Request By:
Mr. Harold B. McGuffey
Commissioner
Department of Insurance
151 Elkhorn Court
Frankfort, Kentucky 40601
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Joseph R. Johnson, Assistant Attorney General
This is in reply to your letter of May 25, 1979, to Robert Stephens, Attorney General. In the letter you requested an opinion on the following question:
May a mortgage loan from a domestic life insurer, negotiated with a person who is neither an officer nor a director of such insurer, be continued in effect for such person in the event such person is subsequently elected a director or officer of such insurer without being violative of the provisions of KRS 304.24-270?
You stated that in your opinion the cited statute does not apply to transactions between a domestic life insurer and an individual who is subsequently elected a director of such insurer. You also stated that in your opinion the literal language of the statute, as well as its spirit and intent, is not violated by mortgage loan transactions between a domestic life insurer and an individual which occur prior to such individual's election as a director.
For the reasons hereinafter stated, this office concurs in your opinion.
KRS 304.24-270 provides:
No director or officer of an insurer shall receive any money or thing of value for negotiating, procuring, recommending or aiding in any purchase or sale by the insurer of any property or investment, or any loan from or to the insurer, nor be pecuniarily interested, either as principal, co-principal, agent, or beneficiary, in any such purchase, sale, or loan, nor shall such insurer guarantee in any manner any financial obligation of any such officer or director.
KRS 304.24-270 is a typical statute dealing with conflict of interest situations. It restricts a director or officer of an insurer -- no one else -- from entering into specified situations which might result in a conflict between his corporate obligations and his private interests.
There are three separate aspects to the statutory provisions. The first is to the effect that no director or officer of any insurer shall receive any money or thing of value for negotiating, procuring, recommending or aiding in any purchase or sale by the insurer of any property or investment, or any loan from or to the insurer. The second aspect is that a director or officer shall not be pecuniarily interested either as principal, co-principal, agent or beneficiary in any such purchase, sale, or loan. The third aspect is that an insurer shall not guarantee any financial obligation of its officers or directors.
The clear terms of the statute deal with specific transactions of an insurer involving an officer or director. Clearly, if a person is involved in one of the specified transactions, but is not an officer or director of the insurer when the transaction occurs, the terms of the statute do not apply. Accordingly, it is our opinion that the provisions of the statute do not apply to transactions which occur prior to a person becoming a director or officer of an insurer.
The purpose underlying the enactment of KRS 304.24-270 was to prevent the private interest of an officer or director of a domestic life insurer from conflicting with his fiduciary duties in serving as an officer or director of such insurer. It is clear that sales, purchases and loans in which an individual had an interest prior to his becoming a director or officer are not, and cannot be, in violation of that purpose and intent, and do not constitute a violation of KRS 304.24-270 when such individual later becomes an officer or director of the insurer.
Any such possible conflict does not exist with regard to transactions which have occurred prior to the person becoming an officer or director.
A literal reading of the statute dictates that the second clause of the statutory provisions is directly and specifically tied to the first clause in the complex sentence. Unquestionably the first clause relates to transactions which occur during the time that an individual is a director or officer of the insurer. The second clause, by reference to "such purchase, sale or loan," can only relate to the transactions which are referred to in the first aspect of the provisions. Any other interpretation of the provisions, in our opinion, would be contrary to sound statutory construction.
Even aside from the literal terms of the statute, our conclusion is supported by the basic rules of statutory construction.
The underlying philosophy with respect to conflict of interest statutes is set forth in Commissioner v. Withers, Ky., 98 S.W.2d 24 (1936), at page 25:
It is a salutary doctrine that he who is entrusted with the business of others cannot be allowed to make such business an object of profit to himself. This is based upon the principles of reason, or morality and of public policy.
Thus, transactions occurring prior to an individual becoming an officer or director of an insurer cannot be reasonably interpreted as being transactions in which a director or officer has made the insurer "an object of profit" to themselves.
The primary rule of statutory construction is to determine the statutory intent and purpose as gained from the language of the statute and an interpretation which will lead to an absurd result will be avoided. City of Covington v. Sohio Petroleum Company, Ky., 279 S.W.2d 746, 750 (1955). The Court of Appeals in Wesley v. Board of Education of Nicholas County, Kentucky, 403 S.W.2d 28 (1966), said, "We have often said that statutes will not be given a strict or literal reading where to do so would lead to an absurd or unreasonable conclusion."
To interpret the statute under consideration as preventing purchases, sales and loans occurring prior to an individual's becoming an officer or director would give an absurd and unreasonable conclusion since it would literally make any person who has ever dealt with the insurer in one of the specified transactions automatically in violation of the statute upon becoming an officer or director of the insurer. We do not believe that the statute requires an officer or director to be devoid of any prior dealings with the insurer. We cannot see that the spirit of the statute is violated in any way by reason of an officer's or director's involvement in sales, purchases and loans occurring prior to his becoming a director.
We are not unaware of the case of Jordan v. Acacia Mutual Life Insurance Co., 409 F.2d 1141 (C.A. D.C. 1969), rev'g 283 F.Supp. 766 (D.C. D.C. 1968), wherein the Court of Appeals for the District of Columbia reached a contrary result when interpreting a statute which included language similar to the language in KRS 304.24-270. However, the statute involved in that case had significant additional language which is not a part of KRS 304.24-270. Moreover, the Court not only placed a great deal of significance on the factual history in the case, but also did not deal with several absurd results to which the application of its conclusions could lead, such as automatic violation of the statute when a person, who has previously dealt with an insurer, becomes an officer or director of the insurer. As stated above, under the rules of Kentucky cases an interpretation which leads to an absurd result, must be considered unreasonable and contrary to the intent of KRS 304.24-270.
The present question is analogous to the situation which was considered in our opinion OAG 72-1 interpreting KRS 304.2-080(1). That statute provides that the Commissioner of Insurance and certain other parties shall not be financially interested in an insurance agency. In considering whether a security interest held by the Insurance Commissioner in his former insurance agency was in violation of the statute, we found that such security interest would not give the Commissioner such a "working business interest" in the insurance agency so as to cause a conflict of interest in violation of the statute.
In view of the above, it is our opinion that a mortgage loan from a domestic life insurer, negotiated with a person who is neither an officer nor a director of such insurer, may be continued in effect for such person in the event such person is subsequently elected a director or officer of such insurer without being violative of the provisions of KRS 304.24-270.