Texas State Insurance Laws CHAPTER 14

Commissioner of Insurance

• Role and Appointment: The Commissioner is the Chief Executive and Administrative Officer of the Texas Department of Insurance (TDI).

  • The Governor appoints the Commissioner for a $2$-year term, with the advice and consent of the Senate.

• General Powers and Duties:

  • Regulating Insurance: Oversees the business of insurance in Texas.

  • Enforcement: Executes and enforces the state’s insurance code and other insurance laws; notably, the Commissioner does not establish the laws but enforces them.

  • Fair Competition: Ensures the industry remains competitive to foster a healthy market.

  • Consumer Protection: Handles insurance-related consumer complaints and ensures fair treatment of consumers.

  • Licensing and Authority: Issues producer licenses and approves, disapproves, or denies applications for certificates of authority for insurers.

  • Financial Oversight: Examines insurer records to determine financial condition and solvency.

  • Regulatory Actions: Empowered to make reasonable rules and regulations, conduct investigations, hold hearings, issue subpoenas, administer oaths, take testimony, and issue cease and desist orders or penalties.

• Examination of Records:

  • Scope: The Commissioner must examine every insurance carrier organized under Texas law (domestic) and those authorized to do business in the state.

  • Frequency: Domestic and licensed insurers must be examined at least once every $5$ years.

  • Access: Insurers and agents must provide free access to all books and papers related to their business affairs.

  • Sworn Testimony: The Commissioner may summon and examine officers, agents, and employees under oath regarding the insurer’s condition.

  • Disciplinary Action: Failure to comply with an examination request subjects the person or entity to disciplinary action.

• Financial Remediation:

  • Hazardous Condition: If the Commissioner determines an insurer's condition makes continued operation hazardous to policyholders, creditors, or the public, they may order the insurer to take specific remedial actions after notice and hearing.

  • Surplus Impairment: Impairing the surplus of an insurance company is prohibited. The Commissioner will order the insurer to correct the impairment to an acceptable level or cease business in Texas.

• Communication and Inquiries:

  • Consumer Complaints: The Department maintains records of written complaints and must notify each party of the status at least quarterly until disposition.

  • Departmental Inquiries: Any person (insurer, agent, etc.) receiving a written inquiry from the Department must respond in writing within $15$ days. A $10$-day extension may be granted upon written request.

Sanctions, Penalties, and Cease & Desist Orders

• Violating federal fraud laws doesn’t just lead to trouble—it leads to serious legal consequences. Here’s what you need to know about the penalties under this law:

  • General fraud violation: Up to 10 years in prison

  • Fraud involving less than $5,000: Up to 1 year in prison

  • If the fraud threatens the financial security of an insurer: Up to 15 years in prison

  • Criminal penalties may include a fine, imprisonment, or both

  • Civil penalties: Up to $50,000 or the amount of compensation received from the prohibited conduct—whichever is greater

  Anyone convicted of a felony involving dishonesty or breach of trust mu            st receive a consent waiver from the state insurance regulator before working in the insurance industry again. Working without a required waiver is a federal crime-punishable by a fine, up to 5 years in prison, or both. All criminal penalties under this law may be brought by the Attorney General.

• Sanctions: After notice and hearing, the Commissioner may cancel or revoke authorizations if the Texas Insurance Code has been violated. Additional actions include:

  • License suspension for up to $1$ year.

  • Administrative penalties.

  • Issuance of cease and desist orders.

  • Restitution to Texas residents or insureds.

  • Note: The Commissioner does not have the authority to imprison individuals.

• Dispositions: Matters may be settled informally via consent order, agreed settlement, stipulation, or default. These may include reservations stating the holder does not admit to the violation.

• Cease & Desist Orders:

  • Normal Order: Typically requires notice and a hearing.

  • Emergency Order: Issued immediately if the Commissioner believes an authorized person is in a hazardous condition or committing unfair acts, or if an unauthorized person is unlawfully transacting insurance. Conduct must appear fraudulent, hazardous to public safety, or expected to cause immediate, irreparable public injury.

  • Genetic Testing: Issuers of health plans violating standards for genetic tests may receive emergency cease and desist orders.

