Could the Texas Department of Insurance regulate viatical settlement companies under the 1993 law?

Plain-English summary

The Texas Department of Insurance came to the Attorney General with four practical questions about a brand-new statute. In 1993 the legislature had passed article 3.50-6A of the Insurance Code, which said the insurance board had "exclusive jurisdiction in this state to regulate viatical settlements." A viatical settlement is the sale of a life insurance policy by a terminally ill person to an investor: the investor buys the policy for less than its face value, becomes the beneficiary, and collects when the insured dies, while the insured gets cash up front (often half to four-fifths of the policy's value). The industry grew up around the AIDS epidemic in the late 1980s and had spread to cancer and other terminal illnesses. The department wanted to know whether the new law let it license viatical companies, charge them a fee, enforce its rules through the commissioner's sanction powers, or refer violations to the Attorney General.

The office never reached any of those four questions, because all four assumed the statute validly handed the department power to regulate. It did not. Article 3.50-6A was unconstitutional. The reason is the nondelegation principle baked into the Texas Constitution's separation of powers (article II, section 1). The legislature sets public policy; an agency carries it out. When the legislature delegates rulemaking power, it must supply either standards to guide the agency or, at a minimum, a discernible general regulatory purpose the agency can work toward. Article 3.50-6A did neither. It contained no standards or guidelines, and reading it alongside the rest of the Insurance Code did not supply any. There was no body of prior case law, administrative practice, or industry custom the legislature could have meant the department to borrow, since viatical settlements were new and unregulated almost everywhere. And the statute did not even express a purpose, not so much as what one treatise called a "pious wish." The legislative history made things worse rather than better: the House Insurance Committee's own bill analysis said the bill did "not confer rulemaking authority" on any state agency, and the only stated purpose was to "establish the jurisdiction" of the board, which says nothing about what the regulation should achieve.

The office contrasted this with statutes courts had upheld despite thin standards, like a federal law letting the Federal Home Loan Bank Board appoint conservators for building and loan associations, where banking's long-settled practices supplied the missing standards. Viatical settlements had no such backdrop. The office also stressed that a court could not rescue the statute by inventing an objective for it; doing so would be judicial legislation. With no standards and no discernible purpose, article 3.50-6A violated separation of powers and was null and void, so the department had no authority to regulate viatical settlements under it.

Currency note

This opinion was issued in 1995. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Texas later enacted a detailed viatical and life settlement regulatory scheme, so the gap this opinion identified has long since been addressed by statute. The Insurance Code articles cited here have also been recodified. Read this page for the nondelegation reasoning and for the history of how Texas first (and unsuccessfully) tried to regulate the viatical industry, and check current law before relying on anything about how viatical or life settlements are regulated today.

What the opinion meant for those who asked

For the Department of Insurance: The opinion concluded that the department had no authority under article 3.50-6A to license viatical companies, charge a license fee, enforce rules through the commissioner's sanction powers, or refer violations to the Attorney General, because the statute granting that authority was void.

For viatical companies and investors: The opinion held that the statute purporting to place the industry under the insurance board's exclusive jurisdiction was a nullity. It noted separately that the department's general insurance-enforcement tools (the cease-and-desist power in article 1.10A and the unfair-practices prohibitions in article 21.21) reached a viatical company only if the company actually engaged in the "business of insurance" as defined in article 1.14-1, which buying and reselling policies does not automatically do.

For terminally ill policyholders and consumer advocates: The consumer protections some legislators and "other opponents" of the bill had wanted (requiring sellers to get legal counsel, a waiting period to reconsider a sale, limits on broker fees) had no statutory footing under this void article. The office observed that any of those goals could have supplied the missing regulatory objective had the legislature actually expressed it.

For the legislature: The opinion identified precisely what the statute lacked, standards and a discernible objective, which is what a constitutional delegation of regulatory power to the department would have needed.

Common questions

What is a viatical settlement?
The opinion defined it as a contract in which an insured with a terminal illness who owns a life insurance policy assigns or transfers the policy to another person or entity for valuable consideration. In plain terms, a dying person sells their life insurance to an investor for cash now, and the investor collects the death benefit later.

Why did the Attorney General say the 1993 law was unconstitutional?
Because it gave the insurance board power "to regulate viatical settlements" without supplying any standards or even a discernible purpose for the regulation. Under the separation of powers in article II, section 1 of the Texas Constitution, the legislature cannot delegate regulatory authority that open-endedly.

Did this mean viatical companies were unregulated in Texas?
The opinion concluded the department had no authority to regulate them under article 3.50-6A specifically. It did not create regulation; it removed the supposed basis for it. The office noted that other insurance laws applied only if a viatical company actually engaged in the business of insurance.

