, -
E
OF XAS
AUWMN. TEXAS 78711
CW*wFORD c. 3L4RTIN
September
Honorable Clay Cotten Opinion No, M-281
Commissioner
State Board of Insurance
1110 San Jacinto
Austin, Texas 78701 ,~ Re: Whether fire ln-
surance premiums
may be deducted
by a reciprocal
in making out its
gross premium tax
return in accord
with Article 7064,
pear Mr. Cotten: R. C. S.
You request the opinion of thls office as to whether
any fire premiums should be deducted by a reciprocal ex-
change from its gross :bFemlurn income in making its tax re-
turn.
‘Your letter states, in &rt, as follows:
“As a matter o&d$partmental practice,
we advise that one rediprocal exchange has,
for several years, eliminated the fire in-
surance premium from Homeowners policies,
ocean marine policies, and inland~ marine poli-
cies e This e 0 . was In addition to the eli-
mination of premiums on the. Texas Standard
dwelling policy form and fire premiums on
automobile insurance policies, the latter two
premiums being specified in the contract and
therefore ascertainable without question.
All of the deductions named in this paragraph ‘~’
have also been taken by one additional recipro-
cal exchange for the year 1966. Apparently
the remaining 22 reciprocal exchanges licensed
in this state have not sought to reduce their
taxable premium income .by calcula’ting the por-
tion of the Homeowners, ocean marine, and in-
land marine ,premlums attributable to the fire
risk 0
- 1358-
”
Honorable Clay Cotit&/ page 2
c.
“We are confronted with the basic’
queationof whether an Sire premluaa should
be deduoted by a %ec ry- procal exchange in.,
making ita,tax return, .and we. request you,r ‘. ‘~
advice on this quiatlon.” (Emphasis added . . ‘,
througvt .)
Article 19.12 of ;:t&a l$xa8 Insurance ~Code &e~$&~~
reciprocal or inter-inMranhe exchanges Prom the OperatIP ,’
of all insurance laws bf ,thE, State. except as Chept8r ,I94
governing reciprocal exchanges, apeclSlcally ~provide~a, .-or .~..
unless .realprocal or inter’-insurance exchanges ‘ar8 sp8Olflc~
ally mentioned In such other laW8.” .,
Article 19,.11 of ,the Imaurance Cod8 apeO.iSlO~~lly pro-
vld8a Sor certaln’taxea? to ::be appiioable to reciprocals.;“
.:
“Said exchanges ahall be aubjeat to the ‘.
provisions o,S Article ‘7064’ and of Ar,ticle .,‘.
7064a, ,oidth; Revised Civil S.tatut.88 oS .!Pexf+.‘;, ,,
. a *. e .:.,, Article 5.12.eand qS 0. ,.,, ,‘:
.’ Article 5.49’ ‘. ,. . ~.,oS ..
;&his Code ;”
‘.
'A&icle 7064; Vernonia;~~ivil Statutes,, lm&aea’a g&as
prgmiuma tax on insurance ..&np9niea ‘other th8nflS8, :SraF 1’. .”
ternal’ benefit aaaoclet,lon$; and non-profit group hoapit?l
service plans D It reed-a.@ .part that: ,
“Every lnaurence I corporation, Lloyda’
or reel rocals; anii an& other organization,
or tinaac:tihg’the buain8aa dS SIrei .’ i’
marine, n?ar%‘Ie lnlrqqcl, aocldent . . e casualty
0 0 . or any othefr’.~klnd, or,char&cter OS In- ,‘,’ ~ :“-
aurance business’ .~6 o e at ,the time of flllng
its annual statemetit, ;a.hall repor,t to the
Board of Inaurance~.~Commlaaionera the gross ~‘,”
amount, of premiuma: received upon property ... .~.:
0 e e and eachcoS;..~auch insurance carriers .~
.ahall pay an anriua,.l tax upon such gross pre- ..
m&urn- receipts a 0 m j ,-
’ I,
Purely, coo.&ratlve or mutual Sire, iti- ’
Laura& Eo&nlea ‘Par.rZed on by the members ‘:,,,: :,
th8reoS Solely, for’ the prot8Otton OS th8.ir own ‘:,
‘property, and no.t 3or,,proSlt, ah~ll~:.be. exempt :
from then ~prlo~iai~~~.~of’:thla law,.. ‘,,’ ‘,
. .
