THEATTORNEY GENERAL
OFTEXAS
AUSTIN ~~.TEXAS
WVIJX. WILSON
ATrouNEY GENxmcAL
.December 9, 1958
Ron. Will.iam A.,Harrison Opinion No. W-533
Commissioner of Insurance
International Life Building Re: Certai~nquestionscon-
Austin 14, Texas cerning reinsurance by
companies subject to the
fire insurance rating
laws relnsuri~ngfire in-
surance policies issued
by companies which are
not subject to such rat-
ing laws.
Dear Sir:
Your amended request for an opinion given. in lieu
of your letter of May 5, 1958, is as follows:
"Most companies writing fire and casualty.insurance
in Texas are subject to the provisions of Sub-chapter C
of,Chapter 5 of the Texas Insurance Code which author-
izes the State Board of Insurance to fix and pr.omulgate
firesinsurance rates. However, reciprocals, Lloyd8 and
county mutual insurance companies need'not conform to
th,efire Insurance rates promulgated by the Board. It
has come to the attention of the Board that a number of
stock and mutual insurance companies which are subject
to the rating laws are reinsuring 100% of the fire in-
surance coverages written by companies which are not sub-
ject to these rating laws. Polici~esof fIre insurance
purportedly are Issued by a Lloyds or reciprocal or
cpuatg mutual (which will hereinafter be referred to as
exempt ,companies)at rates fixed!by such exempt company+ .
without respect to the rates promulgated by tie Board.
At the inception the coverage Is reinsured 100% by the
stock or mutual company which could not otherwise issue
policiesat the rates used in the issuance of such
policies.
"We respectfully request your opinion on certain
questions pertaining to the following facts:
"An exempt company has entered into a reinsurance
contract with,a non-exempt company. Such agreement Is
in substance that the exempt company has agreed to cede
. ’
Hon. William A. Harrsion, page 2 (WW-533)
to the non-exempt company all the ~premiumswritten by
theeexempt company on certain fire insurance coverages
and in turn the non-exempt company has agreed to rein-
sure 100% of the liability of the exempt company. The
only return to the exempt company is a small ced,ing
commission. The non-exempt or reinsuring company has
agreed to bear all of the expenses of servicing the bus-
iness, paying the agent's commissions and has even been
de~legatedthe authority to appoint agents to act for the
exempt,company in connection with the sale of the par-
ticular insurance in question. The non-exempt company
assumes full responsibility to investigate, settle and
defend all claims arising under the policy. The pur-
pose of this arrangement is to permit the non-exempt
company to obtain the business at rates lower than that
which they are permitted to write under the applicable
rates promulgated by the State Board of Insurance. It
IS standard procedure for the policy of the exempt
company to have on its face or by endorsement language
to the effect that the obligations under the policy are
reinsured 100s by the non-exempt company. As a matter
of practice the insured In settlement of,ang loss deals
direotly with the non-exempt reinsuring company. In
many Instances the policyholders are unwilling to ac-
.cept the insurance of the exemptcompany until they have
been furnished absolute evidence that the policy will
be reinsur~ed100% by the pon-exempt company.
"With.respect.to the above,outline fact situation
we,ask .the following questions:
'j!(l)'
Must the rate of premium charged the policy-
holder conform to the standard premium pro-
mulgated by the State Board of Insurance for
the particular risk covered under the provi-
sions of Sub-chapter C of Chapter 5 of the
' Texas Insurance Code of 1951 as amended?
/.
