, - 

E 

OF XAS 

CW*wFORD c. 3L4RTIN AUWMN. TEXAS 78711 

September 

Honorable Clay Cotten 

Commissioner 

State Board of Insurance 

1110 San Jacinto 

Austin, Texas 78701 ,~ 

pear Mr. Cotten: 

You request the opinion of thls 

any fire premiums should be deducted 

change from its gross :bFemlurn income 

turn. 

‘Your letter states, in &rt, as 

Opinion No, M-281 

Re: Whether fire lnsurance premiums 

may be deducted 

by a reciprocal 

in making out its 

gross premium tax 

return in accord 

with Article 7064, 

R. C. S. 

office as to whether 

by a reciprocal exin making its tax refollows: 

“As a matter o&d$partmental practice, 

we advise that one rediprocal exchange has, 

for several years, eliminated the fire insurance premium from Homeowners policies, 

ocean marine policies, and inland~ marine policies e This e 0 . was In addition to the elimination 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 reciprocal 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 portion of the Homeowners, ocean marine, and inland 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.” ., 

vld8a 

Article 19,.11 of ,the Imaurance Cod8 apeO.iSlO~~lly proSor 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 *. 

.’ Article 5.49’ ‘. 

e .:.,, Article 5.12.eand qS 0. ,. ,, ,‘: 

,. . ~.,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’ insurance” 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 Insurance that no type of insurance carrier other than a reciprocal 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 persuasive 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 attorney in fact shall be authorized to Issue pollties for cash premiums only, in pursuance of the 

authority of this Article, .it may waive all cont 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 policies 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 concern 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 intended to exempt from the cave,&jge of the Act a particular type of 

insurance corn an 

---?d 

not mer@@ premiums from fire business done 

by any organ sa on which’&d mutual and non-profit characteristics * At that time reciprocals were not insurance companies 

and therefore were not,_cont,emplated b th 

the coverage provision or the exempt&- 

e 1 anguage of either 

.~ 

- 1361- 
. ” 

Honorable Clay Cotten, page 5 M-281 

The “coverage” provision speaks only of Insurance 

$EtF%%: 

not types of premiums; therefore, the exemption 

in employing the phrase “cooperative or mutual 

fire insurance, companies” necessarily exempted~ a particular type of insuranoe ‘company from the coverage of ,the Act D 

It is reasonable to assume that the Legislature intended 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 companies 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 examlnation 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 referred 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 describe 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-operatingthrough an attorney In fact for the purpose of insuring 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 insurance 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 accruing 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 regard was foreclosed by the 1937 amendment{ express);y placing 

reciprocals for the first time under the ‘coverage, provisions; however, the language of the exemption remained unchanged 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 reciprocals 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 organization or concern transacting the business of fire q . .U 

To hold otherwise would be to attribute to the Legislature the Intent of taxing reciprocals on their fire 

bu.siness at the beginning of Article 7064 and of exempting 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 clalming 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 

Legislature, R.S. 1939, Chapt. 8, p. 417 3 , 

(Acts, 46th 

substantially 

amended the laws pertaining to reciprocals and attributed 

to them some of the characteristics of certain mutual insurers 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 insurers” 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 additional one and one-fourth (1 and $) per scent of the 

fire.. insurance premiums" for the Fire Insurance 

gross 

Division Fund. An "additional" tax on gross premiums presupposes the basic gross premium tax assessed reciprocals 

in Article 7064, as that Article 

.t 

rohiblts any taxes other 

than those imposed by Article 706 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 premiums "to a purely cooperative inter-insurance and reeiprocal 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 provisions which excluded "mu:tiual insurance companies which 

are inter-insurers or reciprocal underwriters,, and substituted 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-insurance exchanges must pay a gross receipts 

tax on all fire insurance premiums and are 

not a non-profit "purely cooperative or mutual 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 CHARLES T. 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- 

.,.