.   .




        Hon. J. P. Gibbs
        Casualty Insurance Commissioner
        Board of Insurance Commissioners
        State Office Building
        Austin 14, Texas
        Dear Sir:                          Opinion No. O-5873
                                           Re: Control by Board of Insurance
                                               Commissioners over workman's
                                               compensation rates and spe-
                                               cific questions answered in
                                               relation thereto.
        In your letter addressed to Honorable Grover Sellers, Attorney
        General, under date of February 15, 1944# you submit twenty-two
        separately numbered questions you desire answered by an opinion of
        this department. The submission of such questions grow out of a
        publicized notice issued relative to a puolic hearing held by the
        Board of Insurance Commissioners in Austin, Texas, on November 19,
        1943, at which time the Insurance Carriers were inf~ormedthat the
        Board had under consideration the following matters, quoted herein
        from said notice:
             "It has come to the attention of the Board that various plans
             and agreements, both written and oral, are being used by a
             number of insurance carriers in the writing of workmenss com-
             pensation insurance, which plans and agreements are not writ-
             ten into the application and policy, It is the opinion of
             the Board that under the express terms of Article 4913, such
             agreements or contracts are void and of no effect and in
             violation of the provisions of the law. All interested in-
             surers, regardless of type or plan of operation, and insureds
             are hereby invited to give definite and good reasons, if
             there by any, why the Board should not:
                    (a) Prohibit premium surcharge waiver agreements under
                        retrospective rating plans or prescribe a premium
                        waiver table.
                    (b) Prohibit so-called "cost-plus" plans.
                    (c) Prohibit so-called "stop-loss" plans,
                                                                  ,   .




Hon. J. P. Gibbs, page 2    O-5873


         (d) Require participating companies to file plan of
             operation and seals of proposed dividends to be
             approved by the Casualty Insurance Commissioner in
             the form of an endorsement to be attached to each
             and every policy written by such carrier.
         (e) Prohibit the use of any plan, contract, agreement or
             resolution not specifically prescribed or authorized
             by the Board."
As pointed out in your letter, the Board contemplated taking such
action under its authority to make rules and regulations con-
sidered by it necessary and proper to establish control over the
rates promulgated ‘by it under statutory authority.
Further in connection with your request, you submit certain facts
pertaining to the practices and methods of various insurance
carriers writing workmen's compensation insurance in this State
in the form of exhibits and other data relating to grouping of
insureds, payment of dividends and certain agreements entered in-
to between these carriers and particular insureds. In addition
you call our attention to eight former opinions heretofore ren-
dered by the Attorney General's Office at various times during
the period from December 18, 1926, to April 20, 1940, answering
certain questions. The foregoing data has received our careful
consideration. Such answers we may give to the questions in-
dividually must be considered in the light of the authorities in-
corporated herein as applicable to the power and authority of the
Board expressly given in Art. 4915, K.C.S. of Texas, which reads:
     "The Commission (Board) is hereby empowered to make and en-
     force all such reasonable rules and regulations not incon-
     sistent with the provisions of this law as are necessary
     to carry out its provisions."
The matter of payment of premiums by the subscriber or the cor-
rectness of the applicable premium rate payable is one solely be-
tween the insurer and the insured, once the contract is entered
into and with which the Board of Insurance Commissioners is not
concerned, having fixed and promulgated the rate under the author-
ity of the statutes. Nor is any question herein considered in-
terpreted as affecting the reasonableness or adequacy of any par-
ticular rate schedule promulgated under the 8oard's rate making
power, it being clear that the questions deal not with "control"
as might 'beapplicable to the reasonableness or adequacy of the
rates applicable to all classifications of hazards but solely to
indirect control as by contract and side agreements with insureds,
such rates fixed and promulgated by the Board and accepted by the
insurers on the face of the policies, are abrogated and modified,
usually by endorsements or other means, having heretofore, in
.   .




        Hon. J, P. Gibes, Page 3     O-5873


        some instances, the approval of the tioard. Assuming, therefore,
        the proper exercise oi the doard's power in fixing rates of pre-
        mium applicable to the various classifications of'hazards and
        the classes to which they apply as well as oeing adequate to the
        risks, we will endeavor to aiscuaa the power and authority of the
        board in the light of our interpretation and construction of the
        statutes,
        'Thematerial statutes, vestin,gin the tioardof Insurance Commis-,
        stoners power and authority to classify hazards, promul,satepre-
        mlum ratess and prescribe stanor;rdand uniiorm policy contract
        f'orms,deemed necessary to cite, read:
             "Art. 4907 R.C.S. 1~25.
             "The said tommission ('board)shall make, estaolish and promul-
             gate all classifications of hazards and rates of'premiums res-
             pectively appiicaeie to each, contemplated and provided for
             by Title 139, known as the yjorkmen'sCompensation Law and/or
             by the"Longshoremen~s and Ha&or ulorkers'Compensation Act"
             as enacted oy the Congress of the United States. Said Gem-
             mission shall publish all rates promulgated by it as affect-
             ing Compensation insurance in tnis State, and said rates> or
             any change therein, shall be published fifteen days before
             they become effective and in force. Acts 1923, po 408; Acts
             1931, &Znd Leg., pO 290, ch. 1'711."
             "Art. l+yOc,.
                         The iommission (Board) shail prescribe standard
             policy forms to be used by all companies or associations
             writing workmen"s compensation insurance in t'iisState, id0
             company or association authorrzecito write workmen".5compen-
             sation insurance in this State shall, except as hereinarter
             provided f'or,use an'yclassiT'icati0ris
                                                   of nazarosp raies ot
             premium, or policy forms other Lhan tilosemade, estaoll,shed
             and promulgated a,laprescri'bedby the Commission. Acts 122j y
             p0 408."
             "Art. 4909, 'TheCommission (hoard) shall assemule all neces-
             sary data for its use in estaolishing classiilcations of
             hazards and making and promulgating premiun rates."
             "Art. 4910, The Commission (aoard) may require sworn state-
             ments from any insurance company or association affected oy
             this law showing,the payroll reported to it ana incurred
             losses by classii'ica.tions
                                       and such other information which
             in the judgement of the Commission may be necessary in deter-
             mining proper classifications, rates and f'orms. 'I'he
                                                                  Sommis-
             sion shall prescribe tne necessary forms for such statements
             and reports, having due regard to the methods and l~ormsin
             use in other States for similar purpose in order that uni-
             formity of statistics may not be disturbed,"
Hon. J. P. Gibbs, Page 4     G-5873


