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~n questionsconAustin 14, Texas cerning reinsurance by 

companies subject to the 

fire insurance rating 

laws relnsuri~ng fire insurance policies issued 

by companies which are 

not subject to such rating 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 authorizes the State Board of Insurance to fix and pr.omulgate 

fires insurance rates. However, reciprocals, Lloyd8 and 

county mutual insurance companies need'not conform to 

th,e fire 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 insurance coverages written by companies which are not subject to these rating laws. Polici~es of 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 ~premiums written by 

thee exempt company on certain fire insurance coverages 

and in turn the non-exempt company has agreed to reinsure 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 business, paying the agent's commissions and has even been 

de~legated the authority to appoint agents to act for the 

exempt,company in connection with the sale of the particular insurance in question. The non-exempt company 

assumes full responsibility to investigate, settle and 

defend all claims arising under the policy. The purpose 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~ed 100% 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 policyholder conform to the standard premium promulgated by the State Board of Insurance for 

the particular risk covered under the provisions of Sub-chapter C of Chapter 5 of the 

' Texas Insurance Code of 1951 as amended? 

"(2) Id?the non-exempt.'reinsuring' company required 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+ Insurance to promulgate end fix rates of fire insurance premlums 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 consideration agrees to ,indemnlfg another, 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 Insurance Law,. p. 7389, Sec. 2256; 24-D Tex. Jur. 980, Sec. 484. 

Of course,, reinsurance is a form of Insurance. However, 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'urance Code, 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,t l's prohibited, that is, the company Is prohl; 

bited from '!'knowingly writing insurance at .any lesser rate . 

.', . -.~See,also the first sentence of Article 5.42 indicatingthe Fntent of the Legislature to only regulate relations 

~,between a.c~ompanyand lts,pollcyholders rather then relations 

: .bat.~aen,:co,~pdnle.s.. Again; the following leW3UVM from 

.Artlclis 5.27,..'"..... (l)t.being Intended that every contract 

or policy of.:lnsUrenc,e against the hazar~d of fire shell be 

issuedin'eccordenee ,with the terms and provls,ions of this 

subchapter; . .; .,':.' is indicative of an intent to' exclude 

r.einsurance'. "In a true contract of relnsurance the,reinsuring company does not iSSUe a 'contract or,policy of lnsurence against the~hezard of fire". The reinsurance contract 

Insures 'the policy $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 reasonable 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 Attorney General rendered an opinion to the State Fire Insurance Commission that properly licensed stock fire insurance 

companies which undertook to reinsure risks which were ln8Ured 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 advised the Fire Insurance Commission that the writing of reinsurance 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 interpretation 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 reinsurante, 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 provisions of 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 reinsurance 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 Insurance 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 issued 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,ed directly against the 'reinsurer there is.nothtng 

which distinguishes the obligation of'the so-called reinsurer from that which he would undertake should he Issue 

directly a pollcg on the risk in question---the "reinsurer" 

has contracted,to indemnify against then hazard 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.'such a manner that the relnsurer assumes direct responslbflities to thee polingholder. 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 insurance 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 discriminated 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 particular 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 latter 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 contalns 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~irect policy from.the nonexempt company, thereby creating the discrimination Intended 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'ermination ls~prlmarilg your responsibility, 

Your second questlon is whether the reinsuring company 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 provisions ~of Article 7064,are 'premiums received from other 

licensed companies for reinsuranc,e?. We are not here con-, 

cerned with the substantial qu~estion:of whether or not reciprocal exchanges come underthe.terms of Article 7064.. 

Article 7064 requires the fnsurance company subject thereto 

to report-to then Board'the;"gross amount of premiums' recelved on property which is further defined:.,'~ 

II 

. . (t)he gross premium receipts :where"referredto in thls.'law:shall be the total gross ~amount .a 

of ~premiums reaeived'onl each, and every kind of insur- 

,. 

,ance OS risk written, exc,epQ premlums received from 

other licensed cdmpan~l&s for 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 obllgation of the so-called reinsurfng company.was ln~ fact a dire@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-called ceding 

., ': 
. . 

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. Assuming that the ceding company was a type of company subject 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 premium 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,sumes 100% of the liab111ty provided in the policy. 

The Insured could elect to proceed either against the socalled ceding company or against the reinsuring company independently or could proceed against’ them jointly in one 

swit q Thus, each of the companies has assumed a joint and 

sev~eral llabilltg 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 lnzurante 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 relnsurlng 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