Could a Texas life insurer pay its wholly owned service subsidiary a fee based on net premiums?
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This page answers the general question as of 1984. Ezel answers yours: what it means for your facts, under current Texas law, with citations.
Texas AG Opinion JM-187: Life Insurer Affiliate Fees
Plain-English summary
JM-187 concluded that a life insurance company could compensate a wholly owned service subsidiary based on the parent company's net premiums without violating article 3.68, provided the arrangement complied with the other cited Insurance Code safeguards.
"A life insurance company may base its payment to a wholly owned subsidiary corporation, for services rendered by the affiliate corporation, on the net premiums received by the parent life insurance company without violating article 3.68, so long as the arrangement is consistent with article 1.29 and article 21.49-1, section 4, of the Insurance Code."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
The opinion rejected a per se rule that every fee calculated as a percentage of annual premiums violated article 3.68. It treated the statute as targeting compensation to specified non-sales officers for individual steps in producing or approving insurance business.
"Transactions such as those you have inquired about which are based on the volume of business transacted are not prohibited by article 3.68."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
The remaining provisions required affiliate transactions to satisfy fairness, propriety, equity, and reasonableness standards rather than prohibiting them automatically.
"Both article 1.29, a broad conflict of interest statute, and article 21.49-1, a comprehensive regulatory scheme for insurance holding company systems test the propriety of transactions within insurance holding company systems by standards of fairness, reasonableness, and other equitable bases."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
Currency note
This opinion was issued in 1984. 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.
Common questions
What part of JM-88 did JM-187 withdraw?
It withdrew the portions treating a fee based on policies sold as a per se violation when paid to a subsidiary sharing the parent company's president and secretary.
"We withdraw those portions of the reasoning and conclusions of JM-88 which hold that any arrangement by which a life insurance company pays a fee based on the number of policies sold, to a subsidiary having the same president and secretary as the parent company per se violates article 3.68 of the Texas Insurance Code."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
What part of JM-88 remained?
JM-187 reaffirmed JM-88's conclusion that article 3.68 applied to arrangements between foreign corporations concerning out-of-state business.
"We reaffirm the conclusion of JM-88 as to that matter."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
What payments did article 3.68 prohibit?
The opinion read the statute as barring commission-like payments to specified non-sales officers when tied to particular policy-writing, application, renewal-premium, or risk-assumption activity.
"Article 3.68 obviously prohibits payments to certain specified non-sales personnel ... for the types of activities listed above, all of which constitute discrete steps in the sale of life insurance policies."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
Why did the agents-and-solicitors exception matter?
The opinion treated it as evidence that the statute addressed conflicts between people earning sales commissions and officers responsible for approving insurance applications and binding the company.
"The prohibition is directed at particular, individual transactions and was intended to prevent only conflicts of interest between those persons who produce applications for insurance business in order to receive commissions therein, and those persons who have the responsibility to approve the applications for insurance on behalf of such companies."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
What standards governed regular services between affiliates?
JM-187 quoted provisions requiring fair and equitable terms and reasonable charges and fees.
"Rendering of services on a regular or systematic basis" was governed by standards including "fair and equitable" terms and "reasonable" charges and fees.
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
Could premium volume measure the subsidiary's work?
Yes. The opinion said annual net premiums could serve as a measure of the value of the affiliate's services.
"The amount of annual net premiums issued ... [is] a measure of the value of work done by the affiliate for the parent company."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
Background and statutory framework
The request asked whether all financing arrangements between a life insurer and an affiliate using a fee based on annual premiums were automatically prohibited or instead tested for fairness and reasonableness.
"You have requested a reconsideration of JM-88 regarding whether all financing arrangements between a parent life insurance company and an affiliate which are based on a fee computed on a percentage of annual premiums written are per se prohibited by article 3.68, or whether they are subject to the fair and reasonable test set out in article 1.29 and article 21.49-1, section 4, of the Texas Insurance Code."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
The original statutory language dated to 1909 and was titled as a measure making it unlawful to pay certain people for procuring insurance.
"The 1909 title ... indicates that the statute was one 'making it unlawful to pay certain persons for procuring insurance.'"
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
JM-187 said neither the older statute's legislative history nor prior opinions directly resolved the affiliate-service arrangement presented.