     “Art. 4911. The Commission (doard) shall determine hazards by
     classes and fix such rates of premium applicable to the pay-
     roll in each of such classes as shall be adequate to the
     risks to which they apply and consistent with the maintenance
     of solvency and the creation of adequate reserves and a reason-
     able surplus, and for such purpose may adopt a system of
     schedule and experience rating in such manner as to take
     account of the peculiar hazard of each individual risk, pro-
     vided such rate shall ‘befair and reasonable and not confis-
     catory as to any class of insurance carriers authorized by
     law to write workmen’s compensation insurance in this State.
     ‘Toinsure the adequacy and reasonaoleness of rates, the Com-
     mission shall take into consideration an experience gathered
     from a territory sufficiently broad to include the varying
     conditions of the industries in which the classifications are
     involved, and over a period sufficiently Long to insure that
     the rates determined therefrom shall be just, reasona'bleand
     adequate rates. The Commission shall exchange information
     and experience data with the rate-making bodies of other
     States and shall consult any national organization or asso-
     ciation now or hereafter existing for the purpose of assemb-
     ling data for the making of compensation insurance rate.”
     “Art. 4912. Any policyholder, insurance company or association
     shall have the right to a hearing before the Commission on
     any grievance occasioned by the promulgation of any classifi-
     cation, rate or policy form by the Commission; such hearing
     to be held in conformity with rules to be prescribed by the
     Commission. No hearing shall suspend the operation of any
     classification, rate or policy form unless the Commission
     shall so order. Provided that any party aggrieved shall have
     the right to apply to any Court of competent jurisdiction to
     obtain redressm As amended Acts 1943, 48th Leg., p& 614, ch.
     355, 1.”
     "Art. 4913. The Commission (Board) shall prescl;ibea uniform
     policy for workmen's compensation insurance and no company
     or association shall thereafter use any other fo'rmin writing
     workmen’s compensation insurance in this State, provided that
     any company or association may use any form of endorsement
     appropriate to its plan of operation, if such enforsement
     shall be first submitted to and approved Dy the Commission,
     and any contract or agreement not written into the applica-
     tion and policy shall be void and of no eSfect and in viola-
     tion of the provisions of this chapter, and shall be suffi-
     cient cause for revocation of license to write workmen’s com-
     pensation insurance within this State."
.        .




             Hon. J. P. Gibbs, Page 5     O-5&13


                 "Art. 4914. Nothing in this chapter shall Abeconstructed to
                 prohibit the operation hereunder of any stock company,
                 mutual company, reciprocal or inter-insurance exchange, or
                 Lloyd's association, to prohibit any stock company, mutual
                 company, reciprocal or inter-insurance exchange or Lloyd's
                 association, issuing participating policies, provided no
                 divident to subscribers under the Norkmen's Compensation Act
                 shall take effect until the same has been approved 'bythe
                 Commission. (doard). No such dividend shall be approved un-
                 til adequate reserve has been provided, said reserves to be
                 computed on the same oasis for all classes of companies or
                 associations operating under this chapter, as prescrioed un-
                 der the insurance laws of the State of 'Texas."
                  "Art. 4916. No provision of the Act creating the State In-
                  surance Commission (Board) with regard to the  fixing and
                  promulgation of rates for fire insurance or the prescribing
                  of fire insurance policies and forms shall 'be applicaole to
                  the fixing of compensation insurance classifications or the
                  making of compensation insurance rates or the prescrioing of
                  compensation insurance policy forms; but the provisions of
                  this Act shall be construed and applied independently of any
                  other law or laws, or parts of laws, having to do with the
                  matter of insurance rates and forms or of fixing the duties
                  of the State Insurance Commission."
                  "Art. 4917. The words rCompanyt and 'Association' used in
                  this iictmean the Texas Employers Insurance Association, or
                  any stock company, or any mutual company, or any reciprocal,
                  or any inter-insurance exchange, or Lloyds association
                  authorized to write Workmen's Compensation Insurance in this'
    a,            State."
             The Board of Insurance Commissioners can exercise only the autnor-
             ity conferred upon it by law. Certain acts of the doard in excess
             of powers conferred are not official acts and it is not necessary
             that the exercise of the powers be negative in order to restrain
             the scope of their exercise. State vsa Robinson, 30 S.si.2d, 292,
             Nhile it appears the statutesconferring such authority will be
             strictly construed, Commercial Standard Ins. Co. vs. ijoardof
             Insurance Commissioners, 34 S.W. 2d, 345, 24 Texas Jurisprudence,
             paragraph 443,-this rule has been extended to those necessarily
             implied and such statutes and orders promulgated thereunder will
             'beliberally construed to carry out the intent of the Legislature,
             Railroad Commission vs. High Underwriters, 124 S.;i.2d, 413; See
             Railway kommission of P. v/.and D. C. Hailway Company, et al, 161
                   2d, 560. In passing upon such orders made by the Board of
             S. v/i.
             Insurance Commissioners to determine whether they are conferred un-
             der statutory or constitutional authority, the iourts will examine
             the language of the authority to see that it is free from doubt,
             and that it admits of no other reasonable interpretation. Humble
                                                               .      .




