R-479



       T~EA~TORNEY                     GENERAL
                     OF TEXAS


                               July   11,   1947


Hon.  George B. Butler, Chairman
Board of Insurance   Commissioners
Austin,  Texas                     Opinion            No, V-300

                                            Re:    Whether the Assured
                                                   Home Ownership Plan
                                                   of the Equitable
                                                   Life Assurance   Soci-
                                                   ety of the United
                                                   States  violates  Ar-
                                                   ticle  5053, V,C.S.

Dear Sir:

             In proeenting       the above . question        to this
                                                                 ^..   Depart-
me&, you hare srslosed           your complete       record of' tne near-
ing before    your Board on the Fquitable              plan.     You have
also encleeed     able briefs      submitted      by Equitable       end those
complaining    of the plan.        The Equitable         plan is in essence
one to require,      simultaneously       with the making of R loan
on residential      property,     one of Equitable's          own policies
of life   insurance     as security      for the loan in the event
of the desth of the borrower.              It may be important         to
note that in the course of negotiations                  the plan does
not contemplate      the premise of a loan.              The plan, in its
broadest   aepeot,     involves    a complete       sellin?     program,
with contracts      and applications         consistent      with the plan;
and of course,      the administration         of the loan znd insur-
ance policy    subsequent       to the closing       of each loan.        The
statute   involved,     Article     5053, Vernon's        Civil   Statutes,
reads as follows:

               "No insurance    company of any kind doing
        business   in this State shall make or permit
        any distinction     or discrimination     in favor
        of individuals     between the insured of the
        same class and of equal expectation          of life
        inhe     amount of, or payment of, prembums or
         rates charged for policies      ef life    or endow-
        ment insurance,     or in the dividends      or other
        benefits   thereon;    nor shall   any such company
        or agent thereof     make any contract      of insur-
        ance or agreement as to such contract          other
Bon,   George    B I Butler,    Page 2 s V-300



       than as expressed     in the policy    issued there-
       on; nor shall    any such company, or any offi-
       cers agent, solicitor,      or representative
       thereof,   pay) allow, ‘or give,    or offer    to
       pay, allow or give,     directly   or indirect-
       ly, as an inducement to insurance,         any re-
       bate of premiums payable on the ~olfcs,
       or any special    favor or advantage      in the
       dividends   or other benefits     to accrue
       thereon,   or any paid employment or con-
       treat for service     of any kind or anything
       of value whatsoever,     or any valuable      con-
       sideration   or inducement whatever not
       specified   in the polioy    or contract    of
       insurance;    9 L 0n (Emphasis supplied)

                The requirement        of insurance,        both property
 and life,      as additional       security     for loans fs general-
  ly recognized       as a wholesomepractice           if it is not abused.
 Lending organizations           universally       require     some type of
  insurance     on the property        mortga~ged.       Property     insur-
 ance agents are quite generally                engaged in, the loan bue-
 fness 0 In the very nature of things                  the agent, d~qsiree
.the insurance        bus’iness   in conjunction         with the loans he
 negotiates      0 Any borrower        knows that the agent wfl,l take
 greater     interest     in the loan applfcatfon~           when he expects
 to write     the insurance0          The probable       advantage, to the
 borrower      in purchasing      his insurance        from the agent is
 present     in any such negotiation            by tacit     understanding.
 We see no real distinction             between such a transaction
  and. the plan utilized         by the Equitable,           Equitable      is
 free to select        its borrowers       and its insureds,           It,may
  refuse   to make a loan unless            secured    to its satisfaction.
 It is not contended          that it may not require            life    insur-
  ance as additional         security     for its loans;         We see no
  reason why this concern           legally     engaged in both lines
  of business     may not take advantage of their                complemen-
  tary features 5

              Article    5053 Ss primarily   designed  to prohibit
 discrimination      between insureds    of the same class i As
 stated   in Coueh on Insurance,      Volume 3, Section   5Mp page
 1872 “,

             “The object    or intent  of statutes
        aimed against   discrimination   and rebates
        is that uniform rates shall be established
        and maintained 9 so as to secure     all per-
        sons equality   as to burdens imposed,     as
-.   -




         ITon, George    B. Butler,      Page 3,     V-300



               well as to benefits      derived,   by preventing
               discrimination     by insurers    in favor of in-
               dividuals    of the same class,     either    as to
               premiums charged or dividends        allowed,     or
               as has been stated,      in order that prospec-
               tive insurants     of the same class     shall not
               be unfairly    treated   or discriminated      a-
               gainst,   by inducements     being given to one
               of such class,     which are not available        to
               all therein."

                    As is true of all anti-discrimination      statutes,
         the elements of reasonableness     and fairness   are to be read
         into them,   The law cannot and does not attempt to place
         everyone  on an identically   equal basis    in every situation,
         Of this statute,   the Court of Civil Appeals at Texarkana
         said in the case of Morris v. Ft, Worth Life Insurance
         Company, ZOO S. W. 1114:

                      "It is one of the evident         purposes  of
               the statute     above quoted to prevent dis-
               crimination      and secret   agreements    bvxich
               certain    nolicVholders     may be enabled to
               secure speciai      favors   as"a consideration
               for their    contracts     of insurance."

