Opinion ID: 66467
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Heading: Reciprocal Insurance Exchanges

Text: The parties refer to USAA as a reciprocal interinsurance exchange, but such an association is also referred to as a reciprocal insurer, a reciprocal insurance exchange, an interinsurance exchange, an interindemnity exchange, or a reciprocal. The most commonly used name appears to be reciprocal insurance exchange. A reciprocal insurance exchange is essentially an insurance company cooperatively owned by those it insures. See Kiepfer v. Beller, 944 F.2d 1213, 1216 (5th Cir.1991); Wilson v. Marshall, 218 S.W.2d 345, 346 (Tex.Civ.App.1949). Through such an entity, members undertake to indemnify each other against certain kinds of losses by means of a mutual exchange of insurance contracts, usually through the medium of a common attorney-in-fact appointed for that purpose by each of the underwriters.... 43 Am. Jur.2d Insurance § 81 (2008). Thus, in its pure form, a reciprocal insurance exchange is a web of contractual relationships between subscribers who agree to insure one another, consummated through a common agent with power of attorney. See Dennis F. Reinmuth, The Regulation Of Reciprocal Insurance Exchanges 11 (1967) ([C]onceptually a reciprocal consists of a series of private contracts among the members or subscribers, each agreeing to insure one another, the exchange of insurance being consummated through the common agent of the members, the attorney-in-fact, and by means of the subscriber's agreement of power of attorney.).
When reciprocal insurance exchanges were first established in the late nineteenth century, subscribers had several, not joint, liability on all of the exchange's liabilities. See Lee v. Interinsurance Exch. of the Auto. Club of S. Cal., 50 Cal.App.4th 694, 702-03, 57 Cal.Rptr.2d 798 (1996) (citing Delos v. Farmers Ins. Group, 93 Cal.App.3d 642, 652, 155 Cal. Rptr. 843 (1979); 2 Couch on Insurance 2d § 18.11, at 613 (1984); Reinmuth, supra, at 10-20). The exchange had no capital, and funds for the payment of losses were collected from subscribers after losses occurred. Id. at 703, 57 Cal.Rptr.2d 798 (citing Mitchell v. Pac.Greyhound Lines, 33 Cal.App.2d 53, 59-60, 91 P.2d 176 (1939); Couch, supra, §§ 18:11, at 614-15; Reinmuth, supra, at 2). To avoid delays, exchanges began collecting advance annual deposits, which were kept in a separate account for each subscriber, with the subscriber's pro rata share of losses and expenses being deducted as needed. If a subscriber's account had a positive balance at the end of the year, that amount became part of a subscriber's savings or surplus, and was either distributed to subscribers or held until the subscriber withdrew from the exchange. If the balance was negative, the subscriber could be assessed for a specified maximum amount beyond their deposit. Id. at 703, 57 Cal.Rptr.2d 798 (citing Couch, supra, §§ 18:26-18:30, at 633-641; Reinmuth, supra, at 2, 30-31). The original concept of reciprocal insurance contemplated the allocation of all surplus to the accounts of individual subscribers, but over time it became customary for reciprocals to accumulate unallocated surplus, which was held perpetually in anticipation of catastrophic losses and not subject to withdrawal by departing subscribers. However, the use of such separate surplus accounts is merely an internal bookkeeping device; all assets are held in a common fund, and there is no physical segregation of assets to individuals. Reinmuth, supra, at 31. As a result of the accumulation of surplus assets, many reciprocals, including USAA, began issuing nonassessable policies, under which subscribers had no contingent liability for claims, expenses, or losses of the exchange. See Lee, 50 Cal.App.4th at 703-04, 57 Cal.Rptr.2d 798 (citing Reinmuth, supra, at 2, 18, 30-37, 186-87). True holds such a nonassessable policy from USAA.
The Texas Insurance Code specifically authorizes the establishment of reciprocal insurance exchanges and establishes rules relating to their operation. See Tex. Ins. Code Ann. § 942 (2008); see also 44 Tex. Jur.3d Insurance Companies § 57. The statute provides that subscribers of this state may exchange reciprocal or interinsurance contracts with other subscribers of this state or of another state or country to provide indemnity among those subscribers for a loss for which insurance coverage may be obtained under other law. Tex. Ins.Code Ann. § 942.002(a). A subscriber is defined as an individual, partnership, or corporation who, through an attorney in fact, enters into a reciprocal or interinsurance contract. Id. § 942.001(4). A reciprocal or interinsurance contract is defined as an insurance policy or other contract that provides indemnity among a group of subscribers for certain losses, id. § 942.001(3), and the statute provides that such a contract may be executed by an attorney in fact appointed by the subscribers of an exchange, id. § 942.051. The statute requires subscribers, through an attorney in fact, to file a declaration specifying the name of the proposed exchange, the kinds of insurance to be provided, a copy of the power of attorney or other authorization of the attorney in fact, the location of the exchange's offices, and an affidavit stating that the capital and surplus is the bona fide property of the exchange and that the information in the declaration is true. Id. § 942.053. The statute imposes financial requirements on exchanges relating to the maintenance of sufficient unencumbered surplus and reserves. Id. § 942.155. The primary purpose of [such requirements are] to provide policyholder security in the event of adverse or catastrophic loss experience. Reinmuth, supra, at 119.