Hon. J. P. Gibbs, Page 6            O-5873


Oil and Refining Company vs. Railroad Commission, 12d S.UV.2d,
9, paragraph 5; that it is conferred in clear and unmistakable
legislative terms, Board of Insurance Commissioners vs. Guardian
Life Ins. Co. of Texas, et al, Vol. 12, Ray's Supreme Court He-
;;rt;z& page 495; Scanlan vs. Home Insurance Company, 79 S.W.
  ,      l




The law appears settled that applicable State laws and by-laws of
such insurance corporations are read into every contract made on
behalf of the corporation and neither the president not the Board
of Directors of Insurance Corporations can exceed the limitations
placed upon.them by the laws effecting such corporations. Ed-
wards vs. Keller, 133 S.W. 2d, 823. This rule, it seems, also
applies to contracts of insurance issued by such corporations.
Home Life Accident Insurance Company vs. barron, 4'1S.W* ad, 380;
29.Amer. Juris., Par. l'ig-160,p. 196 and 19’7. In Scanlen vs.
Home Ins. Co., supra, the Court said:
      '*The'businessof insurance is of public concern and therefore
      subject to strict regulation and control by the State. Hence
      the rights of the parties to contract with respect to in-
      surance are limited ~bythe laws of the State which are a
      part of every contract. And any stipulation in an insurance
      policy which contravenes the statute is void."
In the light of the aforegoing authorities, we proceed to discuss
the questions submitted. The first 7 questions read as follows:
      "1. Can any insurer place each subscriber in a separate
      e-p p regardless of hazards, such subscriber being the only
      subscriber in such group?
      "2. Can any insurer agree with a suoscrioer, oy way of re-
      solution of its Board of Directors, or in any other manner,
      that such subscriber will pay to the insurer's certain per-
      centage of the prescribed premium for administrative ex-
      pense, without such agreement or resolution being made a
      part of the policy of insurance and approved 'bythe Board
      of Insurance Commissioners?
      "3. Can any insurer agree with each subscriber that a cer-
      tain percentage of the prescribed premiums may be used for
      the purpose of paying losses, and the saving to be returned
      to the subscriber?
                a. As returned premium
                'b. As excess a'boveexpense and losses, or
                c. As a dividend?
.   .




    Hon. J. P. Gibbs, Pao;e',j     O-5673


         "4. Can any insurer return to its individual subscribers as
         dividends in proportion to its
             a. losses, or
             b. amour+ of premiumpaid?
        "5. If you have answered in the affirmative any of the in-
        quiries mentioned in Questions 3 or 4, than does such agree-
        ment have to be approved by the Board of Insurance Commissiom-
        ers before such agreement becomes legally operative?
         "6. If you have answered in the negative any of the inquiries
         mentioned in Questions 3 and 4, then would the Board of In-
         surance Commissioners exceed its authority in approving such
         agreement?
         "7. If you have answered that the Board of Insurance Commis-
         sioners would exceed its authority in approving such a plan
         as mentioned in Questions 3 and 4, then would such plan be
         illegal even though approved by the Board of Insurance Com-
         missioners?"
    In the memorandum and data submitted in connection with your re-
    quest, it is disclosed that under the annual applications sub-
    mitted to the Board on the part of certain insurers, for approval
    of dividend disbursements, certain applications disclosed no
    methods of making the disbursements nor do they contain any stipu-
    lations as to the manner of disbursement. Referring to Art. &3&
    Sec. 13> of the Revised Civil Statutes of lY25, you point out
    that subscribers of the association are divided into groups and
    the examination of the records of the association reveals that all
    subscribers are not paid the same rate of dividend. You further
    point out instances have revealed only one subscriber comprising
    a "groupT1. You also state that your examinations further reveal
    agreements relating to the percentages concerned in questions 2,
    3 and 4, also involving questions l'?and 18, made by special reso-
    lutions, passed by the .Boardof Directors, su~osequentto a pre-
    vious resolution oy the Directors of the Company, placing such
    su’bsCriOeR3 in a particular group, and that it is found that these
    percentages vary and that a factor disclosed with reference to
    the association's general or largest group is that the varying
    dividends paid in this group is determined by loss ratios and
    size of premium paid.
    Art. 830tf,Sec. 13, K.C. S., lY25, provides:
         "The board of directors may distribute the sucscrioers into
         groups for the purpose of segregating the experience of each
         such group as to premiums and losses, and for the purpose
         of determining dividends payable to and assessments payable
                                                               .




Hon. J. P. Gibbs, Page Ei


     by the subscribers within each group, but for the purpose of
     determining the solvency of the association, the funds of
     the association shall oe deemed one and indivisible. The
     board of directors shall have power to re-arrange any of
     the groups by withdrawing any suoscriber and transferring
     him wholly or in part to any group and to set up new groups
     at its discretion."
Generally speaking, any insurer authorized to write workmen's
compensation insurance in this state is authorized to distribute
and place its subscribers into ,groupsfor the purpose of segre-
gating the experience of each group as to premiums and losses.
Since the Act of 1923, Ch. 182 (including Articles 4907 through
49191, the Board of Insurance Commissioners has had imposed upon
it, the duty, among other things, to determine hazards by classes
and fix such rates of premiums applicable to the payroll in each
of such classes as shall ‘be adequate to the risks to which they
apply. In order to insure adequacy and reasonableness of rates,
the Board is required to take into consideration anexperience
gathered from a territory sufficiently broad to include the vary-
ing conditions of the industries in which the classifications are
involved and over a period sufficiently long to insure that the
rates determined from such experience will be just, reasonable and
adequate. In this connection, in so far as the rate making power
of the Board is concerned, having established and fixed a rate of
premium, the question arises as to whether there has been a dis-
regard of hazards in connection with any suoscriber so grouped.
The word "hazard" is broad in meaning and scope. It is generally
accepted asconnotating "risk" and is so defined by iiebster’s
New International Dictionary. The work hazard is not used in the
above Section 13 of Article 8308. 'TheLegislature used in the
word in the original workmen's compensation law, Acts of 1913,
33rd Leg., Ch. 179, wherein Part 3, Sec. 13, the hoard of Direc-
tors of the "Texas Employers* Insurance Association", created
thereby, were permitted to distribute the subscribers into groups
"in accordance with the nature of the business and the degree of
hazard incident thereto." It is significent to note that in Sec-
tion 16, following, the Act provided that all premiums, assessments
and dividends shall, by the Board of Directors, ‘be fixed by and
for groups as above provided, "in accordance with the experience
of such group."
In 1917, the 35th Legislature, Chapter 103, amended the entire
1913 Act, and in Sec. 13, Part 3 of the 1917 Act, the words "in
accordance with the nature of the business and the qdegree of
                         , were omitted Andy-inlieu thereof the
hazard' incident thereto‘!
following was inserted:
.   .




