HBA-ATS C.S.H.B. 1089 76(R)BILL ANALYSIS Office of House Bill AnalysisC.S.H.B. 1089 By: Eiland Insurance 4/26/1999 Committee Report (Substituted) BACKGROUND AND PURPOSE Presently, 30 fraternal benefit societies (societies) are licensed in Texas, including six whose main offices are located in the state. More than $16 billion of life insurance issued by fraternal benefit societies, held by the state's more than 575,000 fraternal members, is currently in force in Texas. Fraternal benefit societies are different than commercial insurers in several respects, including a society's nonprofit status, its organization for the benefit of its members, its branch or lodge system, its representative form of government, and its provisions for the payment of death, sickness, disability, or other benefits. As a nonprofit organization, a society qualifies for tax-exempt status under the Internal Revenue Code (26 I.R.C. Section 501), if the society establishes that it operates under a lodge system and provides for the payment of benefits. Most fraternal benefit societies in the United States are members of the National Fraternal Congress of America (NFCA), the national trade association for fraternal benefit societies. NFCA provides support to its members, oversees the development of initiatives and programs to benefit the system, develops policy recommendations on legislative and regulatory issues, and monitors all state and federal bills for activity affecting member-societies. NFCA recently promulgated the Model Fraternal Code to reflect changes in the insurance industry and federal tax law. Forty states have enacted the Model Fraternal Code. The law regulating fraternal benefit societies in Texas has not been substantially revised since 1951. Only minor amendments since that date have been enacted. C.S.H.B. 1089 amends Chapter 10 (Fraternal Benefit Societies), Insurance Code, to enact portions of the Model Fraternal Code. This bill redefines the representative form of government for a fraternal benefit society. In addition, this bill includes the provision that a society is authorized to pay for any other benefit that may be provided by a life, accident, or health insurance company, provided that the benefit is offered in compliance with Chapter 3 (Life, Health, and Accident Insurance), Insurance Code, and consistent with Chapter 10, and that a society is required to specify in its laws or rules those persons to whom a certificate may be issued or who may be covered by benefits. This bill also requires a society to specify in its laws or rules the eligibility standards for each membership class, creates a grievance procedure, and authorizes the admission of social members. Additionally, this bill authorizes an owner of a benefit contract to change the beneficiary at any time in accordance with the laws or rules of the society. This bill authorizes a society to establish and operate one or more separate accounts and issue benefit contracts on a variable basis. In addition, this bill authorizes the creation a fraternal society for fraternal or patriotic purposes. This bill also increases from $25,000 to $150,000 the aggregate amount of payments collected by a society from its members before the society can incur any liability, issue a certificate, or pay a benefit. Additionally, this bill authorizes a society to indemnify a director, officer, employee, or agent of the society if that person is found guilty of a breach of duty, and authorizes a society to purchase and maintain liability insurance. In addition, this bill limits the personal liability of a person serving as a volunteer for a society. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the commissioner of insurance in SECTION 10 (Article 10.15, Insurance Code) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Article 10.01(b), Insurance Code, to redefine "control" as that term is defined by Section 2(d), rather than 2(c), Article 21.49-1 (Insurance Holding Company System Regulatory Act), Insurance Code. SECTION 2. Amends Article 10.03, Insurance Code, to redefine the representative form of government for a fraternal benefit society (society). Under the new definition, a society has a representative form of government if it has a supreme governing body constituted as an assembly or as a board; if the officers of a society are elected by the supreme governing body or by the board of directors; if only benefit members are eligible to serve as members of the supreme governing body, the board of directors, or an intermediate assembly of a society; if only benefit members may vote on the management of insurance affairs of a society; if a voting member of a society has only one vote; and if a voting member may not cast a vote by proxy. Deletes the existing definition. SECTION 3. Amends Chapter 10, Insurance Code, by adding Article 10.03A, as follows: ARTICLE 10.03A. ASSEMBLY AS FORM OF SUPREME GOVERNING BODY; BOARD OF DIRECTORS. (a) Provides that the supreme governing body is an "assembly" if it is composed of delegates elected directly by the members or their representatives and of other delegates as prescribed by a society's laws. (b) Authorizes