                                                The Attorney         General of Texas
                                                                 November 9, 1983
     JIM MATTOX
     Attorney General



     Supreme   Court Bollding                  Mr. Lyndon L. Olson, Jr.                Opinion No. ~~-88
     P. 0. Box 12546                           Chairman
     Austin. TX. 76711. 2549
                                               State Board of Insurance                Re: Whether article 3.68 of
     5121475~2501
     Telex    9101674-1367
                                               1110 San Jacinto Boulevard              the Insurance Code applies to
     Telecopier     51Z475.0266                Austin, Texas   78711                   non-Texas business of a life
                                                                                       insurance company holding a
                                                                                       Texas certificate of authority
     714 Jackson.        Suite 700
     Dallas.   TX.     75202-4506
     2141742.6944
                                               Dear Mr. Olson:

                                                    You have requested our opinion concerning the scope of article
     4624 Alberta          Ave., Suite   160   3.68 of the Insurance Code. Specifically, you ask whether the article
     El Paso. TX.          799052793           requires your agency to revoke the Mid-South Life Insurance Company's
     9151533-3464
                                               certificate of authority to transact business in Texas. Article 3.68
                                               of the Texas Insurance Code provides as follows:
,-
        ‘01 Texas.    Suite 700
     ,,ouston.     TX. ‘77002-3111                      Art. 3.68.    No Commissions Paid Officers
     7131223.5666
                                                           No life insurance company transacting business
     606 Broadway,           Suite 312
                                                        in this State shall pay, or contract to pay,
     Lubbock.        TX.    79401-3479                  directly or indirectly, to its president, vice
     6061747-5236                                       president, secretary, treasurer . . . or to any
                                                        officer of the company other than an agent or
                                                        solicitor, any commission or other    compensation
     4309 N. Tenth. Suite B
     McAllen. TX. 78501-1665
                                                        contingent upon the writing or procuring of any
     512/062-4547                                       policy of insurance in such company, or procuring
                                                        a" application therefor by any person whomsoever,
                                                        or contingent upon the payment of any renewal
     200 Main Plaza. Suite 400
                                                        premium, or upon the assumption of any life
     San Antonio.  TX. 76205.2797
     5121225-4191
                                                        insurance risk by such company.        Should any
                                                        company violate any provision of this article, it
                                                        shall be the duty of the Board of Insurance
     An Equal        OpportunityI                       Commissioners to revoke its certificate of
     Affirmative       Action     Employer
                                                        authority to transact business in this State.

                                                    Mid-South   Life  Insurance Company     (hereinafter "insurance
                                               company"), a Mississippi insurer, holds a certificate of authority to
                                               write life, health, and accident insurance in Texas. The insurance
                                               company owns 100% of the voting securities of MS Services, 1°C.
                                               (hereinafter "service company"), a Mississippi corporation. The
                                               president and secretary of the two companies are the same.




                                                                            p. 371
Mr. Lyndon L. Olson, Jr. - Page 2   (JM-88)




     The insurance company and the service company entered into a
service agreement in 1981, whereby the service company would provide
sales promotion services, clerical help, office space, office
equipment, and other equipment, facilities, and support services for
the insurance company. The agreement provided that the insurance
company would pay the service company a fee based on the amount of
annual "et premiums written.

     The first question to be addressed is whether the payment of
compensation under the terms of the 1981 agreement would violate
article 3.68 if paid for the Texas business of the companies. The
payment to an officer of the insurance company of any commission or
other compensation contingent upon the procuring of any policy of
insurance would violate the statute. The 1981 agreement provides for
the payment by the insurance company of a fee based on the number of
premiums written; this fee is thus contingent upon the procuring of
insurance policies.

     The statute forbids the payment by a" insurance company to "its"
officers, directly or indirectly, of a commission. Although the 1981
agreement is between two corporations, it does contemplate the
indirect payment by the insurance company to "its" officers of such a
commissio". The service company is a wholly owned subsidiary of the
insurance company. The president and secretary of the service company
are also president and secretary, respectively, of the insurance
company. When the insurance company pays the service company a
commission under the 1981 service agreement, it is indirectly paying
the officers of the service company. Because the officers of the two
companies are the same, they would be receiving the indirect benefits
of the commission payments through their salaries or otherwise.