Could a court have fixed the statute by reading a purpose into it?
No. The office said a court may not formulate a regulatory objective on the legislature's behalf, because that would be judicial legislation and an invasion of a responsibility that belongs to the elected lawmakers.

Background and statutory framework

Article 3.50-6A was added by Acts 1993, 73d Leg., ch. 918 (House Bill 431). Its definitions section described a "viatical settlement" as a contract by which a terminally ill insured assigns or transfers a life insurance policy for valuable consideration, and its operative section gave "the board" exclusive jurisdiction to regulate viatical settlements regardless of form, except for transactions governed by the Securities Act (art. 581-1 et seq., V.T.C.S.). The "board" was the Department of Insurance (Ins. Code art. 1.01A(c)).

The constitutional analysis drew on a line of Texas Supreme Court cases. Texas Antiquities Committee v. Dallas County Community College District, 554 S.W.2d 924 (Tex. 1977) (plurality), held that "some criteria or safeguards" are necessary for a valid delegation of legislative power to an agency. Trapp v. Shell Oil Co., 198 S.W.2d 424 (Tex. 1946), established that the safeguards need not appear in the delegating statute itself, but that a statute lacking meaningful standards must at least have a discernible general regulatory purpose; Brown v. Humble Oil & Refining Co., 83 S.W.2d 935 (Tex. 1935), framed the rule that the legislature sets policy and the agency acts within the primary standards it prescribes. Applying those principles, the office found article 3.50-6A had neither standards nor a discernible purpose. Reading the article in pari materia with the rest of the code supplied nothing, unlike the federal scheme in Carlson v. Landon, 342 U.S. 524 (1952), where other statutes filled the gap. There was no crystallized administrative practice to borrow, in contrast to Kent v. Dulles, 357 U.S. 116 (1958); the office found no reported case anywhere dealing with viatical settlements and noted only a handful of states then regulated the industry. And unlike the long-regulated banking field in Fahey v. Mallonee, 332 U.S. 245 (1947), where settled practices supplied the standards, the viatical industry had no such backdrop. The legislative history confirmed the absence of any objective, the House committee analysis stating the bill conferred no rulemaking authority. Because the delegation lacked both standards and a discernible objective, the statute violated Texas Constitution article II, section 1, and the office, citing its earlier conclusion about a similarly standardless racing statute in Attorney General Opinion JM-1134 (1990), held article 3.50-6A null and void.

Citations

Statutory provisions discussed:

• Ins. Code art. 3.50-6A (purported delegation to regulate viatical settlements; held void)
• Ins. Code art. 1.01A(c) ("board" means the Department of Insurance)
• Ins. Code art. 1.10 (commissioner's sanction powers, including subsection 7(a)); art. 1.10A (cease-and-desist orders)
• Ins. Code art. 1.14-1 (acts constituting the "business of insurance"); art. 21.21 (unfair methods of competition and deceptive practices)
• Securities Act art. 581-1 et seq., V.T.C.S. (carve-out from the board's jurisdiction)
• Tex. Const. art. II, § 1 (separation of powers)
• Acts 1993, 73d Leg., ch. 918 (House Bill 431, adding article 3.50-6A)

Cases discussed:

• Texas Antiquities Comm. v. Dallas County Community College Dist., 554 S.W.2d 924 (Tex. 1977)
• Trapp v. Shell Oil Co., 198 S.W.2d 424 (Tex. 1946)
• Brown v. Humble Oil & Refining Co., 83 S.W.2d 935 (Tex. 1935)
• Carlson v. Landon, 342 U.S. 524 (1952)
• Kent v. Dulles, 357 U.S. 116 (1958)
• Fahey v. Mallonee, 332 U.S. 245 (1947)

Attorney General opinions discussed:

• JM-1134 (1990) (standardless racing-regulation statute held an unconstitutional delegation)

Secondary authority discussed:

• 1 Kenneth C. Davis, Administrative Law Treatise § 3:15 (2d ed. 1978); Frank E. Cooper, State Administrative Law (1965); Viatical Settlements Model Act (Nat'l Ass'n of Ins. Comm'rs 1994)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0314
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1995/dm0314.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

January 10, 1995

Ms. Rebecca Lightsey
Interim Commissioner of Insurance
Texas Department of Insurance
P.O. Box 149104
Austin, Texas 78714-9104

Opinion No. DM-314

Re: Whether the Department of Insurance may, pursuant to Insurance Code article 3.50-6A, license noninsurance entities that offer viatical settlement agreements, and related questions (RQ-663)

Dear Ms. Lightsey:

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

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

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

3. Does article 3.50-6A authorize the commissioner of insurance to enforce, through the sanctions provided in code article 1.10, subsection 7(a),[1] rules the department would adopt under article 3.50-6A?

