     ,          -




                                     E
                                                   OF            XAS
                                             AUWMN.      TEXAS         78711
CW*wFORD            c. 3L4RTIN


                                           September


         Honorable   Clay Cotten                                        Opinion   No,   M-281
         Commissioner
         State Board of Insurance
         1110 San Jacinto
         Austin,   Texas 78701 ,~                                       Re:    Whether fire    ln-
                                                                               surance premiums
                                                                               may be deducted
                                                                               by a reciprocal
                                                                               in making out its
                                                                               gross premium tax
                                                                               return  in accord
                                                                               with Article    7064,
         pear       Mr. Cotten:                                                R. C. S.
               You request the opinion of thls                          office  as to whether
         any fire  premiums should be deducted                          by a reciprocal  ex-
         change from its gross :bFemlurn income                         in making its tax re-
         turn.

                    ‘Your   letter       states,      in &rt,     as follows:

                           “As a matter o&d$partmental           practice,
                    we advise   that one rediprocal        exchange has,
                    for several    years,   eliminated      the fire     in-
                    surance   premium from Homeowners policies,
                    ocean marine policies,       and inland~ marine poli-
                    cies e This e 0 . was In addition            to the eli-
                    mination   of premiums on the. Texas Standard
                    dwelling   policy   form and fire      premiums on
                    automobile    insurance    policies,     the latter      two
                    premiums being specified         in the contract        and
                    therefore   ascertainable      without     question.
                    All of the deductions       named in this paragraph ‘~’
                    have also been taken by one additional               recipro-
                    cal exchange for the year 1966. Apparently
                    the remaining     22 reciprocal      exchanges     licensed
                    in this state have not sought to reduce their
                    taxable   premium income .by calcula’ting          the por-
                    tion of the Homeowners, ocean marine, and in-
                    land marine ,premlums attributable           to the fire
                    risk 0



                                                        - 1358-

                                                                                         ”
Honorable        Clay    Cotit&/      page    2

c.

               “We are confronted      with the basic’
         queationof     whether an     Sire premluaa should
         be deduoted by a %ec ry-  procal exchange in.,
         making ita,tax    return,   .and we. request  you,r                      ‘.    ‘~
         advice on this quiatlon.”         (Emphasis added .                              . ‘,
         througvt    .)

       Article 19.12 of ;:t&a l$xa8 Insurance ~Code &e~$&~~
reciprocal    or inter-inMranhe        exchanges     Prom the OperatIP       ,’
of all   insurance    laws bf ,thE, State. except as Chept8r ,I94
governing    reciprocal    exchanges,     apeclSlcally    ~provide~a, .-or .~..
unless .realprocal      or inter’-insurance     exchanges ‘ar8 sp8Olflc~
ally   mentioned In such other laW8.”                                     .,

          Article  19,.11 of ,the Imaurance Cod8 apeO.iSlO~~lly pro-
vld8a      Sor certaln’taxea?   to ::be appiioable to reciprocals.;“
                                                            .:
                  “Said exchanges           ahall      be aubjeat   to the ‘.
          provisions     o,S Article          ‘7064’   and of Ar,ticle           .,‘.
          7064a, ,oidth;    Revised Civil              S.tatut.88 oS .!Pexf+.‘;,        ,,
           . a *.                e .:.,, Article       5.12.eand qS 0. ,.,, ,‘:
        .’ Article    5.49’ ‘. ,. . ~.,oS  ..
                                              ;&his    Code ;”
     ‘.
      'A&icle   7064; Vernonia;~~ivil      Statutes,, lm&aea’a   g&as
prgmiuma tax on insurance        ..&np9niea ‘other th8nflS8,   :SraF 1’.                         .”
ternal’ benefit   aaaoclet,lon$;      and non-profit  group hoapit?l
service   plans D It reed-a.@       .part that:              ,