"(2) Id?the non-exempt.'reinsuring' company re-
quired to pay the gross premium.recelpts
tax led& by Article .7064, R-S,, 1925'"
The ,speclfic statutory authority for fixing of rates
of :fire~insurance premiums is contained in Article 5.26 of
" I, 'the.Texas Insurance Code as amended, Acts 1957, 55th Leg.,
p.,1.443;: C'h.497 p Section (h) speCifically exempts from the
operation of.Aptlcle 5.26 "County Mutual Insurance Companies
operating under Chapter 17 of this Code; Underwriters at a
: &loyd's operating under Chapter,18, of this Code; Reciprocals
and inter-insurance exchanges operating under Chapter 19 of
'this Codes". 'Sub-chapter C of Chapter 5 of the'Texas Insurance
Hon. William A. Harrison, page 3 W-533)
Code generally governs the power of the State Board of+ In-
surance to promulgate end fix rates of fire insurance pre-
mlums charged on polrcles of fire fnsurence and allied lines
~issued in the State of Texas.
Article 5.26 as emended In 1957 requires the State
Board of Insurance to promulgate maximum rates of insurance
ror fire risks. Insurance companies subject to the law must
charge the rate8 fixed by the Board unless permission Is
granted by the Board to deviate.
Initially, it 'is our opinion that the Legislature
did not intend .for'the State Board ,of Insurance to promulgate
maximum rates for 'relnsurance" premiums.
'Relnsurence" is a contract whereby one for a con-
sideration agrees to ,indemnlfganother, either In whole or
In pert, against loss or liability, the risk of which the
latter he8 assumed under a separate and distinct contract
a8 Insurer of a third party. 8 Couch Cyclopedia of Insur-
ance Law,.p. 7389, Sec. 2256; 24-D Tex. Jur. 980, Sec. 484.
Of course,,reinsurance is a form of Insurance. How-
ever, we believe the Legislature Fn Sub-chapter C of Chapter
5 of the.Texas Insurance Code has recognized e distinction
between "InsUrlng" and %einsuring". In Article 5.41, Texas
Ins'uranceCode, it .is.provided:
: '"No,'company
shall engage or participate.In the
insuring or reinsuring of.eny property inthis State
against loss or damage by fire ~except In compliance
with the terms end provisions of this law; nor shall
any.such'company knowingly write insurance at any
les8errate thanthe rates herein provided for, . . .'
The,firstcleuse expressly recognizes the distlnction
between-!'j.n&rance"ena 'reinsurance' and then the next clause
deacribea~wha,tl'sprohibited, that is, the company Is prohl;
bited from '!'knowingly
writing insurance at .any lesser rate .
.', . -.~See,alsothe first sentence of Article 5.42 indicat-
ingthe Fntent of the Legislature to only regulate relations
~,betweena.c~ompanyand lts,pollcyholders rather then relations
: .bat.~aen,:co,~pdnle.s..
Again; the following leW3UVM from
.Artlclis (l)t.being Intended that every contract
5.27,..'".....
or policy of.:lnsUrenc,eagainst the hazar~dof fire shell be
issuedin'eccordenee ,with the terms and provls,ionsof this
subchapter; . .; .,':.'is indicative of an intent to'exclude
"In a true contract of relnsurance the,reinsur-
r.einsurance'.
ing company does not iSSUe a 'contract or,policy of lnsur-
ence against the~hezard of fire". The reinsurance contract
Insures 'thepolicy $SSUing company against 1oSS by reason
Hon. William A; Harrison,'page 4 (WW-533)
of having issued contracts or policies of insurance.
Again, this conclusion is reinforced by the language
of the emergency~clause of the original Act permitting the
Board to set maximum rates of fire insurance. Section 31 of
the Act, 1913, p. 195, is as follows:
"The fact that there is now no sufficient law
in this State prohibiting unjust discrimination In the
collection of fire insurance rates as between citizens
of the State; nor protecting citizens in securing rea-
sonable rates, constitutes an emergency . . . . -'
We are not unaware of previous Attorney General
opinions rendered on the same OP similar questions. By
opinion dated June 25, 1924 (Vol. 267, p. 267) the then At-
torney General rendered an opinion to the State Fire Insur-
ance Commission that properly licensed stock fire insurance
companies which undertook to reinsure risks which were ln-
8Ured by companies not subject to the rating law were obliged
to observe the rates for such risks which had been estab-
'lished by the Commission. A year later by opinion dated
August 4, 1925 (Book 274, p. 901) the Attorney General ad-
vised the Fire Insurance Commission that the writing of re-
insurance was not covered by the fire rating law. There is
no discussion in this opinion of.the previous opinion of
June 25, 1924. Then by opinion dated September 29, 1930
(Book 316, p. 903) the Attorney General advised the State
Fire Insurance.Commissioner in effect that reinsurance was
within the rating provisions of the statute.