a society to provide for election of delegates by mail. (c) Provides that the elected delegates must constitute a majority of the assembly in number and be entitled to the greater of two-thirds of the votes in the assembly or the number of votes required to amend a society's laws. (d) Requires an assembly to meet at least once every four years and elect a board of directors to conduct the business of the society between meetings of the assembly. (e) Authorizes a vacancy on the board of directors that occurs between elections to be filled as prescribed in a society's laws. SECTION 4. Amends Chapter 10, Insurance Code, by adding Article 10.03B, as follows: ARTICLE 10.03B. BOARD AS FORM OF SUPREME GOVERNING BODY. (a) Provides that a supreme governing body is a "board" if it is composed of delegates elected either directly by the members or their representatives and of other persons as prescribed by a society's laws. (b) Authorizes a society to provide for election of the board by mail. (c) Provides that the persons elected to the board must constitute a majority of the board in number and have at least the number of votes required to amend the society's laws, other than those laws, if any, that must be amended by direct vote of the members. (d) Prohibits the term of the board member from exceeding four years. (e) Authorizes a vacancy on the board of directors that occurs between elections to be filled as prescribed in a society's laws. Provides that a person filling the unexpired term of an elected board member is considered to be an elected member. (f) Requires a board to meet at least once each year to conduct the business of a society. SECTION 5. Amends Chapter 10, Insurance Code, by adding Article 10.03-1, as follows: ARTICLE 10.03-1. DEFINITIONS. Defines "benefit contract," "benefit member," "certificate," "laws," "lodge," "premiums," and "rules." SECTION 6. Amends Article 10.05, Insurance Code, as follows: (a) Creates this subsection from existing text. Deletes the prohibition that a monument or tombstone dedicated to the memory of a deceased member of a society cannot exceed $300 if the society provides for its payment. Includes the provision that a society is authorized to pay for any other benefit that may be provided by a life, accident, or health insurance company, provided that the benefit is offered in compliance with Chapter 3 (Life, Health, and Accident Insurance), Insurance Code, and consistent with Chapter 10. Makes conforming and nonsubstantive changes. (b) Adds this subsection to require a society to specify in its laws or rules those persons to whom a certificate may be issued or who may be covered by benefits. Requires a society to make the provision of those benefits consistent with the provision of benefits to members and their beneficiaries. (c) Adds this subsection to authorize a society to appoint a legal reserve life insurance agent licensed by the Texas Department of Insurance (department) to sell benefits listed under Subsection (a), Article 10.05, to society members. (d) Adds this subsection to authorize a society to offer a benefit under Subsection (a)(8), Article 10.05, Insurance Code, only if the person who sells the benefit is licensed by the department as a legal reserve life insurance agent Deletes existing Subdivision (2) which authorizes benefits to be provided on the lives of members, or upon application of a member, on the lives of the member's family, including the member, the member's spouse and minor children, in the same or separate certificates. SECTION 7. Amends Article 10.07(a), Insurance Code, to make a conforming change. SECTION 8. Amends Article 10.12, Insurance Code, as follows: ARTICLE 10.12. New title: QUALIFICATIONS FOR MEMBERSHIP; GRIEVANCE PROCEDURES. (a) Requires a society to specify in its laws or rules the eligibility standards for each membership class, provided that if benefits are provided on the lives of children, the minimum age for adult membership is between age 15 and age 21; the process for admission for each membership class; and the rights and privileges of each membership class, provided that only benefit members may vote on the management of the insurance affairs of a society. (b) Authorizes a society to admit social members. Prohibits a social member from voting in the management of the insurance affairs of a society. (c) Provides that membership rights in a society are personal to a member. Prohibits a member from assigning membership rights. (d) Authorizes a society to provide in its laws or rules for grievance or complaint procedures for members. (e) Deletes existing Article 10.12, except for the provision that nothing in this chapter shall be construed to affect or apply to societies which admit to membership only persons engaged in one or more hazardous occupations, in the same or similar lines of business. SECTION 9. Amends Chapter 10, Insurance Code, by adding Article 10.12-1, as follows: ARTICLE 10.12-1. BENEFICIARIES. (a) Authorizes an owner of a benefit contract to change the beneficiary at any time in accordance with the laws or rules of the society unless the owner waives this right by specifically