                       The Equitable      plan is essentially           uniform in its
         application      to insureds     of the same class.            On its face,
         the plan contains         no element of a secret          or side agreement
         with the assured which could be considered                    as an inducement
         or consideration        for the sale of an insurance             policy     any
         different     from that offered        to any other assured of the
         same class.       Simply because        a prospective       mortgagor     is re-
         quired to secure        his loan by a policg           of life   insurance,
         affords    no.basis     for the contention          that the borrower         is
         induced illegally         to purchase      insurance,     or that the loan
         forms a part of the consideration                for the policy,        To hold
         otherwise    would be reading into the statute                 a broader pro-
         hibition    than is contemplated.             The inducement aimed at
         is that which actually          occurs,      proved by competent        evidence
         which of necessity         by the very nature of the term involves
         the intent,      purpose,     methods and approach of the company,
         officer    or agent employed in each transaction.                  According
         to Webster,      the word 7'induceY9 is synonymous with "insti-
         gate" s "luretl,     "incite"   o "entice"      s "impel" 9 "urge".        We
         cannot speculate        that these elements will be present                 in
         each transaction        even before      it occurs,

                      Questions       raised     in various states   undoer es-
         sentially    identical       statutes     have been resolved   by State
                                                                 L
                                                                        .-




Hon. George   B. Butler,    Page 4, V-300



Courts,  Attorneys  General,   and insurance    offfcfals    agaPnst
holding  the plan and sfmflar    transactions     to be prohfbft-
ed as a matter of law,     While the basis of these holdings,
findings  and opfnfons  are not entirely      uniform,    the ultf-
late conclusions   that such transactfens      are not per se
illegal  have been practfcally     unanimous y

           In the case of Greer vs, Aetna Life Insurance
Company (Supreme Court of Alabama) 9 142 So, 393, the
court held that an arrangement by Aetna to secure             loans
by fts own policies      of frsurance   did not violate      the Al-
abama Statute,    which is in essence      the same as the Texas
statute,   However, in that case the main contention             dis-
cussed by the court was that the pol.fcy         issue&    on a 15
year term on a flat      premium to all persons between the
ages of 21 and 59 s the same premium to b e applicable            to
every age,   constituted    a discrimination     between the pol-
icyholders   and in that way violated        the statutes.

           In the case of Phillips    vsO Ffshback, (140 Pae,
Ml),   the insurance   agent agreed with the assured that &
loan would be made and that a policy      of insurance    was re-
quired to secure    the loan,   It was contended    there that
the loan agreement was an illegal     consfderatfon     or fnduce-
ment for the policy    of insurance,   The Oourt said:

              “If the inducement and consideration     flcw-
      fng from appellant      in such transa~otfons con-
      stitute     an inducement or favor for anything,
      it is for the grantfng      of a loan,”

            We find this statement    in Joyce      on Insurance:
Volume 2,   page 2195, section  192g:

            “Nor is it vfolatfve    of the statutes   as
      to rebates E et@, j to require   one who desires
      a mortgage loan from the company to take out
      lff e fnsuranc e 0n

            In considering  thfs plan,       the New York Depart-
ment of   Insurance  had the following       to say:
            “In view of all the cfrcumstances,          and
      after   listening   t.r, the pofnts   raised by the
      members of the insured Savings Associations           !,
      I am convfnced    that the Equitable       is making
      every reasonable      effort  to conduct     its af-
      fairs   ethically  and with due consideration
      to the effects    of replacing      mortgage loans
Ron.     George    B. Butler,   Page 5,   V-300



         with lower interest        rates.   I can see no
         justification       for the charge of rebate and,
         so far as I can determine,         the charge of
         ‘raiding’      other portfolios    seems unjusti-
         fied d However, it does appear to be a fact
         that the Equitable       has an advantage    in ob-
         taining     this type of 1-n      by reason  of its
         trained     )ersonnel   and the selected    areas
         in Which they appear to be operatingrW

                Likewise,  the Superintendent         ef   Insurance   la
Ohio     is   quoted as follows:

               “An applicant    for a loan must at the
         same time apply for a policy     of life    in-
         surance is same amount; the policy       is then
         assigned  as oollateral    to the loan.    e 0

               “In my opinion,     to say, an insurance
         company in requiring      an applicant    for a
         loan to take out a policy       of life   insur-
         ance, is violating      General Code 9404 in
         that in so doing it is ‘giving         something
         of value, ’ is urroneous r To require         a
         life  insurance   policy    to be taken with
         each loan end to have said policy         assign-
         ed as collaPera1     security   for said loan
         is within   the rights    of the company, a I

