CHAPTER 422.  ASSET PROTECTION ACT

SUBCHAPTER A.  GENERAL PROVISIONS

Revised Law

Sec. 422.001.  SHORT TITLE.  This chapter may be cited as the Asset Protection Act.  (V.T.I.C. Art. 21.39-A, Sec. 1.)

Source Law

Art. 21.39-A

Sec. 1.  This article shall be known and may be cited as the Asset Protection Act.

Revised Law

Sec. 422.002.  PURPOSES.  (a)  The purposes of this chapter are to:

     (1)  require an insurer to maintain unencumbered assets in an amount equal to the insurer's reserve liabilities;

     (2)  provide preferential claims against assets in favor of an owner, beneficiary, assignee, certificate holder, or third-party beneficiary of an insurance policy; and

     (3)  prevent the pledge or encumbrance of assets in excess of certain amounts without a prior written order of the commissioner.

(b)  This chapter and the powers granted and functions authorized by this chapter shall be exercised to accomplish the purposes of this chapter.  (V.T.I.C. Art. 21.39-A, Secs. 2, 6 (part).)

Source Law

Sec. 2.  This Act is for the purpose of requiring insurers to have and maintain unencumbered assets in an amount equal to reserve liabilities; to provide preferential claims against assets in favor of owners, beneficiaries, assignees, certificate holders, or third party beneficiaries of insurance policies; and to prevent the hypothecation or encumbrance of assets in excess of certain amounts without prior written order of the Commissioner of Insurance.

Sec. 6.  The provisions of this Act and the powers and functions authorized by this Act are to be exercised to the end that its purposes be accomplished… .

Revisor's Note

(1)  Section 2, V.T.I.C. Article 21.39-A, provides that a purpose of the article is to require an insurer to "have and maintain" unencumbered assets in a certain amount.  The revised law omits "have" as unnecessary because an insurer that maintains assets must necessarily have the assets.

(2)  Section 2, V.T.I.C. Article 21.39-A, provides that a purpose of the article is to prevent the "hypothecation or encumbrance" of certain assets.  "Hypothecation" of an asset is a form of a pledge.  Subsequent provisions in the article refer to the "pledge" of assets, clearly indicating that a purpose of the article is to prevent the "pledge" of assets, not just the more narrow "hypothecation" of assets.  For clarity and consistency of terminology throughout this chapter, the revised law substitutes "pledge" for "hypothecation."

(3)  Section 2, V.T.I.C. Article 21.39-A, refers to the "commissioner of insurance."  Section 31.001 of this code defines "commissioner" for purposes of this code and the other insurance laws of this state to mean the commissioner of insurance.  Throughout this chapter, the revised law is drafted accordingly.

Revised Law

Sec. 422.003.  DEFINITIONS.  In this chapter:

     (1)  "Asset" means any property in which an insurer owns a legal or equitable interest.

     (2)  "Claimant" means an owner, beneficiary, assignee, certificate holder, or third-party beneficiary of an insurance benefit or right arising from the coverage of an insurance policy to which this chapter applies.

     (3)  "Reserve assets" means the assets of an insurer that are authorized investments for policy reserves under this code.

     (4)  "Reserve liabilities" means the liabilities that an insurer is required under this code to establish for all of the insurer's outstanding insurance policies.  (V.T.I.C. Art. 21.39-A, Sec. 4.)

Source Law

Sec. 4.  As used in this Act:

     1.  "Reserve liabilities" are those liabilities which are required to be established by the insurer for all of its outstanding insurance policies in accordance with the Insurance Code, as amended or as hereafter amended;

     2.  "Reserve assets" are those assets of an insurer which are authorized investments for policy reserves in accordance with the Insurance Code, as amended or as hereafter amended;

     3.  "Assets" are all property, real or personal, tangible or intangible, legal or equitable, owned by an insurer;

     4.  "Claimants" are any owners, beneficiaries, assignees, certificate holders, or third party beneficiaries of any insurance benefit or right arising out of and within the coverage of an insurance policy covered by this Act.

Revisor's Note

(1)  Section 4, V.T.I.C. Article 21.39-A, defines "assets" to include "real or personal, tangible or intangible" property.  The revised law omits the reference to "real or personal" because under Section 311.005(4), Government Code (Code Construction Act), "property" includes both real and personal property. That definition applies to the revised law.  The revised law omits the reference to "tangible or intangible" as unnecessary because property may only be tangible or intangible.