    Hon. J. P. Gib'bs,Page 9         G-5873


         "For the purpose of segregating the experience of each such
         group as to premiums and losses, and for the purpose of de-
         termining dividends payable to and assessments payable by
         the subscribers within each group,"
    Section lrjcwas added in the Act of 1917, providing that the
    Board of Directors shall "determine hazards ‘by classes, and fix
    the rates of premiums which shall be applicaule to the payroll
    in each of such classes at the lowest possible rate consistent
    with the maintenance of solvency and the creation of adequate re-
    serves and a reasonable surplus, and I'orsuch purpose may adopt
    the system of schedule and experience rating in such a manner as
    to take account of the peculiar hazard of each individual risk."
    Section 17 provided that any proposed rate of premium, assessment
    or dividend, or any distribution of subscribers shall not take
    effect until approved my the Commissioner. 'Thesesections of the
    191'1Act, Sections lbc and 17, were repealed by the 1923 Act here-
    inaoove mentioned.
    It is apparent from the foregoing legislative history that the
    association or any other compensation carrier cannot segregate or
    classify assureds in accordance with the nature of their business
    or according to the degree of hazards. Such classifications for
    the purpose of grouping is inconsistent with the power vested sole-
    ly in the board and peculiarly confined and limited in use to the
    fixing of rates of premium.
    Insurers and their subscribers, contract with each other with re-
    ference to anticipated losses. The hazards in connection with
    the operation or any pcrtion of the operations of SLIDSCriberS,
    are, as far as practical to be taken into account, considered ex-
    clusively 'bythe board in fixing the rate of premium and deemed
    acceptable to both insurers and subscribers at the time the ckn-
    tract is entered into.
    Art. 8308, Sec. 13, supra, authorizes subscribers, as to their en-
    tire operations, or any part of the operations of each, to be dis-
    tributed into ,groups'by the insureds, for the purpose of segre-
    F-atine,the experience of each such group as to nremium and losses,
    and for the b w-pose    of determinin.a dividends pava'bleto an assess-
    ments payabh’by      the subscribers within eachArso_uq. Segregating
    the experience of each group is to be distinzulshed from the class-
    ification of a subscriber according to hazards, wholly or inpart.
    Every insurer engaged in writing Norkmen's Compensation Insurance
    is prohibited from using any classification of hazards as a basis
    for setting up groups for segregating experience and paying di-
    vidends. Such is inconsistent with the provisions of Article
    4908, supra.
                                                                 .      .




Hon. J. P. Gibbs, Page 10      o-5S73


It will be noted that Art. t3308,Sec. 20, provides the procedure
for,determination as a subscriber under his contract or policy on
or before the date of its expiration. Present regulation, promul-
gated by the Board, (Texas Compensation Manual, page R12, effective
March 1, 19431, provides that the compensation policy shall be
written or issued for a term of one year. It is commonly recog-
nized that policies expire and new ones are issued, necessitating
the latter to be placed within certain groups in the event the
assurer has adopted this plan of operation. While the subject
or plan of grouping is not necessarily to be considered a proper
subject for endorsement, there is no prohibition against its
inclusion in an endorsement authorized ~bythe Board of Directors
of a company and attached to and made a part of the contract,
where it is first submitted to and approved 'bythe Board.
In Art. 830&, Sec. 13, the consideration by the insurer of the
particular experience of certain subscribers or a group is per-
mitted as well as limited to premium and losses. It is believed
that the Legislature used the term premium and losses as a unit
as would prohibit the segregation solely on the basis of the pre-
mium paid or on the losses sustained, the first estimated and the
latter anticipated. In other words, the statute is clear and un-
ambiguous in designating the basis for permissible grouping, viz:
the relation of premium to losses or the ratio between the two.
This statute furthermore does not use the word experience in a
retroative sense, but it is used in a present sense and we can
readily foresee the breakdown in the rates promulgated and divi-
dends paya'ole,resulting in discrimination, from any other inter-
pretation of the statutes as a whole.
While the word trgroupTt    connotes more than one subscriber, and is
defined by Webster as meaning two or more figures forming a design
or taken together as a distinct unit in a more complicated de-
sign, it is not believed that the Legislature used the word in a
limited or strict sense, 'but solely as a unit to distinguish that
which is segregated,     i.  e., one group from another. One subscri-
ber properly segregated may constitute one "group". See Hope vs.
Flentge, 41 S.N.     1002, Words and Phrases, Vol. lb',Per. Ed. Page
780.
We can attach no significance to the fact that in Sec. 2, Art.
8309, R.C.S., lY25, Sec. 13, was not included as would expressly
make that section applicable to other insurers, while certain
other sections, such as 10, 17, ltiaand 21 were specifically de-
signated. The intention of the Legislature is expressed in con-
trolling terms, to the effect that any insurance company, which
term includes mutual and reciprocal companies, lawfully trans-
acting a liability and accident business in this State "may have
and exercise all the rights and powers conferred by this Act
(Arts. 8306, 7,g, and 9, R.C.S., 1925, and as amended) on the
association created hereby,"stibject to a limitation imposed upon
.   ,




