                         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~nquestionscon-
             Austin 14, Texas                          cerning reinsurance by
                                                       companies subject to the
                                                       fire insurance rating
                                                       laws relnsuri~ngfire in-
                                                       surance policies issued
                                                       by companies which are
                                                       not subject to such rat-
                                                       ing 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 author-
                    izes the State Board of Insurance to fix and pr.omulgate
                    firesinsurance rates. However, reciprocals, Lloyd8 and
                    county mutual insurance companies need'not conform to
                    th,efire 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 in-
                    surance coverages written by companies which are not sub-
                    ject to these rating laws. Polici~esof 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 ~premiumswritten by
                    theeexempt company on certain fire insurance coverages
                    and in turn the non-exempt company has agreed to rein-
                    sure 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 bus-
                    iness, paying the agent's commissions and has even been
                    de~legatedthe authority to appoint agents to act for the
                    exempt,company in connection with the sale of the par-
                    ticular insurance in question. The non-exempt company
                    assumes full responsibility to investigate, settle and
                    defend all claims arising under the policy. The pur-
                    pose 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~ed100% 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 policy-
                              holder conform to the standard premium pro-
                              mulgated by the State Board of Insurance for
                              the particular risk covered under the provi-
                              sions of Sub-chapter C of Chapter 5 of the
                           ' Texas Insurance Code of 1951 as amended?
         /.
                        "(2)   Id?the non-exempt.'reinsuring' company re-
                               quired 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+ In-
          surance to promulgate end fix rates of fire insurance pre-
          mlums 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 con-
         sideration agrees to ,indemnlfganother, 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 Insur-
         ance Law,.p. 7389, Sec. 2256; 24-D Tex. Jur. 980, Sec. 484.
                 Of course,,reinsurance is a form of Insurance. How-
         ever, 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'uranceCode, 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,tl'sprohibited, that is, the company Is prohl;
         bited from '!'knowingly
                               writing insurance at .any lesser rate .
.', .            -.~See,alsothe first sentence of Article 5.42 indicat-
           ingthe Fntent of the Legislature to only regulate relations
         ~,betweena.c~ompanyand lts,pollcyholders rather then relations
        : .bat.~aen,:co,~pdnle.s..
                               Again; the following leW3UVM from
          .Artlclis             (l)t.being Intended that every contract
                   5.27,..'".....
           or policy of.:lnsUrenc,eagainst the hazar~dof fire shell be
           issuedin'eccordenee ,with the terms and provls,ionsof this
           subchapter; . .; .,':.'is indicative of an intent to'exclude
                        "In a true contract of relnsurance the,reinsur-
           r.einsurance'.
           ing company does not iSSUe a 'contract or,policy of lnsur-
           ence against the~hezard of fire". The reinsurance contract
           Insures 'thepolicy $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 rea-
     sonable 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 At-
torney General rendered an opinion to the State Fire Insur-
ance Commission that properly licensed stock fire insurance
companies which undertook to reinsure risks which were ln-
8Ured 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 ad-
vised the Fire Insurance Commission that the writing of re-
insurance 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 interpreta-
tion 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 reinsur-
ante, 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 provisionsof 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 rein-
 surance 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 Insur-
            ance 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 is-
                sued 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,eddirectly against the 'reinsurer there is.nothtng
            which distinguishes the obligation of'the so-called rein-
            surer from that which he would undertake should he Issue
            directly a pollcg on the risk in question---the "reinsurer"
            has contracted,to indemnify against thenhazard 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.'sucha manner that the relnsurer assumes direct responsl-
             bflities to theepolingholder. 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 insur-
             ance 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 dis-
             criminated 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 par-
                  ticular 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 lat-
                  ter 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 con-
                  talns 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~irectpolicy from.the non-
                  exempt company, thereby creating the discrimination Intend-
                  ed 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'erminationls~prlmarilg your responsibility,
,
                         Your second questlon is whether the reinsuring com-
                 pany 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 pro-
                  visions ~of Article 7064,are 'premiums received from other
                  licensed companies for reinsuranc,e?. We are not here con-,
                  cerned with the substantial qu~estion:ofwhether or not re-
                  ciprocal exchanges come underthe.terms of Article 7064..
                  Article 7064 requires the fnsurance company subject thereto
                  to report-to thenBoard'the;"gross amount of premiums' re-
                  celved on property which is further defined:.,'~
                           II . . (t)he gross premium receipts :where"re-
                      ferredto in thls.'law:shallbe the total gross ~amount        .a
                      of ~premiumsreaeived'onleach,and every kind of insur-
            ,.        ,ance OS risk written, exc,epQpremlums received from
                      other licensed cdmpan~l&sfor 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 obll-
                 gation of the so-called reinsurfng company.was ln~fact a di-
                 re@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-calledceding
                   .,                                   ':
.   .




        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. As-
        suming that the ceding company was a type of company sub-
        ject 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 premi-
        um 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,sumes100% of the liab111ty provided in the policy.
        The Insured could elect to proceed either against the so-
        called ceding company or against the reinsuring company in-
        dependently or could proceed against’them jointly in one
        swit q Thus, each of the companies has assumed a joint and
        sev~eralllabilltg 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 lnzur-
                    ante 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 relnsur-
                    lng 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