(2)  Section 4, V.T.I.C. Article 21.39-A, refers to the Insurance Code, "as amended or as hereafter amended."  The revised law omits the quoted language because under Section 311.027, Government Code (Code Construction Act), applicable to the revised law, a reference to a statute applies to all reenactments, revisions, or amendments of the statute unless expressly provided otherwise.

Revised Law

Sec. 422.004.  APPLICABILITY OF CHAPTER.  This chapter applies to:

     (1)  the following domestic insurers:

          (A)  a stock life, health, or accident insurance company;

          (B)  a mutual life, health, or accident insurance company;

          (C)  a stock fire or casualty insurance company;

          (D)  a mutual fire or casualty insurance company;

          (E)  a title insurance company;

          (F)  a mutual assessment company;

          (G)  a local mutual aid association;

          (H)  a local mutual burial association;

          (I)  a statewide mutual assessment company;

          (J)  a stipulated premium company;

          (K)  a fraternal benefit society;

          (L)  a group hospital service corporation;

          (M)  a county mutual insurance company;

          (N)  a Lloyd's plan;

          (O)  a reciprocal or interinsurance exchange;

          (P)  a farm mutual insurance company; and

          (Q)  a mortgage guaranty insurer; and

     (2)  all kinds of insurance written by an insurer to which this chapter applies.  (V.T.I.C. Art. 21.39-A, Sec. 3 (part).)

Source Law

Sec. 3.  This Act shall apply to all of the following types of domestic insurance companies and to all kinds of insurance written by such companies; and where used herein "insurer" shall mean: all domestic stock and mutual life, health and accident, fire, casualty, fire and casualty and title insurance companies, including mutual assessment companies, local mutual aid associations, local mutual burial associations, Statewide mutual assessment companies, stipulated premium insurance companies, fraternal benefit societies, group hospital service insurance companies, county mutual insurance companies, Lloyd's and reciprocal exchanges, farm mutual companies, and mortgage guaranty insurance companies. …

Revisor's Note

(1)  Section 3, V.T.I.C. Article 21.39-A, lists insurers to which the article applies and states that "where used herein 'insurer' shall mean" those listed insurers.  The revised law omits the quoted language as unnecessary.  Because the section specifies the types of insurers to which this chapter applies, the defined term is not helpful to the reader.

(2)  Section 3, V.T.I.C. Article 21.39-A, refers to "stipulated premium insurance companies," "group hospital service insurance companies," a "Lloyd's," "reciprocal exchanges," "farm mutual companies," and "mortgage guaranty insurance companies," meaning entities operating under Chapter 884, 842, 941, 942, 911, or ____ [[[V.T.I.C. Art. 21.50]]], respectively.  The terms most frequently used to refer to those entities are "stipulated premium company," "group hospital service corporation," "Lloyd's plan," "reciprocal or interinsurance exchange," "farm mutual insurance company," and "mortgage guaranty insurer."  For consistent use of terminology in this code, the revised law substitutes "stipulated premium company," "group hospital service corporation," "Lloyd's plan," "reciprocal or interinsurance exchange," "farm mutual insurance company," and "mortgage guaranty insurer" for "stipulated premium insurance companies," "group hospital service insurance companies," a "Lloyd's," "reciprocal exchanges," "farm mutual companies," and "mortgage guaranty insurance companies," respectively.

Revised Law

Sec. 422.005.  EXEMPTIONS.  (a)  This chapter does not apply to:

     (1)  variable contracts for which separate accounts are required to be maintained;

     (2)  a reinsurance agreement or any trust account related to the reinsurance agreement if the agreement and trust account meet the requirements of Section ____ [[[V.T.I.C. Art. 3.10]]] or ____ [[[V.T.I.C. Art. 5.75-1]]];

     (3)  an assessment-as-needed company or insurance coverage written by an assessment-as-needed company;

     (4)  an insurer while:

          (A)  the insurer is subject to a conservatorship order issued by the commissioner; or