                “The complaint    as a whole attacks
         the general     plan,  and we find that the
         evidence   introduced    is insufficient   to
         sustain   the complaint,     The complaint    is
         therefore    dismissed,”

                 The Attorney   General   of   Ohio   is   quoted   in a
ruling        in 1941 as follows:

               “At no time does it appear from the
         papers which you have submitted          to me that
         the insurance    company gives or offers        to
         give 2 or enters    into  any   separate   agree-
         ment promising    to secure     the loan of any
         money as an inducement oY consideration
         for insurance.      It would therefore      seem
         that the loan,    if made,    is mot an induce-
         ment to insurance      but rather that the in-
         surance is an inducement to the loan.
Bon.   George   B. Butler,    Page 6 S V-300



              “I realize,     of course,    that the plan
       makes it possible       for an agent to offer
       to secure    a loan as an inducement to a
       prospective     purchaser     of fnsurance     to ap-
       ply for such insurance,          This,   however,
       is not contemplated        by the documents
       which you have submitted         to me and the
       mere possibility      of such misconduct         on
       the part of an agent does not suffice
       to make the plan illegal,           In suoh event
       the statutes     gLve to you ample author-
       ity to punish such an agent,            In view
       of the rules of construction           applicable
       to the statutes      in question     and since
       the documents which you have submitted
       to me do not contain        any promise on the
       part of the insurance         company to make a
       loan of money to the applicant          p I con-
       clude that the plan as evidenced            by
       these documents does not constitute             an
       induc,ement to Insure within         the mean-
       ing of the sections        above referred      to,

            From his Biennial   Report of 1950:           the Attorney
General   of Alabama is qtlated as follows:

              “It seems to me that there is a quea-
       tfon of fact to be determined        in each case,
       When the loan is the principal         transaction,
       and the life    insurance    fs a bona fide fn-
       cfdental   requfrement     of the company, for
       the purpose of augmenting the loan secur-
       ity,  a requirement      made of all applicants
       alike B wfthout    discrimination,    who may ap-
       ply for a loan,     then I am of th,e opinion
       that the transactions       do not fall    withln
       the inhibitions     of the statute.

              “However p if the company or agent
       call   upon a prospect   for life    insurance,
       and as a sales argument or inducements
       makes   the promise that ff the policy         of
       insurance   is taken, the company will make
       long time mortgage loans to the insured,
       at a low rate of interest,       ana without
       charging   any commission,    then     I am of
       the opinion    that this will    constitute     an
       r inducement I p in fact and in law, and
       would be offensive     to statutes>     supra-
Hon. George B. Butler,   Page ?$ Vi300


     unless it is specifiedin the contrscti
     of insurance,and unless It applies to
     all persons alike who apply Sor.insnr-
     ante without discrimination.
     Sore, hold that the method of w--' .- _--.
                                            _._,
     loans in connectionwith the issuance_.. _- _-
     or i nsurance policies,as outlined in the
     statement of facts. is not offensiveto _:*
     the Alabama Statutes:,anadoes not have
     to be set out In the poliog of insuranc&?v-c..~
            The two Texas cases construingthis statute.in
connectionwith the offer of a loan in connectionwith
the writing of an insurance policy, Morris v. Ft. Worth
Life Insurance Company, supra, and Gause v. Seourlty Life
Insurance Company of America (Civil Appeals), 207 S.W.
346, are clearly aistlnguishableIn that each involved an
isolated instance of an agent offering to mke or pmmis-
ing a loan clearly and manifestly for the purpose of in-
ducing the particular prospect to take a policy of insur-
ance. The object was primarily to sell an Insurancepol-
icy and the loan was offered in the fullest sense as "an
inducementto insurance." The Equitable in putting Sor-
ward this plan purports to be motivated by a desire for
protected loans. Ii that purported purpose la proseouted
by its agents in good faith antiis not misrepresentedto
the borrower in such a way ag to procure insuranoe on the
promise of a loan which does not materialize, it is not
subject to criticism. It is a legitimateprosecutionof
the oompany'sauthorized business. It is not the plan
nor the ultimate result in the writing of a policy which
the statute   conaemns. It is the approaah which must be
scrutinized. Every negotiationmust be judged upon the
occurrencestranspl.ring   while it is being conauotea.
          We believe that this plan can be legally pre-
sented to prospectiveborrowers. Whether it is used
in a manner contrary to the spirit of Article 5053 is a
question to be determined on the facts of each transact-
ion.


          The Assured Home Ownership Plan of the
     Equitable Life Assurance Society of the
     United States does not-violateArtiole 5053
Hon. George   B, Butler,     Page 8, V-300



      0s  Vernonps   Civfl   Statutes      as   a matlxr    of
      law.

                                        Yours    very   truly

                                ATTORNEYGENERALOF TEXAS


                                     Wd
                                BY
                                       Ned McDaniel
                                          Assistant



                                BY?-‘?
                                         Charles    E0 Crenshaw
                                                      Assistant   .




                                 ATTORNEYGENE%IL

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