requesting in writing that the beneficiary designation be irrevocable. Authorizes a society, through its laws or rules, to limit the scope of beneficiary designations. Requires a society to provide that a person whose designation as beneficiary is revocable may not have or obtain a vested interest in the proceeds, in conformity with the benefit contract. (b) Provides that if, at the death of a deceased insurer, a lawful beneficiary to whom the proceeds of the benefit contract are payable does not exist under the benefit contract, the amount of a benefit under a benefit contract shall be paid to a personal representative of a deceased insured or, if the owner of a certificate is a person other than the deceased insured, to the owner of the certificate. (c) Articulates the inapplicability of Subsection (b) to the extent funeral benefits may be paid under the benefit contract. SECTION 10. Amends Article 10.15, Insurance Code, as follows: (a) Creates this subsection from existing text and makes a nonsubstantive change. (b) Adds this subsection to prohibit a certificate from being delivered or issued for delivery in this state unless the form of the certificate has been filed with the Texas Department of Insurance (department) under Article 3.42 (Policy Form Approval). Provides that a life, accident, health, or disability insurance certificate or annuity certificate issued by a society must meet the requirements applicable to similar policies issued by an insurer in this state that are not inconsistent with this chapter as determined by rule of the commissioner of insurance (commissioner). (c) Adds this subsection to require a society to include in the terms of a certificate a grace period of one month for payment of premiums. (d) Adds this subsection to provide that each certificate must state the amount of premiums that are payable under the certificate. (e) Adds this subsection to provide that, if the laws of a society provide for expulsion or suspension of a member, a certificate must provide that a member who is expelled or suspended may maintain the certificate in force by continuing payment of the required premium, unless the expulsion or suspension is for nonpayment of a premium, or occurs within the contestable period of the benefit contract and is for material misrepresentation in the application for membership or insurance. (f) Adds this subsection to authorize a life insurance benefit contract issued on the life of a person who is younger than the society's minimum age for adult membership to provide for transfer of control or ownership to the insured at an age specified in the certificate. Authorizes a society to require approval of an application for membership in order to effect the transfer. Authorizes a society to provide in all other respects for the regulation, government, and control of certificates and rights, obligations, and liabilities incident and connected to the certificate. Provides that ownership rights under the certificate before a transfer must be specified in the certificate. (g) Adds this subsection to authorize a society to specify the terms and conditions for the assignment of a life insurance benefit contract. SECTION 11. Amends Article 10.18, Insurance Code, by adding Subsection (c), as follows: (c) Authorizes a society to establish and operate one or more separate accounts and issue benefit contracts on a variable basis. Authorizes a society, in order to comply with applicable federal or state law or rules, to issue contracts on a variable basis to which Articles 10.15 and 10.30(e) do not apply; and to adopt special procedures for the conduct of the business and affairs of a separate account and provide special voting and other rights for a person having beneficial interests in a separate account, including special procedures and rights relating to investment policy, investment advisory services, selection of certified public accountants, and selection of a committee to manage the business and affairs of the account. SECTION 12. Amends Article 10.19, Insurance Code, as follows: (a) Creates this subsection from existing text. An entity qualifies as a society if it files with the department, rather than with the State Board of Insurance, certified articles of incorporation or association. Adds fraternal and patriotic purposes to the list of permissible purposes that are authorized to be set forth in the articles of incorporation or association for a society. Authorizes the permissible purposes to be carried out directly by a society or indirectly through subsidiary corporations or affiliated organizations. (b) Creates this subsection from existing text. Specifies that the amount of the bond required to be filed with the commissioner, rather than with the State Board of Insurance, is between $300,000 and $1,500,000, as required by the commissioner. Provides that the sureties of the bond are approved by the commissioner, rather than by the State Board of Insurance. Makes conforming changes. (c) Creates this subsection from existing text. Increases from $25,000 to $150,000 the aggregate amount of payments collected by a society from its members