Honorable William Hunter McLean      Opinion No. C-159
Chairman, State Board of Insurance
1100 San Jaclnto                     Re: Construction of House
Austin 14, Texas                         Bill 938, Acts 58th
                                         Leg. R.S. 196 , ch.
                                         405, P. 981; ?amending
                                         Article 3.53 of the
Dear Sir:                                Texas Insurance Code)
      By letter of August 15, 1963, the State Board of Insur-
ance requested that this office answer several questions con-
cerning the proper construction of the subject act commonly
known as ?Che Model Act for the Regulation of Credit Life
Insurance and Credit Health and Accident Insurance."
      Your Initial question inquires whether or not the
"monthly outstanding balance" method of premium ayments by
creditors or lenders Is in violation of Section ts
                                                 -D of Article
3.53, as amended by House Bill 938, if the creditor or lender
has previously charged the debtor the entire single premium
or identifiable insurance charge in advance for the full term
and amount of the Indebtedness.
      There are two principal methods by which the premium or
charge collected from the debtor is remitted to the insurance
company, and your opinion request describes them essentially
as follows:
      (1) The single premium or advance premium method under
which the creditor, after collecting from the debtor an amount
sufficient to cover the insurance for the full amount and term
of the debt (or adding such amount to the indebtedness of the
debtor) promptly remits such full single premium to the lnsur-
ante company to Insure the debtor for the amount of the debt
for the entire term of up to five years.
      (2) The "monthly outstanding balance' method under
which the creditor does not remit the full single premium to
the Insurance company but instead remits to the insurance
company a monthly premium in payment of coverage for the
total monthly outstanding unpaid balances on all indebted-
ne,ssesof the creditor, as per the group master policy be-
tween the creditor and the insurance company.

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 Hon. William Hunter McLean, page 2 (C-159 )



       Section 8-D of Article 3.53 reads as follows:
           "D. The amount charged to a debtor by the
       creditor for any credit life or credit accident
       and health insurance issued to the debtor shall
       not exceed the actual premium charged the
       creditor by the insurer for such insurance, as
       computed at th$ time the charge to the debtor
       is determined.
        ,We are of the opinion that the "monthly outstanding
"balance" method of premium payment is not In violation of
  Section 8-D of Article 3.53 of the Insurance Code of Texas.
       A reading of Section 8-D indicates clearly that it is
 concerned with and seeks to regulate only the amount charged
 to a debtor by the creditor for credit life or credit accident
 and health insurance. It is not concerned with the method of
 premium payments. The Legislature sought to insure that the
 debtor would not pay to the creditor an amount in excess of
 the actual premium charged the creditor by the insurer for
 such insurance. The maxImum limitation on the amount charged
 to a debtor by the creditor is the actual premium charged the
 creditor by the insurer, and such premium Is to be computed
 at the time the charge to the debtor is determined. Had the
 Legislature Intended to prohibit the monthly outstanding
 balance method of payment, it could easily have done so by
 requiring prompt remittance by creditors to the insurers of
 amounts charged debtors for insurance coverage.
       Our opinion is strengthened by the fact that House Bill
 938, as originally introduced, contained the following sentence
 as the last paragraph of Section 8-D.
           "If a creditor collects a single identifiable
       insurance charge in advance from the debtor or in-
       eludes said amount in the total amount of the in-
       debtedness upon which an interest or finance charge
       Is made to the debtor for the entire term of the
       indebtedness, said creditor shall promptly pay said
       amount as a single premium to the insurance company."
 The inclusion of this language in Section 8-D would effectively
 have abolished the monthly outstanding balance method of pay-
 ment in those instances where a creditor had collected the
 single advance premium from the borrower at the time the in-
 debtedness was incurred.   The fact that the Legislature
 originally considered such language and specifically omitted
 it from the Actis, In our opinion, equivalent to legislative

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Hon. William Hunter McLean, page 3 (C-159 )



authorization of the monthly outstanding balance method of
payments. Had this language remained in tha Act, it would
have permitted the utilization of only the advance premium"
method of payment. That more than one method of payment was
recognized by the Legislature is evidenced by the following
underscored language of Section 2-A(2) of the Act:
         "(2) All life Insurance and all accident and
     health insurance sold in connection with loans or
     other credit transactions of less than five (5)
     years duration, the premium for which is charged
     to or paid for in whole or in part either directly
     or Indirectly by the debtor, shall be subject to
     the provisions of this Act, regardless of the
     nature, tyoe or plan of the credit Insurance
     coverage or premium payment system except where
     the Issuance of such insurance is an isolated
     transaction on the part of the Insurer not re-
     lated to an agreament or plan for insuring debtors
     of the creditor.
      In view of the foregoing, we are of the opinion that the
monthly outstanding balance method described above does not
violate Section 8-D of Article 3.53 of the Texas Insurance
Code. The remaining questions are based upon the assumption
that the monthly outstanding balance method does not violate
Section 8-D and we now turn to them:
      Your second question inquires whether the insurance
company should calculate Its reserves upon the basis of the
monthly premium collected by it from the creditor or upon
the basis of the entire single charge to the debtor. In our
opinion, irrespective of the method of premium payment, the
insurer Is required to maintain appropriate reserves consistent
with the risk to which it Is exposed by its policies.
      Your third question inquires whether premium taxes are
owed to the State of Texas on the full single charge to the
debtor by the creditor or upon the monthly premiums collected
by the company from the creditor. In our opinion, premium
taxes are owed only on the premiums actually collected by the
insurance company whether it be a foreign company paying taxes
under Article 4769, or a domestic company paying taxes under
Article 7064a.  Both of these Articles require that the
companies report the gross amount of premiums "collected"
during the taxable year and require that the companies "shall
pay an annual tax computed on. . .the gross amount of premiums
collected during such year. . . .“


