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### E OF 

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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 :bFemlurnincome 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 .bycalcula’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%ecry- 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.” .,
vld8aArticle 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,SArticle ‘7064’ and of Ar,ticle .,‘

. 7064a, ,oidth; Revised Civil S.tatut.88 oS.!Pexf+.‘;, ,,

. a *.

.’Article 

### 5.49’‘

. e.:.,,Article 5.12.eand qS0.,.,,,‘:

,. .~.,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 Icorporation, Lloyda’ or reel rocals; anii an& other organization, or tinaac:tihg’the buain8aa dS SIrei
.’ i’ marine, n?ar%‘Ielnlrqqcl, aocldent

. . e casualty 0 0

. or any othefr’.~klnd, or,char&cter OSIn- ,‘,’ aurance business’ .~6o eat ,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 eand eachcoS;..~auch insurance carriers .~ .ahall pay an anriua,.ltax 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 OSth8.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,:GOOon 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 LumbermenIs 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 maywaive all contingent premiumse”

,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 DDe and marine .&land insurance company, and every life and acdident, e DDsurety 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 Do -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 cornan

---?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 1anguage of either

.~

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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 ActD 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 CompanyAct 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 factHonorable 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, 

### 36F.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)ipee Columblan Protective AssInOvOMcGoldrick, 

### 54N.E.2d 

### 351, Ct, of Appeals of N.Y, (1944) /

“Virtually all exahanges issue policies under which the subscriber participates in profits or savings Da ,‘I, Best ‘a Insurance ,Reports - Fire and Casualty, pO 557 B, i19b7I0

“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 

### 1937amendment{ 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 

### 7064as 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. 

### .53Tex. 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. 

### 53Tex. 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 

### 1936Opinion 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 madeArticles 5.12 and 

### 5e49applicable 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

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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: OPINIONCOMMITTEE Hawthorne Phillips, Chairman Kerns Taylor, Co-Chairman John Grace Harold Kennedy Ralph Rash Alfred Walker A. J. Carubbi, Jr. Executive Assistant Attorney General



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