before the society can incur any liability, issue a certificate, or pay a benefit. Increases from $1,000 to $2,000 the minimum amount of 500 death benefit certificates that a society must secure before it can issue a benefit certificate or pay any death or disability benefits. Makes conforming changes. (d) Creates this subsection from existing text. (e) Creates this subsection from existing text and makes conforming changes. (f) Creates this subsection from existing text and makes a conforming change. (g) Creates this subsection from existing text. (h) Creates this subsection from existing text. SECTION 13. Amends Article 10.26, Insurance Code, as follows: ARTICLE 10.26. New title: NO PERSONAL LIABILITY; INDEMNIFICATION OR REIMBURSEMENT. (a) Creates this subsection from existing text and makes nonsubstantive changes. (b) Adds this subsection to authorizes a society to indemnify and reimburse a person for expenses reasonably incurred by, and liabilities imposed on, that person in connection with or arising out of a legal proceeding in which the person is involved, or in connection with or arising out of a threat of a proceeding against that person, because that person is or was a director, officer, employee, or agent of the society or a firm, corporation, or organization with which the person served in any capacity at the request of a society. (c) Adds this subsection to prohibit a person, except as provided by Subsection (d), from being indemnified or reimbursed in relation to a matter in a legal proceeding in which the person is finally adjudged guilty of breach of a duty as a director, officer, employee, or agent of a society; or an agreement that settles a matter concerning a breach of duty or the threat of the proceeding. (d) Adds this subsection to authorize a society to indemnify or reimburse a person in relation to a matter described by Subsection (c) only if the supreme governing body, the board of directors, or a court of competent jurisdiction determines that the person acted in good faith for a purpose the person reasonably believed to be in or not opposed to the best interests of the society, and that in a criminal action or proceeding, the person had no reasonable cause to believe that the person's conduct was unlawful. (e) Adds this subsection to provide that a determination by a supreme governing board or board of directors under Subsection (d) of this article must be made by majority vote of a quorum consisting of persons who were not parties to the action, suit, or other proceeding under review. (f) Adds this subsection to provide that the termination of a legal proceeding by judgment, order, settlement, or conviction or on a plea of no contest does not create a conclusive presumption that a person does not meet the standard of conduct required in order to justify indemnification or reimbursement. (g) Adds this subsection to provide that the right of indemnification and reimbursement under this article is not exclusive of other rights to which a person may be entitled as a matter of law and inures to the benefit of the person's devisees, legatees, heirs, and estate. (h) Adds this subsection to authorize a society to purchase and maintain insurance on behalf of a person who is or was a director, officer, employee, or agent of the society or who is or was serving at the request of the society as a director, officer, employee, or agent of another firm, corporation, or organization against a liability asserted against that person or incurred by that person in any capacity or arising out of that person's status as a director, officer, employee, or agent of the society or the other firm, corporation, or organization. Authorizes a society to purchase and maintain insurance under this subsection regardless of whether the society has the power to indemnify or reimburse the person with respect to the covered liability under this article. (i) Adds this subsection to provide that a director, officer, employee, member, or volunteer of a society serving without compensation is not personally liable for damages resulting from an act or omission in the exercise of judgment or discretion in connection with the duties of that person for the society, unless the act or omission involved wilful or wanton misconduct. Sets forth that this subsection does not limit a society's direct or indirect liability SECTION 14. Amends Article 10.30, Insurance Code, as follows: (a) Creates this subsection from existing text and makes conforming changes. (b) Creates this subsection from existing text and makes a conforming change. (c) Creates this subsection from existing text. (d) Creates this subsection from existing text and makes conforming and nonsubstantive changes. (e) Creates this subsection from existing text. Changes the maximum rate of interest that can be charged to a member to make up shortfalls in collections to pay benefits and maintain the fund from five per cent annually to the rate specified for certificate loans under the certificate. Requires the assessment to be levied against an owner of a certificate who is not a member. Makes a nonsubstantive change. (f) Creates this subsection