HBA-ATS H.B. 1089 76(R)    BILL ANALYSIS


Office of House Bill AnalysisH.B. 1089
By: Eiland
Insurance
3/5/1999
Introduced



BACKGROUND AND PURPOSE 

Presently, thirty 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.  The 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.  The 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. 

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 insurance company
and that may be provided in compliance 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 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 9 (Article 10.15, Insurance Code) of this bill. 



 SECTION BY SECTION ANALYSIS

SECTION 1.  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 2.  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 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. 

(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 3.  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 quarterly to conduct the business of
a society. 

SECTION 4.  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 5.  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 insurance company and that may be
provided 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. 

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 6.  Amends Article 10.07(a), Insurance Code, to make a conforming
change. 

SECTION 7.  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 8.  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 9.  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 authorize 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 and 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. 

(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 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 benefit contract. 

SECTION 10.  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 11.  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.  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 12.  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
liable, and prohibits 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. 

SECTION 13.  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 14.  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, 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. 

(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 15.  Amends Chapter 10, Insurance Code, by adding Article 10.37-3,
as follows: 

ARTICLE 10.37-3.  LICENSING OF AGENTS.  (a) Prohibits 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.
Exempts from the personal written examination  required by applicable law
an individual who is authorized to solicit or procure insurance contracts
on behalf of a society on June 1, 1999, if the society certifies to the
commissioner the name and address of that individual on or before September
1, 1999. 

(b) Provides that a license is not required for a regular salaried officer,
employee, or member of a society who devotes substantially all of that
person's services to activities other than the solicitation of fraternal
insurance contracts from the public, and does not receive a commission or
other compensation that is directly dependent on the amount of business
obtained for the solicitation of those contracts. 

(c) Exempts from the requirements of Subsection (a) an agent,
representative, or member of a fraternal benefit society who devotes less
than 50 percent of the person's time to the solicitation and procurement of
insurance contracts for that society. 

(d) Creates 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.  If, in the preceding calendar year, a person solicited
or procured life insurance contracts that have generated, in the aggregate,
more than $20,000 of direct premiums of coverage for all lives insured,
provided that a permanent life insurance contract has not been written that
exceeds $10,000 of coverage of an individual life and a term life insurance
contract has not been written that exceeds $50,000 of coverage on an
individual life, the person satisfies the presumption.  If, in the
preceding calendar year, a person solicited or procured insurance contracts
other than life that have insured the individual lives of more than 25
persons, the person satisfies the presumption.  If, in the preceding
calendar year, a person solicited or procured variable life insurance or
variable annuity contracts, the person satisfies the presumption.  

SECTION 16.  Reenacts and amends Section 5(a), Article 21.07-1, V.T.C.S.,
Insurance Code, as follows: 

(a) Makes nonsubstantive changes.  Includes 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. 

SECTION 17.  Repealer: Articles 10.05-1 and 10.05-2, Insurance Code.

SECTION 18.  Effective date: September 1, 1999, except for Section 17 which
is effective on September 1, 2000.  Makes application of Article 10.15
prospective for a certificate that is delivered, issued, or renewed on or
after September 1, 2000.  Provides that a person is not required to be
licensed in the manner required by Article 10.37-3 before January 1, 2000. 

SECTION 19.  Emergency clause.