          (B)  a court-appointed receiver is in charge of the insurer's affairs; or

     (5)  an insurer's reserve assets that are held, deposited, pledged, or otherwise encumbered to secure, offset, protect, or meet the insurer's reserve liabilities established in a reinsurance agreement under which the insurer reinsures the insurance policy liabilities of a ceding insurer if:

          (A)  the ceding insurer and the reinsurer are authorized to engage in business in this state; and

          (B)  in accordance with a written agreement between the ceding insurer and the reinsurer, reserve assets substantially equal to the reserve liabilities the reinsurer must establish on the reinsured business are:

              (i)  deposited by or withheld from the reinsurer and held in the custody of the ceding insurer, or deposited and held in a trust account with a state or national bank domiciled in this state, as security for the payment of the reinsurer's obligations under the reinsurance agreement;

              (ii)  held subject to withdrawal by the ceding insurer; and

              (iii)  held under the separate or joint control of the ceding insurer.

(b)  Notwithstanding this section, the commissioner may examine any asset, reinsurance agreement, or deposit arrangement described by Subsection (a)(5) at any time, in accordance with the commissioner's authority under this code to examine an insurer.  (V.T.I.C. Art. 21.39-A, Secs. 3 (part), 3A.)

Source Law

Sec. 3.  … This Act shall not apply to variable contracts for which separate accounts are required to be maintained and shall not apply to assessment as needed companies nor to insurance coverage written by assessment as needed companies. This Act shall not apply to an insurance company while subject to a conservatorship order issued by the Commissioner of Insurance nor to an insurance company while a court appointed receiver is in charge of its affairs.

Sec. 3A. (a)  This Act shall not apply to those reserve assets of an insurer which are held, deposited, pledged, hypothecated, or otherwise encumbered as provided herein to secure, offset, protect, or meet those reserve liabilities of such insurer which are established, incurred, or required under the provisions of a reinsurance agreement whereby such insurer has reinsured the insurance policy liabilities of a ceding insurer, provided:

     (1)  the ceding insurer and the reinsurer are both licensed to transact business in this state;

     (2)  pursuant to a written agreement between the ceding insurer and the reinsurer, reserve assets substantially equal to the reserve liabilities required to be established by the reinsurer on the reinsured business are either (a) deposited by or are withheld from the reinsurer and are in the custody of the ceding insurer as security for the payment of the reinsurer's obligations under the reinsurance agreement, and such assets are held subject to withdrawal by and under the separate or joint control of the ceding insurer, or (b) are deposited and held in a trust account for such purpose and under such conditions with a state or national bank domiciled in this state.

(b)  The Commissioner of Insurance shall have the right to examine any of such assets, reinsurance agreements, or deposit arrangements at any time in accordance with the authority to make examinations of insurance companies as conferred by other provisions of this code.

(c)  This Act does not apply to a reinsurance agreement or any trust account related to the reinsurance agreement if the agreement and trust account meet the requirements of Article 3.10 or 5.75-1 of this code.

Revisor's Note

(1)  Section 3A(a), V.T.I.C. Article 21.39-A, refers to certain assets that are "pledged, hypothecated, or otherwise encumbered."  Throughout this chapter, the revised law omits "hypothecated" and variants of that term as unnecessary where the terms are used in conjunction with "pledged" and variants of that term because "hypothecated" is included within the meaning of "pledged."

(2)  Section 3A(a), V.T.I.C. Article 21.39-A, refers to reserve liabilities of an insurer "which are established, incurred, or required under the provisions of a reinsurance agreement."  The revised law omits the references to "incurred" and "required" because, in context, the terms are included in the meaning of "established."

(3)  Section 3A(a)(1), V.T.I.C. Article 21.39-A, refers to a ceding insurer and a reinsurer "licensed to transact business in this state."  The revised law substitutes "authorized" for "licensed" because "certificate of authority" is the term used throughout this code in relation to an entity's authority to engage in business.

Revised Law

Sec. 422.006.  CONFLICT WITH OTHER LAW.  If this chapter conflicts with another law relating to the subject matter or application of this chapter, this chapter controls.  (V.T.I.C. Art. 21.39-A, Sec. 6 (part).)

Source Law

Sec. 6.  … in the event of conflict between this Act and any other law relating to the subject matter of this Act or its application, the provisions of this Act shall control.

