Opinion ID: 66467
Heading Depth: 3
Heading Rank: 2

Heading: A Brief History

Text: 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.