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

All four questions assume as a threshold matter that article 3.50-6A validly delegates authority to the department to regulate viatical settlements. For the following reasons, we are of the opinion that article 3.50-6A is invalid as an unconstitutional delegation of regulatory authority and therefore that the department has no authority under this statute to regulate viatical settlements.

The concept of a viatical[2] settlement agreement

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

In return, the AIDS sufferer receives a large amount of cash, usually 50 to 80 percent of the policy depending on his or her life expectancy, to pay off debts or just enjoy.

Housewright, supra note 2. "The viatical industry got started in 1989 because of AIDS, although people with terminal illness such as cancer are also selling their policies." Leigh Hopper, AIDS Sufferers Swap Insurance for Ready Cash, Houston Post, Apr. 1, 1994, at A1, A15; cf. Miller, supra note 2 ("The first viatical company appeared in 1989"). Cancer patients make up only ten percent of those now selling their policies but are expected to become a majority in the near future. Quint, supra note 2, at C1, C2. Some viatical companies buy and hold policies, and others "are brokers that find buyers and receive a fee for their service." Housewright, supra note 2.

Article 3.50-6A, which was added to the code in the last legislative session, see Acts 1993, 73d Leg., ch. 918, provides as follows:

Definitions

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

Regulation by Board

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

The department is the "board" to which article 3.50-6A refers. See Ins. Code art. 1.01A(c).

It is settled law in this state that "some criteria or safeguards" are necessary to the valid delegation of legislative power to administrative agencies. Texas Antiquities Comm. v. Dallas County Community College Dist., 554 S.W.2d 924, 927 (Tex. 1977) (plurality opinion). The "criteria or safeguards" do not have to be found in the statutory delegation, however: the separation of powers required by section 1 of article II of the Texas Constitution does not forbid that an administrative agency itself make rules establishing standards to guide its exercise of power in effectuation of the legislative purpose, provided that the rules are made pursuant to power delegated by the legislature and in accordance with procedures that protect the rights of persons affected by the exercise of regulatory discretion. See Trapp v. Shell Oil Co., 198 S.W.2d 424, 438-39 (Tex. 1946) (on motion for rehearing); see also Texas Antiquities Comm., 554 S.W.2d at 928 (plurality opinion) ("We have, in this case, no standard or criteria either by statute or rule which affords safeguards for the affected parties"). Thus, to constitute a valid delegation of legislative power, an organic statute that lacks meaningful standards must at least have a discernible general regulatory purpose. See Trapp, 198 S.W.2d at 438; see also 1 Kenneth C. Davis, Administrative Law Treatise § 3:15, at 209 (2d ed. 1978) ("a delegation without standards of power to make rules in accordance with proper rule-making procedure and a delegation without standards of power to work out policy through case-to-case adjudication based on trial-type hearings should normally be sustained, whenever the general legislative purpose is discernible") (last emphasis added). The legislature must set the public policy of the state, and the agency must exercise its delegated rulemaking power within the limits of the primary standards prescribed by the legislature or implicit in the public policy. See Brown v. Humble Oil & Refining Co., 83 S.W.2d 935, 940-41 (Tex. 1935). Analyzing under these principles, we find that article 3.50-6A has neither standards nor a discernible regulatory purpose.

Article 3.50-6A does not express any standards or guidelines for regulation, nor can we infer from reading the article in pari materia with the rest of the code any legislative intent as to such standards or guidelines. Cf. Carlson v. Landon, 342 U.S. 524, 544 (1952) (holding that Internal Security Act of 1950 was not unconstitutional delegation of rulemaking authority because other statutes provided standards for determining what aliens were subject to deportation and thus limited attorney general's authority under Internal Security Act of 1950 to detain such aliens without bail pending deportation proceeding). For instance, we cannot read code article 1.10A, which authorizes the commissioner of insurance to issue a cease and desist order in certain circumstances against a person "engaging in the business of insurance," as being applicable to a viatical company unless that company in fact engages in some act in Texas that constitutes the business of insurance as defined in code article 1.14-1.[3] The same is true of code article 21.21, which prohibits certain "unfair methods of competition or unfair or deceptive acts or practices [in the business of insurance]."

Furthermore, there is no well-established case law, administrative practice, or background of custom that the legislature could have intended the department to rely on as standards of practice or policy guidelines for the infant viatical industry. We have found in our research no reported case dealing with viatical settlements.[4] The department has no existing regulatory scheme with crystallized standards of practice that the legislature could have intended to extend to viatical settlements. Cf. Kent v. Dulles, 357 U.S. 116, 127-28 (1958) (administrative practice prior to enactment of standardless statute granting secretary of state discretion to grant passports had crystallized into two grounds for passport denial, citizenship [or allegiance] and unlawful conduct, which were "the only ones which it could fairly be argued were adopted by Congress in light of prior administrative practice").