                “Every lnaurence I corporation,      Lloyda’
         or reel rocals;      anii an& other organization,
         or tinaac:tihg’the                 buain8aa dS SIrei          .’ i’
        marine,     n?ar%‘Ie lnlrqqcl, aocldent   . . e casualty
         0 0 . or any othefr’.~klnd, or,char&cter       OS In- ,‘,’ ~ :“-
         aurance business’ .~6 o e at ,the time of flllng
         its annual statemetit, ;a.hall repor,t to the
         Board of Inaurance~.~Commlaaionera the gross            ~‘,”
         amount, of premiuma: received       upon property           ... .~.:
          0 e e and eachcoS;..~auch insurance      carriers       .~
        .ahall   pay an anriua,.l tax upon such gross pre-                   ..
         m&urn- receipts    a 0 m      j                    ,-



                ’ I,
                        Purely, coo.&ratlve     or mutual Sire, iti-      ’
          Laura&    Eo&nlea     ‘Par.rZed on by the members ‘:,,,: :,
          th8reoS Solely, for’ the prot8Otton      OS th8.ir own      ‘:,
         ‘property,   and no.t 3or,,proSlt,   ah~ll~:.be. exempt    :
          from then ~prlo~iai~~~.~of’:thla  law,..                ‘,,’      ‘,
.      .




    Honorable    Clay   Cotten,   page 3                      M-281



          The controlling     question    is whether a reciprocal   Is
    such a non-profit     “purely    cooperative   or mutual Sire’ in-
    surance” company as to come within the gross premium tax
    exemption  of Article     7064.

          This question      was,,affirmatively     answered In Attorney
    General Opinion No. 3,:GOO on April 17, 1937:
                                 ,,
                 ‘l/R 7eclprocals      writing  Sire insurance
          operatii; Fn a purely cooperative         or mutual
          basis solely      for the protection      of thelr
          own propertky, and n&t’“for profit         and come
          squarely    within    the exemption.”

         This opinion  affirmed  the opinion      of the Attorney    General
    given on December 21, 1936, denying the exemption’ to mutual
    companies and it also reaffirmed     an earlier     letter opinion
    dated March 1, 1937, granting    application     of the exemption     to
    Lumbermen Is Underwriters,  a reciprocal     ~

           This office  has been advised   by the        State Board of In-
    surance that no type of insurance       carrier       other than a re-
    ciprocal   is claiming  this exemption.

           Because of various       statutory     changes since    1937 and
    other pertinent      considerations       hereinafter    set forth    In
    this opinion,      Attorney   General Opinion No. 3,000,          and the
    informal    letter   Opinion dated March 1, 1937, addressed              to
    the Chairman of the Board of Insurance               Commissioners,    R. L,
    Daniel,   are obsolete      and are no ,longer controlling          or per-
    suasive   in deciding     the question      here presented     and are
    therefore    expressly    overruled     where Inconsistent      herewith.

            Over the years the Insurance      laws have been amended
    allowing    mutual companies and reciprocal        exchanges   to limit
    liability    of members, stipulate    premiums and do numerous
    other acts which were not within         their hlstorlc    category   or
    sphere of operation,      In particular,      Article lg.03 of the
    Insurance    Code of Texas provides      in part that:

                  “When any ‘such subscribers     and their at-
           torney in fact shall    be authorized      to Issue poll-
           ties for cash premiums only,        in pursuance   of the
           authority   of this Article,    .it may waive all con-
           t ingent premiums e”



                                           ,i
                                     ,.,.-:,
Honorable      Clay Cotten,     page 4                       M-281



       You have also advlsed”$hls           office  that there are     no
reciprocal   exchanges   operating         In Texas today Issuing      poli-
cies providing    for contingent          premiums.

       It is the oplnion ‘of this office       that regardless       of
whether a reciprocal     exchange could ever have been included
within    the term “purely   cooperative     or mutual”,    we must
necessarily    hold that one which now Issues policies           upon
which there can be no liability         other than the premium
paid is no longer operating       on a “purely     cooperative     or
mutual” ‘basis as that term is used in Article           7064, and
would not be entitled      to the exemption     therein    provided.