You have orally.advised me that in spite of these
opinions It has been the consistent departmental interpreta-
tion that reinsurance in general was not subject to the
rates promulgated by the State Board of Insurance and the
predecessor Board of Insurance Commissioners. We do not
believe that the statutes in question are ambiguous, but
rather that they clearly exclude from their terms reinsur-
ante, and the two earlier opinions to the contrary are
clearly in error.
However, your lester suggests transactions which do
,not fall within the usual purview of reinsurance and though
we have held that reinsurance as such does not come within
the provisionsof the fire insurance rate laws, the law does
not prevent an inquiry beyond the form of a transaction into
its true substance. We hold that under the fact situation
given that the transaction in question is not one of rein-
surance insofar as the rating laws are concerned. We further
hold in response to your first question that the so-called
reinsuring company has issued a policy of direct insurance.
.I
Hon. Wllllam A. Harrison, page 5 (W-533)
The premium charged the policy holder must conform to the
.rates which the reinsuring company is permItted to use under
'the provFslons of Sub-chapter C of Chapter 5 of the Insur-
ance Code.
What then 1s the primary testto determine whether
or not a given transaction, regardless of the verbiage used,
comes within the provisions of Sub-chapter C of Chapter 5?
We believe that the statute applies when an Insurance company
enters into a contract to directly Insure the hazards of
fire and its allied lines. In support of this conclusion is
the,language of Article 5.27 previously quoted stating the
intent of the Legislature:
"It being intended that every contract or policy
of Insurance against the hazard of fire shall be is-
sued in accordance with the terms and provislons of
this sub-chapter."
The prlmarg test then as to whether or not the so-called
reinsurance described by your request must conform to the
rating provisions of Chapter C is whether or not under the
terms of such so-called relnsurance contract the original
insured has the right to proceed against the so-called re- ?:~
insuring company if he should suffer a loss from the hazards
of flre.&If the original policghold$r has a right to pro- ',
ce,eddirectly against the 'reinsurer there is.nothtng
which distinguishes the obligation of'the so-called rein-
surer from that which he would undertake should he Issue
directly a pollcg on the risk in question---the "reinsurer"
has contracted,to indemnify against thenhazard of fire.
'We do not intend to hold that every contract which
gives the original policyholder a right to~proceedagalnst
the so-called~ reinsurer must conform to the provisions of
Sub-chapter ,C..
Itisnot unusual for the original insuring company
and,the reinsuring company to arrange conventional reinsurance
1 in.'sucha manner that the relnsurer assumes direct responsl-
bflities to theepolingholder. Here again we look to the
b.. purpose;for wh%ch the Act was passed. As evidenced by the
emergency clause the original fire Insurance rating law was
.:enacted to prevent discrimination between policyholders.
~''That purpose.is served when each policyholder similarly
sltuated,obtalnFng direct coverage from a non-exempt insur-
ance company is able to obtain such coverage at the same
rate of premfum. A polLcgholder who has obtained his policies
of Insurance direct from a non-exempt company Is not dis-
criminated again& as between hImself and another who originally
:,’ . _
Hon. William A. Harrison, page 6 (W-533)
obtains a policy from an exempt,company at a lower rate of
premium and then later, Independent of the original negoti-
'ations, the same non-exempt insurance company assumes all
or part of the liabilltg of the exempt company on that par-
ticular policy. The second policyholder in the purchase
or acquisltlon of his policy obtained no advantage of price
or premium to which~he was not properly entitled. The lat-
ter policyholder bargained for and acquired indemnity in the
exempt company only. But where the'policgholder obtains a
policy from an exempt company which at Its inception con-
talns provisions which allow~him to proceed directly against
the non-exempt company,,he has bargained for and obtained
indemnity from the non-exempt company at a lesser rate than
a policyhblder who obtains a d~irectpolicy from.the non-
exempt company, thereby creating the discrimination Intend-
ed to.be eliminated by the law.