     There are several policy reasons for this interpretation of the
scope of article 3.68. First, if a life insurance company coul~dpay
commissions to a subsidiary company whose officers were the same as
the insurance company's, the" the intent of the statute could easily
be thwarted by merely setting up "dummy" corporations when commissions
were desired. Second, this type of arrangement could be used to
channel funds from the insurance company to the subsidiary, eventually
leading to insolvency on the part of the insurance company and a
subsequent inability to fulfill its obligations to policyholders.
Finally, if one of the purposes of the statute is to prevent the
promotion or condoning of unscrupulous selling techniques, then it is
necessary to apply the statute to this agreement, because the service
company rather than the insurance company will be providing all sales
promotion services.

     Statutes regarding insurance should be liberally construed in
favor of the public and the insured. Johnson v. Prudential Insurance
co. of America, 519 S.W.2d 111 (Tex. 1975). For the foregoing
reasons, it is our opinion that the 1981 agreement does violate the
statute.


                                    p. 372
    Mr. Lyndon L. Olson, Jr. - Page 3   (~~-88)




         The two companies entered into another service agreement in 1982
    which uapplies only to services in connection with Texas Business.”
    The agreement provides that the insurance company would pay the
    service company a fee after the commencement of business in Texas, but
    does not specify on what basis the compensation will be pa~id.
    According to the director of the legal staff of the Commissioner of
    the State Board of Insurance, the 1982 agreement was intended to
    provide that no commission would be paid based on the procurement of
    policies in Texas, as opposed to other states. We now consider
    whether the 1982 agreement violates article 3.68.

         No direct authority could be found in response to this question
    other than an Attorney General Opinion, unnumbered (1926), Book 281,
    page 106, interpreting the predecessor to article 3.68. This opinion
    provides in pertinent part as follows:

                I have your letter of recent date in which you
             ask for the opinion of this Department upon the
             legality of the practice indulged in by a life
             insurance company organized under the laws of
             Kansas whereby it pays to an officer commisslons
             upon life insurance business written by the
             company but in which there is a specific waiver of
P            any right to any part of the commission derived
             from business written in Texas . . . .

                 It will be noted that [the predecessor to
              article 3.681 does not confine the restrictions to
              companies doing business under a charter granted
              by the State of Texas but every company which
              transacts business in this state is prohibited in
              the most general terms from paying commission to
              its president and other executive officers upon
              life insurance policies written by it. We think
              that if any company transacting business in this
              state, no matter where organized, shall violate
              the provisions of this article, it is your duty to
              cancel its certificate of authority.

    Under this interpretation of the predecessor of article 3.68 by this
    office, the 1982 agreement would violate the statute.

         An analogous case to the instant situation is State v. State
    Mutual Life Assurance Co. of America, 353 S.W.2d 412 (Tex. 1962).
    State Mutual was a Massachusetts corporation with its home office in
    Massachusetts. It held a certificate of authority to do business in
    Texas, and sold life, health, and accident insurance and annuities in
    .this state.    The National Association of Securities Dealers
    (hereinafter NASD) was incorporated under the laws of Delaware. It
    had offices in Delaware and Washington, D.C., with member firms all
    across the country, including many member firms in Texas.



                                        p.   373
Mr. Lyndon L. Olson, Jr. - Page 4   (JM-88)




     NASD instituted an      i"S"lX."CS trust   for the purpose of
establishing a plan of group insurance for its member firms and their
employees. Applications for group insurance were mailed from NASD's
office in Delaware to State Mutual's office in Massachusetts, which in
turn issued and mailed group policies to Delaware, including policies
for twenty-five Texas member firms of NASD. The group policies were
valid under the laws of Massachusetts and Delaware. They would not
have been valid in Texas had they been executed and delivered in
Texas, because article 3.50, section 3 of the Insurance Code did not
authorize group insurance for members of a trade association. That
statute provided In pertinent part as follows:

         [I]t shall be unlawful to make a contract of life
         insurance covering a group in this state, and the
         license to do business in Texas of any company
         making a contract of life insurance covering a
         group in this state except as may be provided in
         this Article may be forfeited by a suit brought
         for that purpose . . . .