    Hon. J. P. Gibbs, Page 11    O-5673


    mutual or reciprocal organizations requiring them to have at ieasr,
    50 subscribers who have not less .than 2,000 employees. We further
    point out that not only section I.'?
                                       of,the lYl7 Act was repealed
    ny the 1923 Act (Arts. 4907 through 4918, mcJ.usive), but all
    other provisions of the 1917 Act inconsistent with the provisions
    of the 1923 Act were by it expressly repealed,
    Answering the first five questlons, in the   order   presented, it is
    the opinion of this department:
         1. Any insurer may distrioute a suoscrioer into a group to
         itself provided it is done so upon a reasonanle loss ratio
         basis for segregating it fromother ,groups,
         2. An agreement made bv any insurer with any suoscriber con-
         cerning the prescribed-premium, not attached to the policy
         of insurance and approved by the doard is void.
         3. An agreement hstween any insurer and each subscriber pro-
         viding that a certain percentage of the prescribed premium
         may be used for the purpose of paying losses, the saving to
         be returned to the subscriber, is not prohibited or illegal
         so long as same is incorporated in or made a part of the
         policy contract and does not discrimih::tebetween suoscrioers
         of the same class or group.
         4. Any savings, excess or return Frcmium as dividends    can 'be
         returned to any ~suoscriberon the basis of individual    losses
         or amount nf premium paid, Trovided in the payment of    same3
         there is no discrimination between suoscrlbers of the    same
         class of group.
         5. No agreement between insurers and their suoscribers as
         referred to in question 3, or any return as dividends oecomes
         legally operati.veor in effect until approved by the doard
         of Insurance Commissioners. The approval of a policy form
         endorsement does not oonstitute an approval of the dividends
         authorized to be distributed to the policy holders.
    Answering questions 6 and 7, it is our opinion that where discri-
    minatlon is disclosed under any plan for the payment of dividends,
    approval of same by the board ~wouldbe unauthorized. 'Thefact
    that the hoard igored such discrimination and approved such
    dividends for payment would not affect the illegality of the plan.
    Your questions number 8 through 11, specially relating to divi-
    dends, read as follows:


         "6. Does the tioardhave authority to control dividends?      If
         30, to what extent?"
                                                                  .   .




Hon. J. P. Gibbs, Page 12      o-5g73


     'lg.Does the Board have authority to approve dividends for
                1 as referred to under Section 13 of Article
     ;;;;V;,grouP

    "10. Does the Commission have the authority to require any
    insurer to submit the rate of dividend or formula used by
    groups or individual risks?"
     "11. Can an insurer arbitrarily pay one percentage of divi-
     dend to one policyholder and a greater or lesser amount to
     other policyholders.?ff
Art. 830d, Sec. 16, unchanged from its original enactment, ex-
pressly provides that dividends and assessments shall be fixed 'by
and for groups and that the entire assets of the association shall
be subject to the payment of any approved claim for compensation
against the association. This provision of the statute is man-
datory and is not inconsistent with the writing of participating
or participation and assessment policy contracts on the part of
certain insurers other than the Texas Employers. Here again
we are reminded that the law is designed to operate uniformly as
to all insurers. There is no prohi~bitionagainst any insurer,
whether it 'be Texas Employers, Insurance Association, a stock
company, mutual, reciprocal or inter-insurance exchange or Lloyds,
following the ;Y$;azE grouping as authorized by Sec. 13, Art.
d3Oi?,supra.            as to dividends, we may presume that cer-
tain participating poiicies written are 'bycompanies following
this plan, with Art. 4914, supra, recognizing the right of said
companies to issue participating policies, expressly providing
that no such dividends shall be approved until adequate reserve
has been provided, said reserves to be computed on the same 'basis
for all classes of companies or associations operating under
Chapter 10, Title 78, R.C.S., 1925, as prescribed under the in-
surance laws of the State of Texas.
One of the foremost and expressed duties commanded by law of the
Board of Insurance Commissioners if t% see that all laws respect-
ing insurance and insurance companies are faithfully executed.
Art. 4662, Subdivision subject dealt with in our laws respecting
both insurance i;nd insurance companies.
Art. 576, Penal Code, incorporated under Chapter 2, entitled
"Insurance", in part, provides:
     "No insurance company doing business in this State,,..nor
     shall any such company or agent thereof make any contract
     of insurance or agreements as to such conI:ractother than
     as expressed in theplicy issued thereon, nor shall any
     such company or any officer, agent, solicitor or represen-
     tative thereof, pay, allow or give, or offer to pay, allow
.   .