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Hon. William Hunter McLean, page 4 (C-159 )


     Your fourth question reads as follows:
          "(4) In the event of termination of the in-
      debtedness by refinancing or otherwise, is the
      insurance company responsible for refunding the
      unearned portion of the full single premium
      charged to the debtor or just the unearned portion
      of the monthly premium paid to the insurance
      company?"
We are of the opinion that the insurance company is responsible
for refunding the unearned portion of the monthly premium paid
by the creditor to it.
      Your fifth question is as follows:
          “(5)  In the event of the death of the debtor
      prior to repayment of the indebtedness, which re-
      sults In the payment by the insurance company to
      the creditor of the full amount of the lndebted-
      ness, including an amount equal to the full single
      premium charge to the debtor in advance, there Is
      an amount of money paid by the insurance company
      to the creditor which represents an unused
      premium for the insurance which was never paid to
      the insurance compatayand which under the monthly
      outstanding balance method was never due to the
      insurance company. Does this amount of money paid
      by the insurance company to the creditor belong to
      the estate of the deceased, the creditor or the
      insurance company?"
We are of the opinion that such amount of money belongs to the
estate of the deceased and that appropriate rules and regu-
lations may be adopted to insure the proper refund of such
amount by the creditor under the provisions of Section 8-D
of Article 3.53, quoted as follows:
          "B. Each Individual policy, or group policy
      and group certificate shall provide that In the
      event of termination of the indebtedness or the
      insurance prior to the scheduled maturity date
      of the indebtedness, any refund of an amount paid
      by or charged to the debtor for insurance shall
      be paid or credited promptly to the person en-
      titled thereto; provided, however, no refund need
      be made if the amount thereof is less than One
      Dollar ($1). The formula to be used in computing
      such refund shall,,befiled with and approved by
      the Commissioner.

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Hon. William Hunter McLean, page 5 (C-159 )



       Because your request does not submit specific information
with respect to the terms and provisions of the certificate
and policy that might be Involved, we are unable to give a
definite answer to your sixth question. However, the question
as framed suggests the possibility that the debtor might be
furnished a certificate which would Indicate the existence  of
coverage for the full term of the loan, while there might be
provisions in the policy which would restrict the liability
of the insurance company to a period of one month with a
right to monthly renewals subject to the payment of premiums
by the creditor. Assuming that the creditor had previously
charged the debtor the entire single premium or identifiable
insurance charge in advance for the full term and amount of
the indebtedness and further assuming that the certificate
furnished to the debtor is phrased in language which would
indicate to the ordinary debtor that he had coverage for the
full term of the Indebtedness, it is our opinion that any pro-
vision In the policy which would llmlt the coverage to a
period of one month or such other period of time as would be
less than the full term of the indebtedness would be contrary
to good morals and would, therefore, violate the public policy
of the State of’Texas.
         We answer your seventh question that the charging of
interest   or other finance charge on the amount of the single
premium, where monthly outstanding indebtedness Insurance is
provided, would not necessarily violate House Bill 938.    In
the absence of a specific fact situation, we can give no more
definite answer at this time. Many transactions of this
nature come within the purview of the Regulatory Loan Act Of
1963 and would be subject to regulation by the Regulatory Loan
Commissioner   of the State of Texas.
                          SUMMARy
          1. The monthly outstanding balance method of
       premium payment on credit life insurance is..not
       prohibited by Section 8-D of Article 3.53 of the
       Texas Insurance Code.
          2.  The insurance company should maintain its
       reserves so that they will be consistent with
       the risk to which it Is exposed.

          3.  Taxes are owed to the State of Texas only
       on the premiums actually collected by the lnsur-
       ante company.




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Hon. William Hunter McLean, page 6 (C-159 )



            4. The insurance company is responsible for
        refunding the unearned portion of the monthly
        premium paid it by the creditor.

            5. The amount of unused premium payments In
        the event of a death which terminates a policy
        belongs to the estate of the deceased debtor
        and should be remitted to his estate,by the
        creditor.
           6.  If the debtor is furnished a certificate
        of insurance which would indicate to the ordi-
        nary debtor that his debt is protected for the
        entire period contemplated by his loan, any
        policy provision which would restrict the cover-
        age to a lesser term would violate the public
        policy of the State of Texas.

           7.  The charging of interest or other finance
        charge to the,debtor on the amount of the single
        premium not actually remitted to the insurance
        company does not necessarily violate House Bill
        918. Manv transactions of this type come under
        the jurisdiction of the Regulatory-Loan Com-
        missioner of the State of Texas and are subject
        to his regulations.
                             Yours very truly,
                              WAGGONER CARR
                              Attorney General   of Texas


                              BY:            6-h-J
                               Scott Garrison
                                 Assistant Attorney General
SG:br
APPROVED:
OPINION COMMITTEE
W. V. Geppert, Chairman
Albert Jones
Grady Chandler
J. C. Davis
John Reeves
APPROVED FOR THE ATTORNEY GENERAL
By: Stanton Stone
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