Locke Lord QuickStudy: Powerful But Not Responsible: Texas Department of Insurance Clarifies Licensed Officer Requirement for Insurance Agencies

Locke Lord LLP
June 7, 2018
The Texas Department of Insurance (“TDI”) has now offered guidance on one of the most overlooked requirements for a Texas-licensed (both resident and non-resident) insurance agency:  the requirement that an agency have an individually-licensed “officer” or “active partner” who holds an individual insurance agent license for the same line or lines of insurance as does the agency.

This requirement often surprises many applicants for a Texas insurance agency license—applicants who submit a TDI insurance agency license application (a TDI FIN507 Form) and overlook the instructions in Part II in the Form discussing the concept of an individually-licensed officer. And, this requirement is even easier to overlook when prospective buyers of an insurance agency consider officer changes while preparing a change of control filing (a TDI FIN531 Form) pursuant to Texas Insurance Code section 4001.253.

One reason that TDI’s individually-licensed officer requirement is often overlooked is that TDI’s conception of that requirement is not specified by statute. Indeed, the requirement is rooted in Texas Insurance Code section 4001.106(b)(2) which states only the following:

[A]t least one officer of the corporation or one active partner of the partnership and all other persons performing any acts of an agent on behalf of the corporation or partnership in this state are individually licensed by the department separately from the corporation or partnership;

While this statute requires an individually licensed-officer or active partner, it does not mention that the license must be for the same line or lines that the entity is seeking to obtain. And, the statute does not elaborate on what it means to be an “officer” or “active partner.”

Now, however, TDI has a new rule that explains the “same type” of license requirement for officers.  Specifically, 28 Texas Administrative Code section 19.804 now contains examples of license types, and indicates that multiple individually-licensed officers can be used to fulfill the requirement for insurance agencies that are authorized for multiple lines of insurance. The full text of TDI’s new rule can be found here.

Perhaps the most interesting part of TDI’s recent rulemaking on this issue, however, is not found in the final rule at all. Instead, buried within TDI’s comments to the new rule is the most extensive written guidance to date on the type of agency “officer” that meets TDI’s requirement. While the statute and the new rule continue to speak only of an “officer or active partner,” TDI offered the following commentary in response to submitted comments during the rulemaking process:

TDI disagrees with the comment to the extent that a licensed officer or active partner required under Insurance Code §4001.106(b)(2) should not be in a position to have the power to direct or cause the direction of the management and policies of the license holder. If the individual officer or active partner has no power to direct or cause the direction of the management and policies of the license holder, then the individual is little different than an employee or contractor, which renders the requirement in Insurance Code §4001.106(b)(2) that the person be an officer or active partner meaningless. As previously stated, TDI does not consider that the control must be absolute or that it is limited to ownership. (emphasis added).

Given this commentary, it appears that TDI will insist that insurance agencies have an individually-licensed officer that has the power to influence the management and policies of the agency. In other words, while the title given to an officer may not matter, that officer will likely need to have a minimum level of authority to comply with TDI’s requirement.

Finally, it is important to note that the final version of TDI’s rules does not refer to the individually-licensed officer as a “responsible” person. As a result, neither TDI’s statutes nor its rules have followed the path of some other states which expressly codify the concept of a “designated responsible licensed person”. This distinction is important not only for insurance agencies seeking to obtain or maintain their licenses, but also for assessing potential enforcement liability for the individually-licensed officer that is necessary for the agency’s Texas license.  

TDI’s recent commentary on this issue can be found here.