Insurance entity definitions: certificate of authority, transacting insurance, and organization types

Two definitions do the gatekeeping

Before the Texas Insurance Code tells anyone how to conduct insurance business, it settles who may conduct it at all. Two ideas carry that weight on the exam: the certificate of authority (a company's permission to engage in the business of insurance in Texas) and transacting insurance (the acts that require either that permission or an individual license). A third idea — organization type — describes the legal forms an insurer may take, and the code generally reaches all of them.

Certificate of authority

A certificate of authority is the authorization a company must hold to engage in the business of insurance in this state. A company holding one is commonly described as authorized or admitted; a company without one is unauthorized as to Texas business.

Why it matters beyond bookkeeping:

• The Life, Health, and Accident Insurance Guaranty Association Act keys its safety-net obligations to companies licensed or holding a certificate of authority to engage in the business of insurance in Texas. Membership — and the assessment liability that funds coverage — follows the certificate, and the Act separately identifies organization types and lines that fall inside or outside its reach.
• Producer licensing and appointment under Title 13 assume the agent is acting for authorized insurers; the individual holds a license, the company holds a certificate of authority. Do not swap those two words on the exam.

Transacting insurance

"Transacting insurance" — engaging in the business of insurance — covers soliciting or advertising coverage, negotiating terms, selling or effectuating a contract, collecting premium, and servicing or adjusting the resulting policy. Under Title 13, a person who performs those acts for another, for compensation, must hold the appropriate license, and the license type and lines of authority determine what that person may do.

The unfair-practices chapter uses the same broad reach. Chapter 541 regulates unfair methods of competition and unfair or deceptive acts in the business of insurance, and it defines the regulated person to include individuals, corporations, associations, partnerships, reciprocal or interinsurance exchanges, Lloyd's plans, fraternal benefit societies, and other legal entities engaged in the business of insurance, along with agents and adjusters. Practical takeaway: the standard does not soften because of what form the entity took or whether the actor is a company or an individual.

Organization types

Texas recognizes several legal forms, and the definitions in the code sweep them in together:

• Stock company — owned by shareholders.
• Mutual company — owned by its policyholders.
• Reciprocal or interinsurance exchange — subscribers insuring one another through an attorney-in-fact.
• Lloyd's plan — individual underwriters joined in a syndicate.
• Fraternal benefit society — a lodge-system membership organization writing life and health benefits.
• Health maintenance organization — a managed care entity delivering health care services.

In general usage insurers are also grouped by domicile: domestic (formed in the state), foreign (another U.S. state), and alien (another country). Domicile is separate from authorization — any of the three must still hold a Texas certificate of authority to write Texas business, and an agent's appointment does not substitute for it.