Revisor's Note

Section 6, V.T.I.C. Article 21.39-A, refers to the cumulative effect of that article.  An accepted general principle of statutory construction requires a statute to be given cumulative effect with other statutes unless it provides otherwise or unless the statutes are in conflict.  The general principle applies to this revision.  The omitted law reads:

Sec. 6.  … This Act is cumulative of existing laws, but … .

[Sections 422.007-422.050 reserved for expansion]

SUBCHAPTER B.  ENCUMBRANCE OF ASSETS

Revised Law

Sec. 422.051.  RESTRICTIONS ON ENCUMBRANCE OF ASSETS.  (a)  An insurer shall at all times maintain unencumbered assets in an amount equal to the insurer's reserve liabilities.

(b)  An insurer may not pledge or otherwise encumber:

     (1)  the insurer's assets in an amount that exceeds the amount of the insurer's capital and surplus; or

     (2)  more than 10 percent of the insurer's reserve assets.

(c)  Notwithstanding any other provision of this section, on application made to the commissioner, the commissioner may issue a written order approving the pledge or encumbrance of an insurer's asset in any amount if the commissioner determines that the pledge or encumbrance will not adversely affect the insurer's solvency.  (V.T.I.C. Art. 21.39-A, Sec. 5 (part).)

Source Law

Sec. 5.  Every insurer subject to the provisions of this Act shall at all times have and maintain free and unencumbered assets in an amount equal to its reserve liabilities, and no such insurer shall pledge, hypothecate, or otherwise encumber its assets in an amount in excess of the amount of its capital and surplus;  nor shall such insurer pledge, hypothecate or otherwise encumber more than ten per cent (10%) of its reserve assets as herein defined; provided, however, that the Commissioner of Insurance, upon application made to him, may issue a written order approving the hypothecation or encumbrance of any of the assets of such an insurer in any amount upon a finding that such hypothecation or encumbrance will not adversely affect the solvency of such insurer.

…

Revisor's Note

(1)  Section 5, V.T.I.C. Article 21.39-A, requires an insurer to "have and maintain" assets in a specified amount.  The revised law omits the reference to "have" for the reason stated in Revisor's Note (1) to Section 422.002.

(2)  Section 5, V.T.I.C. Article 21.39-A, refers to insurers that are "subject to the provisions of this Act."  The revised law omits the quoted language as superfluous because Section 3, V.T.I.C. Article 21.39-A, revised in relevant part in this chapter as Section 422.004(1), specifies the insurers to which the article applies.  Similar changes have been made throughout this chapter.

(3)  Section 5, V.T.I.C. Article 21.39-A, refers to the "free and unencumbered" assets of an insurer.  The revised law omits the reference to "free" because, in context, "free" and "unencumbered" are synonymous, and the latter is more commonly used.

Revised Law

Sec. 422.052.  REPORT TO COMMISSIONER.  (a)  Not later than the 10th day after the date an insurer pledges or otherwise encumbers an asset, the insurer shall report in writing to the commissioner:

     (1)  the amount and identity of the pledged or encumbered asset; and

     (2)  the terms of the transaction.

(b)  Annually, or more often as required by the commissioner, the insurer shall file with the commissioner a statement sworn to by the insurer's chief executive officer that:

     (1)  title to assets that equal the amount of the insurer's reserve liabilities and that are not pledged or otherwise encumbered is vested in the insurer;

     (2)  the only assets of the insurer that are pledged or otherwise encumbered are those identified and reported in the sworn statement, and no other assets of the insurer are pledged or otherwise encumbered; and

     (3)  the terms of the transaction pledging or otherwise encumbering the assets are those reported in the sworn statement.  (V.T.I.C. Art. 21.39-A, Sec. 5 (part).)

Source Law

Sec. 5.  … Any such insurer which shall pledge, hypothecate, or otherwise encumber any of its assets shall within (10) days thereafter report in writing to the Commissioner of Insurance the amount and identity of the assets so pledged, hypothecated, or encumbered and the terms and conditions of such transaction.  In addition, each such insurer shall annually or more often if required by the Commissioner file with the Commissioner a statement sworn to by the chief executive officer of the insurer that (a) title to assets in an amount equal to the reserve liability of the insurer which are not pledged, hypothecated or otherwise encumbered is vested in the insurer, (b) the only assets of the insurer which are pledged, hypothecated or otherwise encumbered are as identified and reported in such sworn statement and no other assets of the insurer are pledged, hypothecated or otherwise encumbered, and (c) the terms and provisions of any such transaction of pledge, hypothecation, or encumbrance are as reported in such sworn statement.