Honorable Clay Cotten, page 3 M-281
The controlling question is whether a reciprocal Is
such a non-profit “purely cooperative or mutual Sire’ in-
surance” company as to come within the gross premium tax
exemption of Article 7064.
This question was,,affirmatively answered In Attorney
General Opinion No. 3,:GOO on April 17, 1937:
,,
‘l/R 7eclprocals writing Sire insurance
operatii; Fn a purely cooperative or mutual
basis solely for the protection of thelr
own propertky, and n&t’“for profit and come
squarely within the exemption.”
This opinion affirmed the opinion of the Attorney General
given on December 21, 1936, denying the exemption’ to mutual
companies and it also reaffirmed an earlier letter opinion
dated March 1, 1937, granting application of the exemption to
Lumbermen Is Underwriters, a reciprocal ~
This office has been advised by the State Board of In-
surance that no type of insurance carrier other than a re-
ciprocal is claiming this exemption.
Because of various statutory changes since 1937 and
other pertinent considerations hereinafter set forth In
this opinion, Attorney General Opinion No. 3,000, and the
informal letter Opinion dated March 1, 1937, addressed to
the Chairman of the Board of Insurance Commissioners, R. L,
Daniel, are obsolete and are no ,longer controlling or per-
suasive in deciding the question here presented and are
therefore expressly overruled where Inconsistent herewith.
Over the years the Insurance laws have been amended
allowing mutual companies and reciprocal exchanges to limit
liability of members, stipulate premiums and do numerous
other acts which were not within their hlstorlc category or
sphere of operation, In particular, Article lg.03 of the
Insurance Code of Texas provides in part that:
“When any ‘such subscribers and their at-
torney in fact shall be authorized to Issue poll-
ties for cash premiums only, in pursuance of the
authority of this Article, .it may waive all con-
t ingent premiums e”
,i
,.,.-:,
Honorable Clay Cotten, page 4 M-281
You have also advlsed”$hls office that there are no
reciprocal exchanges operating In Texas today Issuing poli-
cies providing for contingent premiums.
It is the oplnion ‘of this office that regardless of
whether a reciprocal exchange could ever have been included
within the term “purely cooperative or mutual”, we must
necessarily hold that one which now Issues policies upon
which there can be no liability other than the premium
paid is no longer operating on a “purely cooperative or
mutual” ‘basis as that term is used in Article 7064, and
would not be entitled to the exemption therein provided.
The predecessor of Article 7064, as originally passed
In 1907, described .the carriers covered as:
“Every’ life, fire, fire and marine D D e
and marine .&land insurance company, and every
life and acdident, e D D surety and ca~sualty
and all other Insurance companies do-
%$%%ness in this state a * .*‘I
In 1911 the coverage provision was amended to read:
“Every Insurance company transacting
the business of fire, marine D o -It
It was not until 1936 that the coverage portion of
the statute was amended to read as it does today,, 1-e .:
“Every insurance corporation, Lloyda I, or
reciprocals and ‘every other organization or con-
cern kransacting the b;slness of fire, marine,
0 0 *
\’
The exemption language of Article 7064 was contained
in the 1907 Act and has been carried forward unchanged.
It Is clear :that the L&gislature in 1907 and 1911 intend-
ed to exempt from the cave,&jge of the Act a particular type of
insurance corn an not mer@@ premiums from fire business done
by any organ---?dsa on which’&d mutual and non-profit character-
istics * At that time reciprocals were not insurance companies
and therefore were not,_cont,emplated b th e 1anguage of either
the coverage provision or the exempt&-
.~
- 1361-
. ”
Honorable Clay Cotten, page 5 M-281
The “coverage” provision speaks only of Insurance
not types of premiums; therefore, the exemption
$EtF%%: in employing the phrase “cooperative or mutual
fire insurance, companies” necessarily exempted~ a particu-
lar type of insuranoe ‘company from the coverage of ,the Act D
It is reasonable to assume that the Legislature intend-
ed to exempt a~ type of insurance company recognized by Texas
law and existing at tha? ti $1 1879 and until the
County Mutual Insurance Con$%y Ac??f 1937 (Acts of 45th
Leg., p. 184)~ there exist&in this State specific creatures
of statute known as non-profit mutual fire insurance com-
panies organized solely for the mutual protection of the
property of its members. These companies are recognized
by the County Mutual Insurance Company Act and their origin
and history in Texas statutes is traced In detail in Report
and Opinions of Attorney -General of Texas, 1922, 1923, page
64 dated Dedember’ 8 1923 . The 1923 opinion construes an
exehptlon provision &ry similar to ‘that here under examlna-
tion as being applicable to mutual fire insurance companies.