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

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

When the legislative draftsmen decide upon the terms of the delegation, it is for them to decide whether the legislature shall set the policy in definitive terms, or whether on the other hand the legislative enactment shall express its general purpose only in terms of a pious wish, delegating to an administrative agency the responsibility of actually determining the working policies by which the generally-phrased legislative desire should be attained.

Frank E. Cooper, State Administrative Law 71 (1965). We need not consider here how precise an expression of regulatory purpose must be to pass muster under the Texas Constitution, for article 3.50-6A lacks the expression of even a "pious wish" or "generally-phrased legislative desire." Compare the legislative purpose in the statutory delegation upheld in the Trapp case: "for the conservation of crude petroleum oil and natural gas and to prevent the waste thereof," V.T.C.S. art. 6029, repealed by Acts 1977, 65th Leg., ch. 871, art. I, § 2(a)(2); see Trapp, 198 S.W.2d at 438. There is no discernible implication of legislative purpose from the statute's expression of "viatical settlements" as the subject matter to be regulated.

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

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

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

House Research Organization, Bill Analysis, H.B. 431, 73d Leg., at 3 (1993). Any or all of the objectives that the "other opponents" allude to above, prohibiting unscrupulous practices, preventing the exploitation of weak, desperate, or incompetent insureds, requiring that the decision to sell one's life insurance policy be an informed one, controlling investors' profits, may have been intended by the legislators to be incorporated within the article 3.50-6A's textually empty delegation of authority "to regulate viatical settlements." Any of these objectives would have served to give purport to the delegation of regulatory power if there had been an expression in the legislative history of such objectives as the sense of the lawmakers. Unfortunately, there is no such expression. Rather, the purpose of House Bill 431 as stated in the House Committee on Insurance's bill analysis, "to clearly establish the jurisdiction of the State Board of Insurance over the regulation of viatical settlements," adds no substance to the needed regulatory objective.

We believe the nondelegation doctrine requires that a valid delegation of administrative regulatory power contain either in the text or in the legislative history of the organic statute a discernible legislative regulatory objective. See Trapp, 198 S.W.2d at 438; 1 Davis, supra p. 3. A court may not assume the function of formulating an objective upon which to limit the scope of regulatory power under article 3.50-6A. Such judicial legislation to formulate regulatory policy would constitute an invasion of a nondelegable responsibility of representative government, see Stephen Koslow, Standardless Administrative Adjudication, 22 Admin. L. Rev. 407, 420 (1970), as well as a function for which the court may not be institutionally equipped:

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

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

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

SUMMARY

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

DAN MORALES
Attorney General of Texas

JORGE VEGA
First Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by James B. Pinson
Assistant Attorney General

[1] Subsection 7(a) authorizes the commissioner of insurance to order sanctions against "the holder or possessor of a permit, license, certificate of authority, certificate of registration, or other authorization issued or existing under [the Commissioner's] authority or the authorization of th[e Insurance] code."

[2] Viatical derives from the Latin word viaticum, which referred to "the money and supplies given to Roman officials before risky journeys to far-flung regions of the empire." Michael Quint, Pre-Death Cash: A Business Grows, N.Y. Times, Nov. 14, 1994, at C1. Viatical settlements sometimes are called "living benefits," Ed Housewright, Investors' Purchase of AIDS Patients' Insurance Policies Raises Ethical Questions, Dallas Morning News, Feb. 7, 1994, at A1, or "death futures," Mark Miller, Taking on "Death Futures," Newsweek, Mar. 21, 1994, at 54.

[3] This footnote quotes the enumerated list of acts constituting the "business of insurance" set out in Insurance Code article 1.14-1, § 2(a). The scanned text of that enumeration is too degraded to transcribe reliably; the linked PDF is authoritative. The footnote concludes: "Ins. Code art. 1.14-1, § 2(a). You do not cite, nor have we found, any provision in the code predating article 3.50-6A that would authorize the licensure of companies to engage in viatical services."

[4] Only a handful of states have laws regulating the industry. Ernest Sander, Grim Reapers, Austin American-Statesman, May 1, 1994, at J1, J16 (listing California, Indiana, Kansas, New Mexico, and New York). Early last year the National Association of Insurance Commissioners adopted model legislation for state regulation of viatical settlements. See id.; Viatical Settlements Model Act (Nat'l Ass'n of Ins. Comm'rs 1994).