    Hon. J. P, Gibbs, Page 13


         or give, directly or indirectly as an inducement to insurance,
         any rebate of premium payaole on the policy, or any special
         favor or advantage,in the dividends or other benefits to
         accrue thereon or any paid employment or contract for service
         of any kind, or any valuable consideration or inducement
         whatever, not specified in the nolicy contract of insurance;
         or give, sell or purchase, or offer to give, sell or purchase,
         as an inducement to insurance or in connection therewith,
         any stocks, 'bondsor other securities of any insurance com-
         pany or other corporation, association or partnership, or
         any dividends or profits to accrue thereon, or anything of
         value whatsoever not specified in the policy, or issue any
         policy c0ntainin.gany special or board contract or similar
         provision 'bythe terms of which said policy will share or
         participate in any special fund derived irom a tax or a charge
         against any portion of the premium on any other policy. Any
         officer or agent of such company violatinS any provision of
         this article shall be fined not less than one hundred nor more
         than five hundred dollars."
    Article 580 of the Penal Code, also codified under the general suo-
    ject of "Insurance", provides:
         "Any officer or representative of any insurance company or
         association authorized to write workmen's com?ensation insur-
         ance in this State, who shall violate any nrovision of the
         laws relating to such business conMined ;n ci:apLer 10, 'Etle
         "Insurance" of the Revised Stiitutes,relatins to tileState
         Insurance Commission and such business, si-iall
                                                       be i'inec,
                                                                not
         less than one hundred nor more than t'lvehundred c~ollE.rs.
         Acts 19.23,p. 411."
    Construing the above articles of the Penal Code, they present a
    definite and fixed public policy on the part of the Legislature,
    which public policy is clearly defined and applicaole to those
    enga,gedin writing .rJorkmen's
                                 compensation insurance in ti>isState.
    The making of any contract of insurance or agreement by an)'com-
    pany or ag,entthereof, other than expressed in tilepolicy; the
    allo;+ingor giving or offering to pay, allow or give directly or
    indirectly as an incucenent to insurance, any redate or premium
    payaole or any special favor or advantage in the dividends or
    other oenefits or profits to accrue thereon, or paid employment or
    contract for service of any kind or any valuable consideration or
    inducement whatever, not specified in the policy; the issuance of
    any nolicy containing any special or tioardcontract or similar
    provision tihereovthe policy .willsnare or participate ?~nany
    special fund derived from a charge against the premium on any other
    policy; to knowingly write insurance at any lesser rate than the
    rate promulgated by the doard of Insurance Commissioners, all these
    and others relating principally to agents, are prohibited under
Hon. J. P. Gibbs, Page 14   O-5873


the foregoing statutes; and any company doing any of the acts pro-
hibited is expressly deemed guilty of unjust discrimination.

In connection with the statutes declaring the public policy, it
is material to note that a company sharing its profits with its
policy holders by agreement as to profit sharing placed on or in
the face of the policy, provided such is uniform and does not
discriminate between individuals or between classes, is permitted.
This expression of profit sharing is recognized in Art. 4914,
R.C.S.) 1925, which provides that nothing in Chapter 10 shall 'be
construed to prohibit any stock company, mutual, reciprocal,
inter-insurance exchange or Lloyd's Association, issuing parti-
cipating policies, provided no dividend to subscribers under the
'i/orkmen's
          Compensation Act lvilltake effect until the same has
been approved by the Board of Insurance Commissioners.
Referring again to Art. 8308, Sec. 16, it requires dividends to
subscribers to be fixed by and for groups where such grouping as
herein discussed is followed by the insurer and Art. 4914 provides
that no dividend to subscribers shall take effect until same has
been approved by the Board. The act of approving payment of
dividends is not to be construed as a merefbrmality on the part
of the Board. It is charged with seeing that all insurance laws
of the State are complied with and to this extent, proposed divi-
dends should not only be disapproved, payment of which would re-
sult in insolvency of the insurer, but no dividend, whether it be
called savings or otherwise, should be approved which discriminates
between subscribers of the insurer or between members of groups
into which they may be properly segregated.
Answering your questions 8,Y,lO and 11, it is our opinion that
the Board of Insurance Commissioners is authorized and required
to approve dividends fixed by and for groups where such plan of
operation is disclosed and followed 'byan insurer. Regardless of
uniform endorsements disclosing the plan and approved by the
doard, said Board may be regulation require all insurers electing
to group its subscribers in accordance with Art. 8308, Sec. 13,
R.C.S., 1925, to present to the Board its basis for payment of
said dividends by groups at the time same are submitted for ap-
proval. No insurer can arbitrarily pay one percentage of divi-
dend to one policy holder and a greater or lesser percentage to
others.
Your questions, numbers 12 and 13, are too,broad in scope and
without sufficient definiteness and meaning for this department
to give you any specific answer thereto. Ne therefore omit these
questions and their consideration herefrom and request that you
re-submit same seperately, specifically advising us of the type
or types of agreement you refer to, or have in mind. Otherwise,
we will consider that our answers to the other questions propound-
ed by you render these questions of material importance to the
i3oard.
Hon. J. P. Giobs, Page 15      O-58,/3


Your question No. 14, reads:
     "Does (Plan of Operation' as referred to in Art. 4913 mean
     the plan peculiar to a c,ertaintype of company; that is, a
     stock company, mutual company, reciprocal exchange or Lloyds
     organization, or doe3 it mean that a carrier within any par-
     ticular type may use an individual plan of operation?"
bfefind no definition given in the statutes nor language particu-
larly limiting the meaning of "plan of operation" referred to.
Answering this question, therefore, it is our opinion that "plan
of operation" referred to in Art. 4Yl3, K.C.S., means any plan
authorized by the laws of this State, and consistent with any
reasonable regulations of the board which may De adopted and used
by any company or class of companies authorized to write Workmen's
Compensation Insurance.
Questions 15 and lb contained in your request, read:
     "15. Can a stock insurance company legally issue a policy
     with an assessment provision against a policyholder?
     “lb. Would a charter issued by the Secretary of State to a
     stock insurance company prior to the passage of the rating
     laws, authorizing such stock company to issue participating
     and assessment policies, and amendments approved Dy the
     Attorney General after the passage of the rating laws, permit
     sucn stock company to issue an assessment policy?
As hereinDefore stated, the law recognized the right of stock
companies to issue participating policies. Art. 4Y14, K.C.S., was
considered in an opinion of this department rendered to Hon.
J. J. Timmons, Secretary of State Insurance Commission 'DyHon-
orable H. B. Cousins, Jr., Assistant Attorney General, under date
of Decemoer 18, 1926, wherein he stated that the word Dartici-
pating in this connection includes the idea of participating in
losses as well a3 participation in profits. We further note that
this opinion passed specifically upon an endorsement form pro-
posed oy a company operating under the Lloyds' plan, the provi-
sions of which would characterize the policy as one of partici-
pation and assessment.
A "participating policy" or one of "participating premiums" is
construed generally to mean one that is entitled to dividends or
which shares in all the profits arising from the premiums paid ‘by
the insured. <fordsand Phrases, Vol. 31, Permanent Addition,
page 135. kqhilethe words 'fassessment"has varied meanings in
insurance parlance, and under the mutual plan may mean "premium"
or "dues", the statutes, charter, laws and contract have to be
looked to for determining the meaning of the term.
Hon. J. P. Gibbs, Page 16      O-5873