  • Service: Must be sent by registered or certified mail with return receipt requested.

• Contesting Orders:

  • An emergency order becomes final on the $61$st day after service unless a hearing is requested within $60$ days.

  • The hearing must be held within $30$ days of the request.

  • Contested Case: Proceedings involving legal rights/privileges require at least $10$ days' notice for the hearing.

Insurance Company Definitions and Domicile

• Certificate of Authority: Required to transact insurance in Texas. It remains effective until suspended or revoked and specifies the kinds of insurance the entity may transact. Failure to file an annual statement is grounds for revocation.

• Transacting Insurance: Includes activities like soliciting, negotiating, executing a contract, taking applications, and collecting consideration (premium, fees, etc.).

• Unauthorized Insurers: Insurance contracts with unauthorized insurers are unenforceable by the insurer. If a loss occur, the unauthorized insurer and any assisting agent are liable for the full amount of the claim.

• Domicile Types:

  • Domestic: Organized under Texas laws.

  • Foreign: Organized under the laws of another U.S. jurisdiction (another state).

  • Alien: Organized under the laws of a jurisdiction outside the United States.

• Ownership Structure:

  • Stock Insurer: Owned by stockholders; issues non-participating policies; pays taxable dividends to stockholders.

  • Mutual Insurer: Owned by policyholders; issues participating policies; pays non-taxable dividends to policyholders (considered a return of profit).

Licensing Requirements

• Agent Definition: A person licensed to transact insurance for an insurer, including soliciting, negotiating, and procuring insurance. Includes individuals, partnerships, and corporations.

  • Non-Agents: Salaried employees who do not solicit/receive commission, and those administering employee benefit plans not compensated by the insurer.

• Qualifications for License:

  • Minimum age of $18$.

  • Submission of application and fees.

  • Passing the licensing exam within the past $12$ months.

  • Proof of intent to be actively engaged in business with the general public.

  • Examination Exemptions: Renewals (unexpired or expired < $1$ year) and professionals holding CLU (for Life/Health) or CPCU (for P&C) designations.

• Controlled Business: Insurance on risks controlled by the agent (self, family, employer, etc.).

  • Requisite Volume: At least $25\%$ of premium volume must come from the general public.

• Corporate and Partnership Licensing:

  • One officer or partner must be individually licensed for the same authority.

  • Must demonstrate the ability to pay up to $25,000$ for negligent acts/errors/omissions.

• Nonresident Agent:

  • Licensed in their home state and granted reciprocity by the Commissioner.

  • CE requirements are waived if they comply with their home state rules.

  • Transition to Texas resident license requires change of address notification and fingerprints.

• Temporary Agent:

  • Issued for up to $180$ days without an exam while being considered for a full appointment.

  • Requires $40$ hours of supervised training ($10$ hours in classroom).

• Appointments: Agents cannot transact insurance until appointed by an authorized insurer. The Department must be notified of additional appointments within $30$ days.

License Maintenance and Continuing Education (CE)

• Expiration: Licenses expire every $2$ years. Individual licenses expire on the last day of the birth month (even years for even-year issues, odd years for odd-year issues).

  • Renewal (Expired): If expired $\le 90$ days (fee + $50\%$ fine). If expired $91$ days to $1$ year (new application + $50\%$ fine, no exam). If expired > 1 year (start over as new applicant).

• CE Requirements:

  • Standard: $24$ hours every $2$ years, including $3$ hours of Ethics.

  • Format: At least $50\%$ must be classroom or classroom-equivalent.

  • Limited License: $5$ hours annually.

  • LTC/Medicare: Initial $8$-hour cert + $4$ hours CE per period.

  • Small Employer Health: Initial $8$-hour cert + $5$ hours CE per period.

  • Annuity: One-time $4$-hour cert + $4$ hours CE every $12$ months.

  • Fines: $50$ per missing credit hour (max $500$ per license).

  • Exemption: Continuous licensure for at least $20$ years in Texas.

• Department Notifications: Monthly notification is required for mailing address changes, felony convictions, or administrative actions by other regulators.

