      c     -.




                      The Attorney               General of Texas
                                          December      21,   1978
JOHN L. HILL
Attorney General


                   Honorable Jose A. Gamez                        Opinion No. H-- 13 6 6
                   Brooks County Attorney
                   P. 0. Box 557                                  Re: Whether counties may pur-
                   Falfurrias, Texas 78355                        chase 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 agree-
                               ment 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, 161S.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




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