We know of no law, statutory or otherwise, that would authorize
a stock company to issue strictly an assessment policy. While
the act of sharing the profits may also include by contract, the
idea of sharing the losses, it does not necessarily mean that one
who shares in the profits, independent of contract, will share in
the losses, nor does it necessarily mean an additional premium
rate in violation of the rate making powers of the Board is con-
tracted for.
Where a stock company writing Workmen's Compensation Insurance
Policies, on a participating or profit-sharing basis, incorporates
an assessment provision in its contract, it is presumed to be
operating under the mutual plan for writing such insurance. There
is no statutory prohibition against a stock company operating un-
der such plan. Nothing contained in the charter or by-laws of a
stock company, however, can authorize it to write strictly assess-
ment policies or policies containing any assessment provision
without likewise providing for participation on the part of the
subscriber. The rule appears applicable as applied to strictly
mutual companies to the effect that any regulation of such matters
by its charter or by-laws must be consistent with express statu-
tory provisions, mandatory or prohibitory in nature.
As to the above questions, Nos. 15 and 16, it is our opinion that
same be and they are each answered in the negative.
Questions 17, 18, and 19, read:
     "17. Can any insurer issue a 'stop-loss' contract; that is,
     a contract guaranteeing that the maximum premium will be a
     lesser amount than the premium produced at rates prescribed
     by the Board?
     1'18.Can any insurer agree, by resolution of its Board of
     Directors, or in any other manner, to cause a 'stop-loss'
     contract to be issued by any other insurer licensed to do
     business in this State, without such agreement being made a
     part of the policy contract andapproved by the Board of In-
     surance Commissioners?
     "19. Can any insurer licensed to do business in this State
     issue a 'stop-loss' contract guaranteeing that the maximum
     premium will be a lesser amount than the premium promulgated
     by the i3oardof Insurance Commissioners on policies of work-
     men's compensation issued by another insurer?"
You point out that the "stop-loss" plans in use in Texas, while
differing in detail, the principles are essentially the same.
That they embody the ,"cost-plus"plans and in addition purport to
protect the employer against losses in excess of 10% of the
standard premium.
Hon. J. P. Gibbs, Page 1'7


The principle of *cost-plus' is described 'byyou as an agreement
between the carrier and employer that a certain percentage of the
premium is to be paid to the carrier for "expenses", and the losses
are paid out of the remainder of the premium. Further, you con-
clude that if the employer can prevent losses, he saves money
because he does not pay all of the premium, and if the losses ex-
ceed the premium, the employer must pay them, or if the carrier
has undertaken payment, reimburse the carrier. In other words,
you submit the view that the employer pays all losses and in addi-
tion pays the carrier for expenses.
From the above views, we are unable to hold that such a contract,
presumed to be incorporated as a part of the policy 'byendorse-
ment, issued 'bythe carrier to all employers alike, without
discrimination, contravenes the rate making power of the Board.
In short, it is nothing more than a participating form policy
whereby the parties, subject to the provisions of the law, read
into every policy contract with reference to the experience or the
anticipated loss ratio of the employer or group into which he is
properly placed. The percentage as to "expense" cannot vary be-
tween subscribers of the same class or group, nor can it in any-
wise affect or bind the Board as to the reserve required or divi-
dends authorized to be paid. Any return of premium or savings
are subject to approval of the 'Boardas in payment of dividends.
In answer to questions Nos. l'i,lb, and 19, it is our opinion
that no insurer writing Workmen's Compensation Insurance in this
State can contract with the subscriber by guaranteeing that the
maximum premium will be a lesser amount that the premium produced
at rates prescribed and promulgated by the Board. The character
of such agreements from the description furnished and termed
"stop-loss" contracts do not amount to such guarantee. The mat-
ter of reinsurance is purely a matter of contract between the
carrier and its reinsuring company for the protection of its re-
serves and surpluses and while there is no prohioition against
its being incorporated in the particular endorsement adopted 'by
the company, to be uniformly done without discrimination, such
endorsement should be attached to all standard form policies of
such insurers.
With reference to your question No. 20, it is not shown that such
appointment is incorporated in any endorsement to the standard
policy approved or before you for approval., viecannot assume the
same participating endorsement attached to all policies from your
Question No, 21, and should we do so, we are not furnished suffi-
cient facts from which it can be determined whether a proper
grouping of subscribers will permit the distinction pointed out.
These questions arp placed in the same category along with your
Question No. 12 and 13. It has long been the practice of the In-
surance Department to submit particular endorsements proposed to
-beadopted by the insurer to this department where any question of
Hon. J. P. Gibbs, Page 18            O-5873


the Board are raised by      you.      We therefore, omit sai d questions
from this opinion, subject          to resubmission, if desired, in accor-
dance herewith.
Your last question, No. 22, reads as follows:
     "22. If a workmen's compensation insurance policy written on
     a so-called 'cost-plus' plan, is insurance insofar as the
     employee is concerned under the Act, in accordance with the
     Comillion vs. Union Piridgedecision 100 Fed. (2) 937, is the
     net premium realized ‘by the insurance company (that is, the
     gross premium less the amount returned to the assured under
     such 'cost-plus' plan) legal premium and authorized bytie
     iuorkmen'sCompensation Insurance Hating Law?"
In the Gomillion vs. Union Bridge case, referred to, the court
had before it apparently the identical participation form endorse-
ment as presented in "Exhibit C" attached to your request. The
material provisions of this endorsement read:
     11
      .....It is agreed between the Company and the Assured that:
     "(1) The Assured will pay the Company the manual or experience
     rates of premium applicable to this policy, as promulgated
     by the Board of Insurance Commissioners of Texas,
     “(2) If the premium so paid are insufficient to provide for
     the payment of
          (a) All paid and incurred losses, including legal and
          other expenses incidental thereto arising under this po-
          licy; and
          (b) Such per cent of all premiums as may be agreed upon
          oetween the Assured and the Company, which per cent shall
          be retained by the Company;