Unfair Trade and Marketing Practices

• Unfair Claim Settlement Practices:

  • Misrepresenting material facts.

  • Failing to acknowledge a claim or provide forms within $15$ business days.

  • Failing to accept/reject a claim within $15$ business days of receiving all proof.

  • Failing to pay a claim within $5$ business days of notification.

  • Delayed Payment Penalty: If delayed > 60 days, insurer must pay amount of claim + reasonable attorney fees + $18\%$ interest per year.

• Prohibited Trade Practices:

  • False Advertising: Misleading statements or using "dividends" to imply they are guaranteed.

  • Misrepresentation: Exaggerating benefits or inducing policy lapse for replacement.

  • Defamation: Spreading false/malicious information about an insurer's financial condition.

  • Boycott, Coercion, and Intimidation: Actions to restrain trade or establish a monopoly.

  • Rebating: Offering anything of value not in the policy ($25$ limit for promotional items).

  • Unfair Discrimination: Rating based on race, religion, color, origin, etc. (Underwriting based on sound principles/experience is allowed).

  • Twisting: Misleading comparisons to induce replacement of a policy.

• Fiduciary Duty: Agents must keep premiums in a trust account separate from personal funds. Commingling personal and business funds is prohibited.

Life Insurance Specific Laws

• Texas Life and Health Insurance Guaranty Association: Protects residents against claims for insolvent/financially impaired insurers.

• Policy Provisions:

  • Grace Period: $1$ month or $31$ days.

  • Policy Loans: Available after $3$ full years of premium payments. Maximum deferral period is $6$ months.

  • Incontestability: Policy is incontestable after it has been in force for $2$ years (except for nonpayment of premium).

  • Misstatement of Age: Benefits adjusted to what the premium would have purchased at the correct age.

  • Claim Settlement: Must be paid within $2$ months of proof of death.

  • Statute of Limitations: Cannot be less than $2$ years for legal action.

• Accelerated Death Benefits: Available for terminal illness (death expected in $\le 2$ years) or specific chronic/LTC illnesses (AIDS, malignant tumors, organ transplants).

• Group Life Insurance:

  • Requires a minimum of $2$ employees.

  • A conversion privilege allows an employee to convert to an individual policy within $31$ days of termination without evidence of insurability.

  • Dependent coverage is allowed for a spouse and children up to age $25$.

• Replacement Procedures:

  • Agents must provide a "Notice Regarding Replacement" signed by both agent and applicant.

  • Replacing insurers must notify the existing insurer within $5$ business days.

  • A $30$-day free look period applies to replacement policies.

• Nonforfeiture Law: Policy must provide a benefit if the policyholder defaults on premiums. Options include: Reduced Paid-Up, Extended Term, and Cash Surrender (after $3$ years).

Health Insurance Specific Laws

• Newborn and Dependent Coverage: Coverage begins at birth and continues for $31$ days. Adopted children have the same rights as natural children. Notification and premium payment are required to continue beyond $31$ days.

• Chemical Dependency: Coverage for alcohol/drug treatment must be provided on the same basis as physical illness.     

• Medicare Supplements:

  • Standardized by the NAIC; must have a $30$-day free look period.

  • Pre-existing condition exclusions are limited to $6$ months.

  • Agents cannot use high-pressure tactics or "cold lead advertising."

• AIDS Testing: Requires written informed consent. Results are confidential and may only be released to the applicant, their physician, MIB (via code), or insurer personnel making underwriting decisions.

• HMOs (Health Maintenance Organizations):

  • Deductibles are generally only allowed for services outside the network.

  • Copayments are limited to $50\%$ of the contracted rate.

  • Immunizations for children birth to age $6$ must be provided at no cost.

  • Cancellation for nonpayment of premium can occur without written notice.

• ACA (Affordable Care Act):

  • Essential Health Benefits: $10$ categories including maternity, behavior health, and pediatric vision/dental.

  • Metallic Levels: Bronze ($60\%$), Silver ($70\%$), Gold ($80\%$), Platinum ($90\%$).

  • Dependents: Coverage available up to age $26$.

  • Guaranteed Issue: Coverage provided regardless of pre-existing conditions.