     The court stated that the "plain and unambiguous language" of the
statute prohibited the coverage of trade association groups in Texas
by contracts of insurance executed and delivered in states where this
type of group insurance was legal. The court next noted that to hold
otherwise would "destroy the effectiveness of article 3.50 and . . .
make a mockery of its purpose and intent." Finally, the court held
that the statute "authorizes cancellation of the license to do
business in Texas of any company which executes and delivers anywhere
a contract of insurance covering a" unauthorized group in Texas,
irrespective of the validity of the contract where executed and
delivered." -Id. at 414-15.

     As in the State Mutual case, the plain and unambiguous language
of the statute at issue here mandates a" even-handed applicati.onof
the prohibition against commissions to officers on both out-of-state
and in-state business. Article 3.68 applies to any life insurance
company transacting business in this state and forbids "any commission
or other compensation contingent upon the writing or procuring of 3
commissio" or other compensation contingent upon the writing or
procuring of s    policy of insurance in such company." (Emphasis
added). The legfslature made no distinction between foreign companies
and domestic companies or between commissions made on Texas policies
and foreign policies, although it makes such distinctions in other
code provisions. See, e.g., Tex. Ins. Code arts. 3.12 and 21.43.

     Furthermore, public policy and legislative intent appear to
require equal application to commissions on both domestic and foreign
policies. Article 1.14-1 of the Insurance Code provides in pertinent
part:



                                p. 374
Mr. Lyndon L. Olson, Jr. - Page 5     (JM-88)




         The   Legislature declares that      it   is . . .
         concerned with the protection of residents of this
         state against acts by persons and insurers not
         authorized to do an insurance business in this
         state by the maintenance of fair and honest
         insurance markets . . . by protecting authorized
         persons and insurers, which are subject to strict
         regulation,    from    unfair    competition    by
         unauthorized   persons   and   insurers   and   by
         protecting against the evasion of the insurance
         regulatory laws of this state.

Article 3.24-l provides as follows:

            When a foreign or alien company has complied
         with the requirements of this Subchapter and all
         other requirements imposed on such company by law
         and has paid any deposit imposed by law, and the
         operational history of the company when reviewed
         in conjunction with its loss experience, the kinds
         and nature of risks insured, the financial
         condition of the company and its ownership, its
         proposed method of operation, its affiliations,
         its   investments, any    contracts leading to
         contingent liability or agreements in respect to
         guaranty and surety, other than insurance, and the
         ratio of total annual premium and net investment
         income to commission expenses, general insurance
         expenses, policy benefits paid and required policy
         reserve increases, indicates a condition such that
         the expanded oueration of the cornDan" in this
         State & its operations outside this state will
         not create a condition which might be hazardous to
         its policyholders, creditors or the general
         public, the Commissioner shall file in the office
         the documents delivered to him and shall issue to
         the company a certificate of authority to transact
         in this State the kind or kinds of business
         specified   therein.    Such   certfficate   shall
         continue in full force and effect upon the
         condition that the company shall continue to
         comply with the laws of this State. (Emphasis
         added).

Thus, the legislature has indicated that it is concerned with
operations of a company outside Texas as well as within Texas, if
those operations may have an effect on Texas policyholders, creditors
or the general public.

     Commissions paid to officers of an Insurance company, eve" if
restricted to out-of-state business, would have a potentially



                             p. 375
Mr. Lyndon L. Olson, Jr. - Page 6   (JM-88)




hazardous effect on policyholders, creditors, or the general public in
Texas. Company officers set company policy governing attempts to sell
life insurance policies to the public.          If officers receive
commissions based on the number of policies written, they may advocate
unscrupulous selling techniques or ignore    malfeasance by insurance
agents so that their income will not be affected. This situation
would affect all policyholders, whether located in Texas or not.
Furthermore, in our opinion, one purpose of the statute is to prevent
overselling of insurance policies, which would impair the financial
well-being of the company. If policies were oversold in other states,
even if not in Texas, the overall financial well-being of the company
would be affected. Insolvency of the company would certainly affect
Texas policyholders and the Texas public as well as the policyholders
and public in those states where commissions are allowed.