We would point out that the determination whether
the transaction constituted ','reinsurance"
as opposed.to
"direct insurance" Is largely a factual one dependent on
assessment of the intent of the parties. That factual de--
t'erminationls~prlmarilg your responsibility,
,
Your second questlon is whether the reinsuring com-
pany is required to'pay the gross $remium receipts tax levied
by Article 7064.
c
Artkle 7064 exacts a tax on'the gross amount of
'premiums ~received on.certainlines of insurance including
fire Insurance. However,,expressly exempted ,from the pro-
visions ~of Article 7064,are 'premiums received from other
licensed companies for reinsuranc,e?. We are not here con-,
cerned with the substantial qu~estion:ofwhether or not re-
ciprocal exchanges come underthe.terms of Article 7064..
Article 7064 requires the fnsurance company subject thereto
to report-to thenBoard'the;"gross amount of premiums' re-
celved on property which is further defined:.,'~
II . . (t)he gross premium receipts :where"re-
ferredto in thls.'law:shallbe the total gross ~amount .a
of ~premiumsreaeived'onleach,and every kind of insur-
,. ,ance OS risk written, exc,epQpremlums received from
other licensed cdmpan~l&sfor reksurance? :less,return
premiums and dividends 'paIdpolicyholders; but there
,., ; shall be no deductlon for premfums paid for reinsurance."
We. have held~under'the fact situationthat~ the obll-
gation of the so-called reinsurfng company.was ln~fact a di-
re@t obllgationof.the reinsuring company rather than one of
relnsurance. Thus,:we':be'li.eve,
that the exemption in Article
7064 "reinsurance~'?:',would,'
not b.e,applicable.:sunder the fact
situation and with the,,:above,con~lusfons,.the.so-calledceding
., ':
. .
Hon. William A. Harrison, page 7 (W-533)
company would be collecting the premium both for itself and
for the so-called reinsuring company and in this sense the
gross premium on the policy would have been received both
for 'itself and for the so-called reinsuring company. As-
suming that the ceding company was a type of company sub-
ject to the tax under Article 7064, then both the assuming
and ceding company would be jointly and severally liable for
the premium tax under Article 7064. If theceding company
be exempt under the terms of Article 7064 from such a premi-
um tax, then only the so-called reinsuring company would
be liable for the tax.
We reached the above conclusion in view of the fact
that under the circumstances given each of the two companies
involved as,sumes100% of the liab111ty provided in the policy.
The Insured could elect to proceed either against the so-
called ceding company or against the reinsuring company in-
dependently or could proceed against’them jointly in one
swit q Thus, each of the companies has assumed a joint and
sev~eralllabilltg under the terms of the contract. Hence,
each would be jointly and severally liable for the taxes on
the premium.
SUMMARY
Under fact situation given, where fire lnzur-
ante polLcy of a company exempt from fire
Insurance rating law is reinsured 100% by a
company subject to this law:
(1) The premium charged the pollcyholder
must conform to the rates which the relnsur-
lng company is permitted to use under the
rating law.
(2) And both companies are subject to the
premium tax levied by Article 7064 unless
: exempted.
FBW:lm:wc Very truly yours,
APPROVED:
OPINIOR COMMITTEE: '. WILL WILSON
Geo. P. Blackburn, ChaIrman Attorney General of Texas
W.E. Allen
Marietta McGregor Payne By s/Fred B. Werkenthin
REVIEWED FOR THE ATTORNEY Fred B. Werkenthin
GENERAL BY: Assistant
W,.V. Geppert