argued were adopted by Congress in light of prior
administrative practice”).

         Compare the legislative delegation of regulatory power in Fahey v. Mallonee, 332
U.S. 245 (1947), where a statute authorized the Federal Home Loan Bank Board to
regulate “the reorganization, consolidation, merger, or liquidation of [building and loan]
associations,” with “the power to appoint a conservator or receiver to take charge of the
affairs of any such association.” Id. at 249. The Court there held that the statute was a
constitutionally valid delegation of legislative fimctions, despite its lack of standards,
because banking was a long-regulated industry with “well-defined practices” for
appointment of conservators and receivers and the courts had “many precedents” in the
field of corporate management that had “crystallized into well-known and generally
acceptable standards.” Id. at 250. Article 3.50-6A, unliie the statute in Fuky, cannot be
construed as conforming to wnstitutionally permissible “‘well-known and generally
acceptable standards” that would limit the department’s rulemaking discretion.” Id.

        Article 3.50-6A lacks even a discernible legislative purpose for the delegation of
regulatory power. One author opines in the following words that exactitude should not be
a requirement for the expression of regulatory purpose:

           When the legislative draftsmen decide upon the terms of the
           delegation, it is for them to decide whether the legislature shall set
           the policy in definitive terms, or whether on the other hand the
           legislative enactment shall express its general purpose only in terms
           of a pious wish, delegating to an administrative agency the
           responsibility of actually determining the working policies by which
           the generally-phrased legislative desire should be attained.
                                LAW 71 (1965). We need not consider here
FRANKE. COOPER,STATEADMTNISTRA~VE
how precise an expression of regulatory purpose must be to pass muster under the Texas
        %nly a handful of states have laws regulatingthe industry. Ernest Sander, Grim     Reapers,
Aufam AMEIUCAN-STATESMAN.       May 1,1994, at Jl, 16 (listing California,lndiana, Kansas,New Mexico,
and New York). Early last year the National Associationof lnsunce Commissionersadopted model
legislationfor stateregulationof viaticalsettlements.See id. Viatical8ettlementsModelAct (Nat’1Ass’n
of Ins. c4Xnm’rs1994).



                                            p.   1672
Ms.RebewaLightsey        - Page 6         (DM-314)




Constitution, for article 3.50-6A lacks the expression of even a “pious wish” or “ge.neraIly-
phrased legislative desire.” Compare the legislative purpose in the statutory delegation
upheld in the Trupp case: “for the wnwrvation of crude petroleum oil and natural gas and
to prevent the waste thereof” V.T.C.S. art. 6029. repealed by Acts 1977,65th Leg., ch.
871, art. I, 5 2(a)(2); see Trqp, 198 S.WSd at 438. There is no discernible implication of
legislative purpose from the statute’s expression of “via&al settlements” as the subject
matter to be regulated.

        Fiiy,     we do not find in the legislative history of article 3.50-6A any statement of
the legislature’s objective for regulation by the department. Furthermore, the House
Committee on Insurance’s analysis for the Seventy-third Legislature’s House Bii 431,
which added article 3.50&A to the code, see Acts 1993, 73d Leg., ch. 918, provides,
surprisingly, ,-It is the opinion of this committee that this bill does not confer rulemaking
authority to a state officer, agency, department or institution.” House Comm. on
Inswanw, Bii halysis, H.B. 43 1.73d Leg. (1993). In the House Research organization
analysis of the House Bii 431 unnamed “other opponents” of the bill are cited for the
following arguments:

                unless regulated wrrectly, unscrupulous viatical settlement
           operators could prey upon physically or mentally vulnerable and
           financially desperate individuals. HB 431 should contain specific
           direction to TDI to ensure the protection of wnsumers, such as
           regulations that would require wnsumers to seek legal counsel,
           operators to offer tax advice and to discuss via&al settlement
           options and the establishment of a waiting period for the insured to
           reconsider a sale.

               Acceptable fee schedules for viatical settlement brokers and
           agents should also be implemented to ensure against high profits
           made at the expense of the terminahy ill. Currently, a wide range of
           fees and expenses are charged for the arrangement of viatical
           WttlWlUltS.

House Research won,               Bii Analysis, H.B. 431,73d Leg., at 3 (1993). Any or all
of the objectives that the “other opponents” allude to above-prohibiting tmscntpulou~
practices; preventing the exploitation of weak, desperate, or incompetent insumds;
rewiring that the decision to sell one’s life insmwce policy be an informed one;
wntrolling investors’ profits-may have been intended by the legislators to be incorporated
within the article 3.50&t’s textually empty delegation of authority “to regulate viatical
settlements.” Any of these objectives would have served to give purport to the delegation
of regulatory power if there had been an expression in the legislative history of such
objectives as the sense of the lawmakers. Unfortunately, there is no such expression.
Rather, the purpose of House Bii 431 as stated in the House Committee on Insurance’s
bii analysis, “to clearly establish the jurisdiction of the State Board of Insurance over the
regulation of viatical settlements,” adds no substance to the needed regulatory objective.



                                           p.   1673
Ms. Rebecca Lightsey - Page 7             (DM-314)




         We believe the nondelegation doctrine requires that a valid delegation of
     . .
admuustratve regulatory power contain either in the. text or in the legislative history of the
organic statute a discemihle legislative regulatory objective. See Trupp, 198 S.W.2d at
438; 1 DAVIS, supru p. 3. A court may not assume the function of formulating an
objective upon which to limit the scope of regulatory power under article 3.50-6A. Such
judicial legislation to formulate regulatory policy would constitute an invasion of a
nondelegable responsibiity of representative government, see Stephen Koslow,
S-em           Adminishztive A+dication, 22 ADMIN.L. REV. 407,420 (l%l), as well as
 a function for which the court may not be institutionslly equipped:

           In a representative democracy, regulatory policy is likely to be the
           product of compromise among a multitude of conflicting interests
           and views which find a voice in the legislative process. Logic and
           legal analysis, touchstones of the judicial process, so &r as relevant
           at all in the work of legislative bodies, play a distinctly subordiite
           role. Courts cannot succeed in simulating that feature of the
           legislative process in the fashioning of regulatory goals unless they
           are willing openly to assume the role of legislators.

Id. at 420-21. Article 3.50-6A is a good example of a statute that purports to regulate a
matter (viatical settlements) involving contlicting interests (persons with terminal illnesses,
viatical companies, investors). Although this statute ought to voice some compromise
among the congicting interests in the form of a discernible objective, it in fact is mute.

         Because there are no standards and no discerniile legislative purpose in the
delegation of regulatory authority in article 3.50-64 we must conclude that the statute
violates the separation of powers principle of the Texas Constitution. See Tex. Const. art.
II, 8 1; cfl Attorney General Opiion JM-1134 (1990) at 4 (statute grant@ Texas Racing
Commission authority to regulate non-pari-mutuel racetracks was unconstitutional
delegation of legislative power). Article 3.50-6A therefore is null and void.




                                           p. 1674
Ms. RebeccaLightsey    - Page 8          (DM-314)




                                   SUMMARY

               Article 3.50-6A of the Insurance Code is null and void because it
          violates the Beparation of powers required by section 1 of article II of
          the Texas Constitution in that it provides neither standards nor a
          discernible objective in its delegation of regulatory authority to the
          DepameM of Insurance.




                                                     DAN MORALES
                                                     Attorney General of Texas

JORGE VEGA
First Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by James B. Pinson
Assistant Attorney General




                                         p. 1675