from existing text and makes a conforming change. SECTION 15. Amends Chapter 10, Insurance Code, by adding Article 10.31, as follows: ARTICLE 10.31. NONFORFEITURE BENEFITS, CASH SURRENDER VALUES, CERTIFICATE LOANS, AND OTHER OPTIONS. (a) Sets forth that for a certificate issued before January 1, 2001, the value of the paid-up nonforfeiture benefit and the amount of a cash surrender value, loan, or other option granted under the certificate must comply with the law applicable to the certificate immediately before that date. (b) Provides that for a certificate issued on or after January 1, 2000, the value of the paidup nonforfeiture benefit and the amount of a cash surrender value, loan, or other option granted under the certificate is computed as provided under the provisions of Articles 3.44a (Standard Non-forfeiture Law for Life Insurance) and 3.44b (Standard Non-forfeiture Law for Individual Deferred Annuities) applicable to life insurance companies issuing policies containing similar benefits and under the applicable tables established under those articles. SECTION 16. Amends Article 10.33(a), Insurance Code, to include Article 1.15A among the articles to which each domestic society is subject. SECTION 17. Repealer: Articles 10.05-1 (Provisions for Life Insurance Benefits) and 10.05-2 (Accident and Health Insurance Certificates), Insurance Code. SECTION 18. Effective date: January 1, 2000, except for Section 17 which is effective on January 1, 2001. Makes application of Article 10.15 prospective for a certificate that is delivered, issued, or renewed on or after January 1, 2001. SECTION 19. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 1089 modifies the original bill by adding a new SECTION 1 that amends existing Article 10.01(b), Insurance Code, to redefine "control" as that term is defined by Section 2(d), rather than by Section 2(c), Article 21.49-1, Insurance Code. The substitute redesignates SECTION 1 of the original bill as SECTION 2. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 2 of the original bill as SECTION 3. In proposed Article 10.03A(c), the substitute modifies the original by providing that the elected delegates to the assembly must constitute a majority of the assembly in number and be entitled to the greater of two-thirds of the votes in the assembly or the number of votes required to amend a society's laws, rather than have at least two-thirds of the votes in the assembly and the number of votes required to amend a society's laws. The substitute also deletes the following phrase that followed "have at least two-thirds of the votes in the assembly and the number of votes required to amend a society's laws": ", other than those laws, if any, that must be amended by direct vote of the members." C.S.H.B. 1089 modifies the original bill by redesignating SECTION 3 of the original bill as SECTION 4. In proposed Article 10.03B(f), the substitute modifies the original by requiring a board of a society to meet at least once each year, rather than quarterly, to conduct the business of a society. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 4 of the original bill as SECTION 5. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 5 of the original bill as SECTION 6. In proposed Article 10.05 (a)(8), Insurance Code, the substitute modifies the original by providing that a society is authorized to pay for any other benefit that may be provided by a life, accident, or health insurance company, provided that the benefit is offered in compliance with Chapter 3, Insurance Code, and consistent with Chapter 10, rather than providing that a society is authorized to pay for any other benefit that may be provided by a life insurance company and that may be provided consistent with Chapter 10. The substitute also modifies the original by adding Subsection (c), Article 10.05, Insurance Code, to authorize a society to appoint a legal reserve life insurance agent licensed by the Texas Department of Insurance (department) to sell benefits listed under Subsection (a), Article 10.05, to society members. The substitute also modifies the original by adding Subsection (d), Article 10.05, Insurance Code, to authorize a society to offer a benefit under proposed Article 10.05 (a)(8), Insurance Code, only if the person who sells the benefit is licensed by the department as a legal reserve life insurance agent. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 6 of the original bill as SECTION 7. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 7 of the original bill as SECTION 8. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 8 of the original bill as SECTION 9 and makes a nonsubstantive change. