c -. 

The Attorney General of Texas 

December 21, 1978 

JOHN L. HILL 

Attorney General 

Honorable Jose A. Gamez 

Brooks County Attorney 

P. 0. Box 557 

Falfurrias, Texas 78355 

Opinion No. H-- 13 6 6 

Re: Whether counties may purchase Nonassessable Reciprocal 

Interinsurance Contracts. 

Dear Mr. Gamer,: 

You ask whether a county may become a member of a reciprocal 

interinsurance exchange under chapter 19 of the Insurance Code. You state 

that the county would like to purchase a nonassessable insurance contract 

from a reciprocal, resulting in financial savings to the county. A reciprocal is 

a method of insurance whereby members of the exchange, called subscribers, 

agree through an attorney in fact to insure each other against designated 

risks. The subscribers are both the insured and the insurer. V.T.C.S. arts. 

19.01- 19.12; Couch on Insurance 2d, SS 18.ll - 18.37. 

Article 19.09 provides that “[alny corporation, public, private or 

municipal, . . . shall . . . have full power and authority to exchange insurance 

contracts of the kind and character herein mentioned.” In previous cpinions 

we have said that public bodies may not purchase assessable insurance 

coverage because this would amount to a lending of credit in contravention of 

article 3, section 52 of the Texas Constitution. Attorney General Opinions 

H-755 (1975); H-365 (1974). This section provides that no county has authority 

to “lend its credit or to grant public money or thing of value in aid of, or to 

any individual, association or corporation whatsoever.” We believe that an 

insurance reciprocal is an association within this provision. Highway 

Insurance Underwriters v. Reed, 221 S.W.2d 925 (Tex. Civ. App. -Austin 1949, 

no writ) (reciprocal is association for venue purposes). Article 19.03(3) 

provides that 

subscribers at such exchange may provide by agreement that the premium or premium deposit specified 

in the policy contract on all forms of insurance except 

life shall constitute their entire liability through the 

exchange if the free surplus of such exchange is equal 

to the minimum capital stock and minimum surplus 

required of a stock company transacting the same 

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Honorable Jose A. Gamez - Page 2 (H-1300) 

kinds of business. . . . [Tlhe power of attorney or other 

authority executed by the subscribers at any such exchange 

shall provide that such subscribers at such exchange shall be 

liable, in addition to the premium or premium deposit 

specified in the policy contract, to a contingent liability 

equal in amount to one (1) additional annual premium or 

premium deposit. Such last mentioned provision may be 

eliminated if the free surplus of such exchange is equal to 

the minimum capital stock and minimum surplus required of 

a stock company transacting the same kinds of business. . . . 

In order for the policy to be nonassessable, the surplus of the reciprocal must 

be as specified in article 19.03 when the policy is issued. Cf. Ins. Code art. 15.11 

(mutual company may issue policies without contingent liability only if it possesses 

a minimum surplus). If the reciprocal does not have the minimum surplus, we 

believe that the subscriber would be liable for the additional premium assessment 

despite a description of the policy as “nonassessable.” Taggart v. George B. Booker 

eco., 28 A.2d 690 (Supt. Ct. Del. 1942). The mere possibility of assessment is an 

unconstitutional lending of credit. City of Tyler v. Texas Employers’ insurance 

3, 288 S.W. 409 (Tex. 1926). 

If, however, the reciprocal has the minimum surplus a county may enter into 

a reciprocal interinsurance exchange on a nonassessable basis as there would be no 

lending of its credit in violation of article 3, section 52 and article 11, section 3 of 

the Texas Constitution. 

Article 3, section 52 also prohibits a county from becoming a stockholder in a 

corporation, association or company. Similarly, article 2, section 3 provides that 

:no county, city, or other municipal corporation shall hereafter become a 

subscriber to the capital of any private corporation or association. . . .‘I 

The question then is whether subscription to a reciprocal insurance exchange 

falls within this stockholder prohibition. Section 52 was construed to preclude a 

school district from acquiring fire insurance from a mutual company because the 

district would therebv become a stockholder in the comoanv with votine rixhts. 

Lewis v. lnd. Sch. D&.~of City of Austin, 161 S.W.2d 450 [Tex. 1942); see &o-% 

of Tyler v. Texas Employers’ Insurance Ass’n, w. The purposethese 

provisions was to prevent public bodies from extending public bodies from 

extending public funds or credit to private entities through the purchase of capital 

stock. We believe that there is no purchase of stock or subscription to capital when 

a subscriber pays a premium to a reciprocal exchange for insurance coverage. 

Therefore, article 3, section 52 is not violated. But see 1937 Attorney General 

Opinions, bk. 375, p. 568 (semble). 

SUMMARY 

A county may purchase a nonassessable policy from a 

reciprocal insurance exchange. 

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Honorable Jose A. Gamez - Page 3 (B-13013) 

Attorney General of Texas 

APPROVED: 

C. ROBERT HEATH, Chairman 

Opinion Committee 

p. 5122