…

Revisor's Note

Section 5, V.T.I.C. Article 21.39-A, refers to "terms and conditions" and "terms and provisions" of a transaction encumbering assets.  The revised law omits the references to "conditions" and "provisions" because "conditions" and "provisions" are included in the meaning of "terms."

Revised Law

Sec. 422.053.  CLAIMANT LIEN ON CERTAIN ASSETS.  (a)  A person, corporation, association, or other legal entity that accepts as security for an insurer's debt or other obligation a pledge or encumbrance of an asset of the insurer that is not made in accordance with this chapter is considered to have accepted the asset subject to a superior, preferential, and automatically perfected lien in favor of a claimant of the insurer.

(b)  Subsection (a) does not apply to an asset of an insurer in conservatorship or receivership if the commissioner in the conservatorship proceeding, or the court in which the receivership is pending, approves the pledge or encumbrance of the asset.  (V.T.I.C. Art. 21.39-A, Sec. 5 (part).)

Source Law

Sec. 5.  … Any person, corporation, association or legal entity which accepts a pledge, hypothecation or encumbrance of any asset of an insurer as security for a debt or other obligation of such insurer not in accordance with the terms and limitations of this Act shall be deemed to have accepted such asset subject to a superior, preferential and automatically perfected lien in favor of claimants;  provided, however, that such superior, preferential and automatically perfected lien in favor of claimants shall not apply to assets of an insurance company in conservatorship or receivership if the Commissioner of Insurance, in the conservatorship proceeding, or the court in which the receivership is pending, approves the pledge, hypothecation or encumbrance of such assets.

…

Revisor's Note

Section 5, V.T.I.C. Article 21.39-A, refers to a superior lien "in favor of claimants."  For clarity, the revised law adds that the superior lien is in favor of a claimant of the insurer that encumbers the asset to secure an obligation.

Revised Law

Sec. 422.054.  PREFERENTIAL CLAIMS ON LIQUIDATION.  If an insurer is involuntarily or voluntarily liquidated, a claimant of the insurer has a prior and preferential claim against all assets of the insurer other than the assets that have been pledged or encumbered in accordance with this chapter.  All claimants have equal status, and their prior and preferential claim is superior to any claim or cause of action against the insurer by any other person, corporation, association, or legal entity.  (V.T.I.C. Art. 21.39-A, Sec. 5 (part).)

Source Law

Sec. 5.  … In the event of involuntary or voluntary liquidation of any insurer subject to this Act, claimants of such insurer shall have a prior and preferential claim against all assets of the insurer except those which have been pledged, hypothecated or encumbered in accordance with the terms and limitations of this Act.  All claimants shall have equal status and their prior and preferential claim shall be superior to any claim or cause of action against the insurer by any person, corporation, association or legal entity.

Revisor's Note

(End of Chapter)

(1)  Section 7, V.T.I.C. Article 21.39-A, states that the article does not apply to a person to whom it cannot apply under the Texas or United States constitution.  Under  general principles of constitutional law, a Texas statute could not apply to a person to whom the Texas or United States constitution does not allow the law to apply.  Therefore, the revised law omits that provision as unnecessary.  The omitted law reads:

Sec. 7.  This Act does not apply to any insurer or other person to whom, under the Constitution of the United States or the Constitution of the State of Texas, it cannot validly apply.

(2)  Section 8, V.T.I.C. Article 21.39-A, states that the article is severable.  The section duplicates Section 311.032, Government Code (Code Construction Act), applicable to the revised law, and Section 312.013, Government Code.  Those provisions state that a provision of a statute is severable from each other provision of the statute that can be given effect.  Therefore, the revised law omits the provision as unnecessary.  The omitted law reads:

Sec. 8.  If any provision of this Act or the application thereof to any person or circumstance is held invalid by any court of competent jurisdiction, such invalidity shall not affect other provisions or applications of the Act which can be given effect without the invalid provision or application, and to this end the provisions of this Act are declared to be severable.