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 9 of the original bill as SECTION 10. In proposed Article 10.15(c), the substitute modifies the original by requiring, rather than authorizing, a society to include in the terms of a certificate a grace period of one month for payment of premiums. In proposed Article 10.15(d), the substitute modifies the original by deleting the condition that each certificate must state or summarize a society's laws or rules in force at the time of issuance of the certificate that, if violated, will result in the termination or reduction of benefits payable under the certificate. In proposed Article 10.15(f), the substitute modifies the original by authorizing a life insurance benefit contract, rather than a benefit contract, issued on the life of a person who is younger than the society's minimum age for adult membership to provide for transfer of control or ownership to the insured at an age specified in the certificate. In proposed Article 10.15(g), the substitute modifies the original by authorizing a society to specify the terms and conditions for the assignment of a life insurance benefit contract, rather than a benefit contract. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 10 of the original bill as SECTION 11. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 11 of the original bill as SECTION 12 and by modifying proposed Article 10.19(c), to increase from $1,000 to $2,000 the minimum amount of the 500 death benefit certificates that a society must secure before it can issue a benefit certificate or pay any death or disability benefits. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 12 of the original bill as SECTION 13. In proposed Article 10.26(i), the substitute modifies the original by specifying that a director, officer, employee, member, or volunteer of a society serving without compensation is not personally liable for damages resulting from an act or omission in the exercise of judgment or discretion in connection with the duties of that person for the society, unless the act or omission involved wilful or wanton misconduct. The substitute also modifies proposed Subsection (i) by deleting the prohibition against a cause of action from being brought for damages resulting from an act or omission in the exercise of judgment or discretion in connection with the duties of that person for the society, unless the act or omission involved wilful or wanton misconduct. The substitute also modifies proposed Subsection (i) by adding a provision that sets forth that Subsection (i) does not limit a society's direct or indirect liability. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 13 of the original bill as SECTION 14. C.S.H.B. 1089 modifies the original bill by redesignating SECTION 14 of the original bill as SECTION 15. In proposed Article 10.31(a), the substitute modifies the original by setting forth that for a certificate issued before January 1, 2001, rather than the year 2000, the value of the paid-up nonforfeiture benefit and the amount of a cash surrender value, loan, or other option granted under the certificate must comply with the law applicable to the certificate immediately before that date. In proposed Article 10.31(b), the substitute modifies the original by providing that for a certificate issued on or after January 1, 2001, rather than the year 2000, the value of the paid-up nonforfeiture benefit and the amount of a cash surrender value, loan, or other option granted under the certificate is computed as provided under the provisions of existing Articles 3.44a and 3.44b. C.S.H.B. 1089 modifies the original bill by deleting the entire text of SECTION 15 of the original, which would have added Article 10.37-3, Insurance Code, to prohibit a person from soliciting or procuring insurance contracts for a society unless the person is licensed as a legal reserve life insurance agent under applicable law, and to provide exemptions from this prohibits for certain individuals. In addition, proposed Article 10.37-3 would have created a presumption that a person spent at least 50 percent of the person's time soliciting or procuring insurance contracts on behalf of a society if those contracts generated a certain amount of premiums, provided coverage to a specific number of persons, or consisted of variable insurance products. C.S.H.B. 1089 modifies the original bill by deleting the entire text of SECTION 16 of the original, which would have reenacted and amended Section 5(a), Article 21.07-1, Insurance Code, to include a person who holds the designation of Fraternal Insurance Counselor (FIC) among the persons not required to take a written examination for a license to act as an agent in this state, and make nonsubstantive changes. In new SECTION 16 of the substitute, the substitute amends Article 10.33(a), Insurance Code, to include Article 1.15A, Insurance Code, among the articles to which each domestic society is subject. C.S.H.B. 1089 modifies the original bill in SECTION 18 by changing the effective date of the Act from September 1, 1999, to January 1, 2000. The substitute also modifies the original by providing that Section 17 of the Act takes effect January 1, 2001, rather than September 1, 2000. The substitute also modifies the original by providing that Article 10.15 applies to a certificate that is delivered, issued, or renewed on or after January 1, 2001, rather than September 1, 2000. The substitute also modifies the original by deleting the provision that provides that a person is not required to be licensed in the manner required by Article 10.37-3 before January 1, 2000.