Reciprocals do not fal& In this classification.
It was not untii.:ci”gl3 that reciprocals were mentioned
in Texas ~statutes, and ‘even then they were,not recognized i’
as insurance companies’. The 1913 Act merely defined and
regulated certain indemnity contracts between individuals,
firms or corporations and provided for indemnity among
them, and provided that indemnity contracts should not be
subject to insurance ,laws. The Courts of Texas have re-
ferred to reciprocals as associations; Highway Underwriters
v. Reed, 221 S.W.2d 925 (Tex. Civ. App. 1949 ,,no writ)
Sergeant v. Goldsmith Dry Goods Co., 110 Tex, 482, 221’S,W,,
P-0 , u we exas decisions referring
to them as insurance ,companles ,
Although some’ cases and text writers ,freguently de-
scribe the operation of a’ reciprocal’ as coope>ative, mutual,
and providing Insurance at cost, the legal status of a
reciprocal is one individual and peculiar to itself *’ It is
neither a coonerative nor a mutual as contemplated by statute;
and in practice, the ~element of profit, is certainly present,
as held by the authorities hereinafter, discussed 0
A reciprocal or inter:insurance exchange has been
described as a “group or association of persons co-opera-
tingthrough an attorney In fact for the purpose of in-
suring themselves and each other, The attorney in fact
Honorable Clay Cotten, page 6 ~-281
issues the contracts to and for them, and he is the one who
is held responsible for a compliance with the laws of the
state so far as they relate to their character of insur-
ance D” In Re Minesota Ins,.+gnderwriters, 36 F.2d 371 (1929)'.
“Like Lloyd’s Associations, they ‘ire unincorporated
or voluntary associations, organized for a scheme of mutual
insurance .‘I Cooley’s Briefs on Insurance, 2d Edition=
I, P. 70.
But the distinguishing feature of a mutual as a type
of carrier is that.mutual companies assume liability in
their corporate capacity which is controlled by and with
profits .to policyholders, Instead of stockholders.
Reciprocals are only “mutual in the sense that. each
policyholder in the arrangement is Insured by all the others,
and in turn also insures them to a stipulated extent,”
Property Insurance, iby SD S, Huebner, pm 84 (1938)i pee
Columblan Protective Ass In O v O McGoldrick, 54 N.E.2d 351,
Ct, of Appeals of N.Y, (1944) /
“Virtually all exahanges issue policies under which
the subscriber participates in profits or savings D a ,‘I,
Best ‘a Insurance ,Reports - Fire and Casualty, pO 557 B,
i 19b7 I 0
“The subscribers% a reciprocal exchange are not
only policyholders thereat and as such entitled to the
protection afforded by the~policies and required to pay
the premiums stipulated in the, policies; but they also
own the insurance business just as stockholders own their
corporation O They are the owners of their Insurance ex-
,change, and as such are entitled to reap the rofits ac-
cruing from the oneration of their insurance
are also required-to pay the.ir pro rata part of the losses
and expenses incurred at the’,exchange *‘I Wilson v. Marshall,
218 S,W,2d 345 (Tex, Civ, App, 1949, no writ).
Any question of the Legislature’s intention in this re-
gard was foreclosed by the 1937 amendment{ express);y placing
reciprocals for the first time under the ‘coverage, pro-
visions; however, the language of the exemption remained un-
changed o Under theses circtistances, we. must conclude ‘that
the Legislature had no intention of exempting reciprocals,
-1363-
-9
.
