The Third Court of Appeals in Austin recently issued an opinion in the case of Cortez v. Progressive County Mutual Insurance Company. The Court concluded, in its review of a Summary Judgment issued by the trial court, that Article 21.21-8 of the Texas Insurance Code must be interpreted using the definition of "unfair discrimination" that is found in Article 21.21-6 of the Code.
The Department of Insurance does not agree with this part of the Cortez decision. Therefore, the Department, through the Office of the Attorney General, has filed a brief as Amicus Curiae in the Cortez case, in order to articulate its position to the Third Court of Appeals. The purpose of this bulletin is to explain the Department´s position, as articulated in the amicus brief, which is that Article 21.21-8 prohibits discrimination by any company between or among insureds who are of essentially the same hazard or risk, without regard to whether there might or might not also be an issue of discrimination based on the characteristics described in Article 21.21-6. The definition of "unfair discrimination" found in Article 21.21-6 is limited to discrimination because of race, color, religion, national origin, age, gender, marital status, geographic location, disability or partial disability. The Department´s position is that requiring the use of that definition in the interpretation of Article 21.21-8 inappropriately limits the applicability of Article 21.21-8.
Specifically, Section 2 of Article 21.21-8 prohibits charging premiums, policy fees or rates that result in individual consumers of the same class and hazard paying different premium amounts to the same company and/or managing general agent for essentially the same type and amount of insurance coverage. Section 2 extends this prohibition to the benefits payable under insurance policies, as well as the terms and conditions to be imposed as a part of the insurance contract. Indeed, the prohibition of this kind of unfair discrimination is not limited to rates, fees, premiums, benefits or contract terms. It is prohibited from occurring in any other matter whatever.
While some people may think of unfair discriminatory behavior as dealing only with issues described in Article 21.21-6, there is in the insurance industry another form of unfair discrimination which is not acceptable. It is specifically highlighted by Article 21.21-8. This is discrimination between " individuals of the same class and essentially the same hazard." Texas has had a statutory prohibition against this kind of discrimination since at least 1909, long before there was any statutory prohibition against the kinds of discrimination described in Article 21.21-6. Notably, neither this language nor any other part of Article 21.21-8 makes reference to the kinds of discrimination described in Article 21.21-6.
The Third Court of Appeals has also interpreted Article 21.21-8 in a manner which suggests that its only purpose is to provide a private cause of action for situations of unfair discrimination, so that the Department would not be able to invoke authority to redress unfair discrimination under that Article. By using this rationale as an explanation for its limiting interpretation of the kind of unfair discrimination to be addressed by Article 21.21-8, the Court tends to ignore the broad authority provided in other sections of the Insurance Code that confer upon the Commissioner of Insurance authority to remedy any violation of the Code. It also puts Texas consumers and the Department in a circumstance where no regulatory authority would exist to prevent discrimination of a kind not described in Article 21.21-6, for the first time since 1909.
The Department has encountered situations it believes involve discrimination not described in Article 21.21-6. One example is rate rebating. Another is the use of tiered (or multi-level) commission compensation systems for agents, without accompanying guidelines to assure that the use of different commission levels does not result in treating differently persons in the same class or of essentially the same hazard. Limiting the interpretation of Article 21.21-8 so that the Department can no longer take action to correct this form of unfair discrimination is contrary to the legislative intent underlying the enactment of Article 21.21-8.
These two interpretations of Article 21.21-8 limit the applicability of 21.21-8 in a manner that is inconsistent with long-standing statutory precedent. Limiting the interpretation of Article 21.21-8 so that the Department can no longer take action to correct this form of discrimination is contrary to the legislative intent that produced Article 21.21-8.
There are two defenses against an allegation of unfair discrimination under Article 21.21-8. The first is that the difference in treatment is based upon sound actuarial principles. The second is that the insuring entity can limit the group to whom it offers service if it is a membership organization, whose membership eligibility is not limited by unfair discrimination.
For more information, please contact Jim Haley at 512-305-7244.
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Sara Shiplet Waitt
Senior Associate Commissioner
Legal & Compliance Division
Texas Department of Insurance