     Another compelling reason for applying article 3.68 to this
arrangement between the insurance company and the service company is
that to fail to do so would discriminate unfairly against domestic
insurers in favor of foreign insurers. A domestic life insurance
company that also did business in other states would be in violation
of article 3.68 if it gave its officers commissions on its
out-of-state business. There is no rational reason to treat foreign
insurers differently.

     Under this interpretation of article 3.68, Texas is not seeking
to prohibit a contractual arrangement made between the      insurance
company and the service company in another state. “It   seeks only to
take away from a foreign insurance corporation what is finally and
essentially a privilege," which is the ability to do the business of
insurance in this state. Texas does not deny full faith and credit to
the laws of the state where the contract    was made by denyi~ng the
insurer the right to do business in Texas if the contract would be
unlawful if made in this state. State v. State Mutual Life Assurance
Co. of America, supra, at 419.

      This application of article 3.68 does not violate the Commerce
 Clause, because Congress removed all Commerce Clause limitations on
 the authority of the states to regulate the business of insurance when
 it passed the McCsrran-Ferguson Act, 15 U.S.C. section 1011, et seq.
Western and Southern Life Insurance Company v. State Board of
 Equalization of California, 451 U.S. 648, 653 (1981). Furthermore,
 the Privileges and Immunities Clause is inapplicable to corporations.
-Id. at 656.
     Finally, this application of article 3.68 does not deny the
insurer due process of law. A statute denies substantive due process
rights if it does not bear a rational relation to a legitimate state
purpose. Exxon Corp. V. Governor of Maryland, 437 U.S. 117, 124
(1978). The courts will assume that the objectives articulated by the
legislature are the actual purposes of the statute. Minnesota v.
Clover Leaf Creamery Company, 449 U.S. 456, 463 n.7 (1961).



                             p. 376
Mr. Lyndon L. Olson, Jr. - Page 7   (JM-88)




      The test for determining the validity of an application of a
 statute such as the one at hand is whether the state is regulating the
business of insurance within the state, or is reaching beyond its
borders to regulate a subject which was not of its legitimate concern.
 Osborn v. Ozlin, 310 U.S. 53, 62-67 (1940). In the Osborn case, the
 Court held that a Virginia statute prohibiting the writing of
 insurance on risks within Virginia except through resident agents was
 constitutional under the Fourteenth Amendment. In Hoopeston Canning
 Company v. Cullen, 318 U.S. 313 (1943), the Court upheld the
 constitutionality of New York's practice requiring an lllinois company
 to subject its Illinois contracts      to New York regulations when
 insuring New York risks. As in the instant case, these laws and
 regulations reached beyond the border of the state where a license was
 sought, and actually controlled the financial and other internal
 systems of the company in its home state and other states. The
 Supreme Court held that this scope of authority was constitutional.
-Id. at 320-21.
     In State v. State Mutual Life Assurance Company of America,
a,     at 416, the court held that a state may condition the right of
a foreign corporation to do business in the state on compliance with
all reasonable regulations. The application of article 3.68 to the
insurance company for payment of commissions on out-of-state business
bears a rational relation to legitimate state purposes, including the
protection of Texas policyholders.

                             SUMMARY

             The arrangement by which a life insurance
          company pays a fee to a subsidiary which has the
          same president and secretary as the insurance
          company based on the number of policies sold would
          violate article 3.68 of the Texas Insurance Code.
          Even if the arrangement were made between two
          foreign companies, and no commissions were paid on
          Texas business, the payment of commissions based
          on out-of-state business would violate article
          3.68.




                                       L-L-J*
                                       Very truly your
                                               .


                                       JIM     MATTOX
                                       Attorney General of Texas

TOM GREEN
First Assistant Attorney General

DAVID R. RICHARDS
Executive Assistant Attorney General



                             p. 377
Mr.   Lyndon L. Olson. Jr. - Page 8       (JM-88)




Prepared by Margaret McGloin
Assistant Attorney General

APPROVED:
OPINION COMMITTEE

Rick Gilpin, Chairman
Jon Bible
Susan Garrison
Margaret M&loin
Jim Moellinger
Nancy Sutton




                               p.   378