"Neither of those opinions dealt with the meaning of the prohibitory language in the statute as applied to the situation at issue in your request."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
Citations and references
- Article 3.68 supplied the officer-compensation prohibition reconsidered in JM-187.
"The language in question prohibits the payment to certain 'officers' of 'any commission or other compensation' if payment is ... contingent upon" specified insurance activity.
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
- Articles 1.29 and 21.49-1 supplied the fair, proper, equitable, and reasonable standards for holding-company transactions.
"Neither statute prohibits, per se, payments to the subsidiary service corporation based on the amount of annual net premiums issued."
Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
Source
- Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-0187
- Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1984/jm0187.pdf
Original opinion text
Best-effort transcription from a scanned PDF. Minor errors may remain. The linked PDF is authoritative.
The Attorney General of Texas
JIM MATTOX Auj:Ist13, 1984
Attorney General
Supreme Court Building Mr. Lyndon L. Olson, Jr. Opinion NO. JM-187
P. 0. BOX 12548 Chairman
Austin. TX. 78711. 2548 State Board of Insurance Re: Reconsideration of JM-88:
512l475.2501
1110 San Jacinto Boulevard Whether the Insurance Code
Telex 910/874-1387
Telecopier 512l475.0286
Austin, Texas 78786 per se prohibits certain finan-
cial arrangements between a life
insurance company and its sub-
714 Jackson. Suite 700 sidiary which is compensated on
Dallas, TX. 752024508
a percentage of annual premiums
2141742.8944
written
4824 Alberta A”.%, Suite 160 Dear Mr. Olson:
El Paso, TX. 79905.2793
915/533-3464 You have reque!;teda reconsideration of ~~-88 regarding whether
all financing arrangements between a parent life insurance company and
hW Texas. Suite 700
an affiliate which are based on a fee computed on a percentage of
.mston, TX. 77002.3111 annual premiums written are per se prohibited by article 3.68, or
?13/2234666 whether they are su>ject to the fair and reasonable test set out in
article 1.29 and article 21.49-1, section 4, of the Texas Insurance
Code. You have no': raised any question about the reasoning of JM-88
606 Broadway, Suite 312
Lubbock, TX. 79401-3479
that article 3.68 applies to arrangements between foreign corporations
8061747-5233 regarding out of si:ate business, and we reaffirm the conclusion of
JR-88 as to that matter. However, upon reconsideration, we withdraw
those portions of the reasoning and conclusions of JM-88 which hold
4309 N. Tenth. Suite S
that any arrangement by which a life insurance company pays a fee
k&Allen, TX. iS501-15S5
512f682.4547 based on the number of policies sold, to a subsidiary having the same
president and secretary as the parent company per se violates article
3.68 of the Texas lr,suranceCode.
200 Main Plaza. Suite 400
San Antonio, TX. 782052797
512,225-4191
The question addressed by JM-88 asked whether a life insurance
company was permitix!dto compensate another corporation with officers
in common for the provision of certain services, when such
An Equal Opportunity/ compensation was bar,edon a percentage of net premiums received by the
Affirmative Action Employer insurance company from non-Texas business. You advised that it was
the long-standing construction of your agency that article 3.68
prohibited certain "officers" of a life insurance company from
receiving any com)+?nsation based on a percentage of the business
produced by their cx~mpapany. Our attention was called to a letter dated
MY 29. 1926, fron an assistant attorney general regarding article
4745. V.T.C.S., whL:h was later transferred unchanged to article 3.68
of the Insurance Code. See Attorney General Letter Opinion Book 281
(1926). page 106. -
Mr. Lyndon L. Olson, Jr. - :?.ige
2 (m-187)
The only other applic;;tionwhich we found of article 3.68, also
in its prior codification 8s article 4745, is contained in Attorney
General Opinion O-5913 (19!,[). Neither of those opinions dealt with
the meaning of the prohibic:orylanguage in the statute as applied to
the situation at issue in y','lrequest.
No legislative history .?rovidesguidance as to the mesning of the
statutory language which wa,3 originally section 7 of a 1909 enactment,
other than the 1909 title, which indicates that the statute was one
"making it unlawful to pay :ertain persons for procuring insurance."