      . Assured
     the
     tional
                 will pay to the Company, upon demand, such addi-
            amounts as may be necessary to provide adequate re-
     serves computed as prescrioed by the Board of Insurance Com-
     missioners under the insurance laws of the State of Texas.
     "(3) If the premiums so paid shall prove to be more than
     sufficient to so provide for the payment of the charges men-
     tioned in the preceding sub-paragraphs (a) and (b) of para-
     graph 2 hereof, and the maintenance of adequate reserves
     computed on all policies as stated in paragraph 2 hereof,
     the Company will return the excess to the Assured as and
     when such return shall be approved by the Board of Insurance
     Commissioners of Texas."
.   . -




      hon, J. P. Gibbs, Page 19   O-5873


      In the Gomillion case involving a suit by the 'beneficiariesof a
      fatally injured employee against his employer for damages, the
      employer defended on the ground that it was a subscriber under
      the Workmen's Compensation Insurance Act. Answering this conten-
      tion, the beneficiaries, appellanLs,contended no risk was assumed
      under the policy and that the employer was a self-insurer.
      The court apparently followed the weight of decisions which appear
      to be in favor of the Commission of Insurance or Board 'beingin-
      vested with the power to determine whether or not policy forms
      conform to requirements under statutes requiring approval of such
      forms 'bythe Commissioner or Board, All American Benevolent
      Society vs. Erickson, 3 N. IV. Zd, 821; Aetna Life Ins. Co., vs.
      hfardison,85 N. E. 40'7;29 Amer. Juris. page 63, note 19.
      It has further been held that the approval of a life policy Sorm
      involves an administrative ruling thtitsuch form met ,iffirmatively
      every requirement of the statutes prescribing its provisions.
      ivianhattan
                Life Ins. Co., New York, vs. <Wilsonmotor Co., Inc.,
      75 Sod. 2d, 721
      Under paragraph (3) of'the above endorsement form, which apparent-
      ly is the participating feature, the company agrees to return the
      excess "as and when such returns shall oe approved by the Board
      of Insurance Commissioners of Texas." Carrying this provision to
      a most favorable result, if the subscriber incurred no losses or
      expense, tne insurer has contracted to return, suoject to the ap-
      proval of the board, 90% of its gross premium or a 90% dividend
      subject to the approval of the aoard. We see no conflict in this
      provision with the rating statutes aoove referred to, presuming
      adequate reserves are maintained as required by law. we are not
      to oe understood, however, as approving such endorsement form, a
      matter we do not consider necessary in order to answer the aoove
      question.
      It is therefore our opinion that the net premium realized from the
      participating clause (3) of the enforsement form involved in the
      case of Gomillian vs. Union Bridge, 100 Fed, Sec. 93'7,whether to
      oe considered premium or otherwise, is authorized and not in con-
      flict with the bvorkmen'sCompensation Insurance dating Law.
      In conclusion, we wish to state that among others, we have reviewed
      the following opinions of this department, suumitted along with
      your request:
           1. Exhibit W'* to Hon. J. J. Timmons, Secretary State Insur-
              ance Commission, 12/1d/26
           2. Exhibit "E" to Hon. ;v.S. Pope, Casualty Insurance
              Commissioner, 2/23/32
Hon. J. P. Gibbs, Page 20   O-5873

     3. Exhibit "F" to Won. R. 0. Waters, Casualty Insurance
        Commissioner, 6/24/35
     5. Exhibit "H" to Hon. R. G, Waters, Casualty Insurance
        Commissioner 9/2d/38
     6. Exhibit Wf to Hon. R. G, jaters, Casualty Insurance
        Commissioner 12/16/3d
In so far as the foregoing opinions, or portions of them, hold
adversely to our answers given or in any wise conflict herewith,
same are expressly overruled. iieexpressly overrule that portion
of the opinion, Exhibit "H", rendered to Hon. R. G. Waters,,
Casualty Insurance Commissioner, under date of September 28, 1938,
by Hon. Richard Rrooks, Assistant Attorney General, in answer to
the seventh question propounded therein.
No portion of this opinion is to be construed or interpreted as
passing upon, upholding or disapproving any endorsement form or
or plan of operation referred to in your memorandum, exhibits or
opinions submitted in connection with this request. The only
specific plan cf operation which could be construed sufficiently
submitted for such purposes is that of the Texas Indemnity
Insurance Company with its present endorsement form, according to
your letter, set forth as Exhibit "Cl'attached. In view of the
fact that your questions individually and in the main relate solely
to specific phases of this or similar plans, without expressly
requesting our review of the particular endorsement form or plan
of any company, we deem it advisable to so limit this opinion as
above stated.
vteare returning herewith the data and exhibits belonging to
your files which were furnished in connection with your letter.
IYedesire to express our appreciation for the able assistance
given by Mr. Vestal Lemmon, Actuary, who generously conferred
with us from time to time at our request.
                               Yours very truly
                               A'l"i'OtiN&Y
                                        GENeHAL Ok''TtiXAS
                               By    Wm. J. H. king
                                         Assistant

WJKK:rt
sncls.
APPKOVEB: Oct. 4, 1944
     Carlos Ashley
     First Assistant