Honorable Clay Cotten,. page 7 M-281
Carrying forward this reasoning to Article 7064 as
presently written, we find that since Lloyds and recipro-
cals are expressly named as taxable entities, the phrase
“purely cooperative or mutual fire insurance companies”
must be construed to provide an exemption to the taxation
of “every insurance corporation” or any other organiza-
tion or concern transacting the business of fire q . .U
To hold otherwise would be to attribute to the Legis-
lature the Intent of taxing reciprocals on their fire
bu.siness at the beginning of Article 7064 and of exempt-
ing them at the end of the same Article. Consequently,
such a construction must be rejected. .53 Tex. Jur.2d
272, Statutes, Sec. 182.
“Statutes granting exemptions from taxation must be
strictly construed and the burden is upon the person clalm-
ing such exemption from taxation to bring himself clearly
within the exemption statute c In considering a claim of
exemution from taxation. the axemotion law must be strictlv
construed and doubts resolved against such claim.” Texas ~”
Employers’ Insurance Association v. City of Dallas, -.2d
614 (Tex, Civ. App. 192& err. ref .,).
It is ~also pertinentin a constructlon of the statute
that effect be given to all laws and provisions bearing
on the same subject as being In para materia, although
passed at different times or sessions of the Legislature.
53 Tex. Jur.2d 280, Statutes, Sec. 186.
House Bill Number 95, enacted in 19 9 (Acts, 46th
Legislature, R.S. 1939, Chapt. 8, p. 417 3 , substantially
amended the laws pertaining to reciprocals and attributed
to them some of the characteristics of certain mutual in-
surers as described in:the Attorney General’s .Opinion of
December 21, 1936, supra Q This 1936 Opinion was the basis
for holding that mutuals did not come within the ,,exemption,
In 1955, Senate Bill Number 15, (Acts, 54th Legislature,
R,S, 1955, Chapt. 117, p. 413) subjected reciprocals to
essentially the same requirements as are imposed upon stock
Insurers * For example, the 1955 amendment of Article 19.11
of the Insurance Code made Articles 5.12 and 5e49 applicable
to reciprocals. Article 5.12 assesses “an additional” tax
on “the gross motor vehicle insurance premiums, of afl in-
surers” to supersede the tax formerly ‘collected upon fire
- 1364-
. .
Honorable Clay Cotten, page 8 M-281
premiums of automobile insurance for the support of the
Board of Insurance Commissioners."
Article 5.49 assesses a tax 'not exceeding an addi-
tional one and one-fourth (1 and $) per scent of the gross
fire.. insurance premiums" for the Fire Insurance
Division Fund. An "additional" tax on gross premiums pre-
supposes the basic gross premium tax assessed reciprocals
in Article 7064, as that Article rohiblts any taxes other
than those imposed by Article 706 .t and the "maintenance
taxes specially levied under the laws of this State ., ~ .'
Further evidencing the legislative intent was the
1955 amendment to Article 5.50 of the Insurance. Code, which
specifically applies the "additional" tax on gross pre-
miums "to a purely cooperative inter-insurance and reeipro-
cal exchange carried on by the members thereof solel{ for
the protection of their propekty and not for profit.
The general law and practice of treating reciprocals
the same as mutual and stock,:,bompanies for tax purposes
finds legal recognition in f&era1 law also, The Revenue
Act of 1962 (Pub. L. 87-834fi:Sec. 8) eliminated prior pro-
visions which excluded "mu:tiual insurance companies which
are inter-insurers or reciprocal underwriters,, and sub-
stituted rovisions authorizing a normal tax e D ."'-26
U,S,C.A. i 821, p. 184, historical note to 1962 amendments.
SUMMARY
-------
In accord with Article 7064, Taxation
General, V.A.C.S., reciprocal or inter-in-
surance exchanges must pay a gross receipts
tax on all fire insurance premiums and are
not a non-profit "purely cooperative or mu-
tual fire insurance" company so as to come
within the exemption of Article 7064.
_
Re tfully submitted, '
C. MARTIN
General of Texas
-1365-
. .
Honorable Clay Cotten, page 9 ~-281
Prepared by CHARLEST. ROSE
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Hawthorne Phillips, Chairman
Kerns Taylor, Co-Chairman
John Grace
Harold Kennedy
Ralph Rash
Alfred Walker
A. J. Carubbi, Jr.
Executive Assistant Attorney General
-1366-
.,.