(Emphasis added). Acts 190 3, 31st Leg., 2d C.S., ch. 25, at 448. Nor
does the subject matter of the remainder of that act give any further
indication as to its purpose. Hence, we must ascertain the meaning
and intention of the legislature from the language of article 3.68 as
it has existed unchanged fcr over seven decades. -See 53 Tex. Jur. 2d
Statutes 5130 (1964).
The language in ques:ion prohibits the payment to certain
"officers" of "any commissi~~:~
dr other compensation" if payment is (1)
contingent upon the writing l)rprocuring of s policy of insurance in
such company; or (2) [ccntingent upon] procuring an application
therefor by x person whon.eoever;or (3) contingent upon the payment
of x renewal premium; or (,i)[contingent] upon the assumption of 9
life insurance risk by suC1 company. Excluded from this prohibition
of payment resulting from the listed actions are agents and
solicitors. We think this exclusion is significant and is indicative
of the objective of this seatute. An insurance agent is routinely
compensated by commissions '>,%sed
on his rates. Article 3.68 obviously
prohibits payments to certstn specified non-sales personnel -- i.e.
"president, vice president, secretary, treasurer, actuary, medical
director . . . or . . . any officer of the company" -- for the types
of activities listed above, all of which constitute discrete steps in
the sale of life insurance .?,,licies.
We think these references to specific steps 1~ the process of
life insurance sales clarify the meaning of the use of the otherwise
ambiguous word "any" in thl:enumeration of each action. See Black's
Law Dictionary 86 (5th ed. 1379). The nature and context ofhis list
indicate that the prohibition is directed at particular, individual
transactions and was intentiazdto prevent only conflicts of interest
between those persons who I'l'oduceapplications for insurance business
in order to receive commissions therein, and those persons who have
the responsibility to appruJz the applications for insurance on behalf
of such companies and ther&,:rbind them on the policy.
Indeed, two other Insul:anceCode provisions adopted in 1971 and
otherwise unnecessary or :onflicting support this result. Both
article 1.29, a broad conflict of interest statute, and article
21.49-1. a comprehensive l,egulatory scheme for insurance holding
company systems test the Ill'oprietyof transactions within insurance
holding company systems by standards of fairness, reasonableness, and
p. a17
Mr. Lyndon L. Olson, Jr. - Page 3 (JM-187)
other equitable bases. For example, section l(c)(S) of article 1.29
allows:
(A) Any tranciactions within an insurance
holding company r%:%tem by insurers with their
holding companies, subsidiaries or affiliates that
are not prohibitetlby law, that meet the test of
being fair and pr#,:,er,and that are regulated by
other statutes; ;nld (B) other transactions or
arrangements not pxohibited by law that meet the
test of being fa:.?.and proper as prescribed by
rules and regulat:ionsadopted by the State Board
of Insurance.
Likewise, section 4. subsections (a)(l), (a)(2), and (d)(Z)(iii) of
article 21.49-1 establishes that such transactions as "rendering of
services on a regular or systematic basis" are governed by standards
including "fair and equit%,Le" terms and "reasonable" charges and
fees. Neither statute prohL)its, per se, payments to the subsidiary
service corporation based on the amount of annual net premiums issued,
this being a measure of thr value of work done by the affiliate for
the parent company.
We see no basis for concluding that article 3.68 ever prohibited
payments such as those at ir;ruehere. Transactions such as those you
have inquired about which are based on the volume of business
transacted are not prohibited by article 3.68.
SUMMARY
A life insurance!company may base its payment
to a wholly own1~11subsidiary corporation, for
services rendered by the affiliate corporation, on
the net premiums received by the parent life
insurance company rrithoutviolating article 3.68,
so long as the arrangement is consistent with
article 1.29 and z,rticle 21.49-1, section 4, of
the Insurance Code.
JIM MATTOX
Attorney General of Texas
TOM GREEN
First Assistant Attorney General
p. ala
Mr. Lyndon L. Olson, Jr. - 'hge 4 ~(JM-187)
DAVID R. RICHARDS
Executive Assistant Attorrq General
Prepared by Colin J. Carl
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Rick Gilpin, Chairman
David Brooks
Colin Carl
Susan Garrison
Henry Robinson
Nancy Sutton
Bruce Youngblood
p. 819
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