     The predecessor    of Article             7064, as originally   passed
In 1907, described   .the carriers             covered as:

             “Every’ life,   fire,  fire   and marine D D e
        and marine .&land insurance       company, and every
        life and acdident,     e D D surety and ca~sualty
                  and all other Insurance         companies do-
        %$%%ness       in this state     a * .*‘I

        In 1911 the coverage         provision     was amended to read:

               “Every    Insurance    company transacting
        the   business    of fire,    marine D o -It

         It was not until 1936 that            the coverage  portion  of
the    statute  was amended to read            as it does today,, 1-e .:

               “Every insurance   corporation,     Lloyda I, or
        reciprocals   and ‘every other organization       or con-
        cern kransacting     the b;slness    of fire,   marine,
         0 0 *
        \’
        The exemption    language of Article      7064 was contained
in    the 1907 Act and has been carried        forward unchanged.

       It Is clear :that the L&gislature      in 1907 and 1911 intend-
ed to exempt from the cave,&jge of the Act a particular            type of
insurance   corn an      not mer@@ premiums from fire      business    done
by any organ---?dsa   on which’&d    mutual and non-profit     character-
istics   * At that time reciprocals       were not insurance    companies
and therefore     were not,_cont,emplated   b th e 1anguage of either
the coverage     provision   or the exempt&-



                                     .~
                                     - 1361-
.       ”




    Honorable    Clay   Cotten,    page 5                        M-281



         The “coverage”    provision  speaks only of Insurance
                 not types of premiums; therefore,      the exemption
    $EtF%%:      in employing   the phrase “cooperative    or mutual
    fire  insurance, companies” necessarily    exempted~ a particu-
    lar type of insuranoe ‘company from the coverage       of ,the Act D

           It is reasonable        to assume that the Legislature            intend-
    ed to exempt a~ type of insurance             company recognized       by Texas
    law and existing        at tha? ti          $1      1879 and until       the
    County Mutual Insurance          Con$%y Ac??f         1937 (Acts of 45th
    Leg.,   p. 184)~ there exist&in            this State specific        creatures
    of statute     known as non-profit         mutual fire     insurance     com-
    panies organized        solely   for the mutual protection          of the
    property    of its members.         These companies are recognized
    by the County Mutual Insurance             Company Act and their         origin
    and history     in Texas statutes        is traced In detail        in Report
    and Opinions      of Attorney -General of Texas,           1922, 1923, page
      64 dated Dedember’ 8 1923 . The 1923 opinion                  construes      an
    exehptlon     provision     &ry similar       to ‘that here under examlna-
    tion as being applicable           to mutual fire      insurance    companies.
    Reciprocals     do not fal& In this classification.

           It was not untii.:ci”gl3      that reciprocals     were mentioned
    in Texas ~statutes,       and ‘even then they were,not        recognized            i’
    as insurance     companies’.       The 1913 Act merely defined         and
    regulated    certain     indemnity    contracts    between individuals,
    firms or corporations         and provided      for indemnity among
    them, and provided        that indemnity      contracts   should not be
    subject    to insurance     ,laws.    The Courts of Texas have re-
    ferred    to reciprocals      as associations;      Highway Underwriters
    v. Reed, 221 S.W.2d 925 (Tex. Civ. App. 1949 ,,no writ)
    Sergeant    v. Goldsmith Dry Goods Co., 110 Tex, 482, 221’S,W,,
    P-0          ,   u we                         exas decisions     referring
    to them as insurance        ,companles ,

           Although some’ cases and text writers          ,freguently     de-
    scribe    the operation    of a’ reciprocal’   as coope>ative,        mutual,
    and providing     Insurance   at cost,     the legal status       of a
    reciprocal    is one individual      and peculiar      to itself    *’ It is
    neither    a coonerative    nor a mutual as contemplated            by statute;
    and in practice,      the ~element of profit,     is certainly       present,
    as held by the authorities        hereinafter,    discussed 0

           A reciprocal    or inter:insurance    exchange has been
    described    as a “group or association      of persons co-opera-
    tingthrough      an attorney    In fact for the purpose of in-
    suring themselves      and each other,     The attorney in fact
Honorable   Clay   Cotten,   page 6                     ~-281


issues the contracts   to and for them, and he is the one who
is held responsible  for a compliance    with the laws of the
state so far as they relate   to their    character   of insur-
ance D” In Re Minesota Ins,.+gnderwriters,      36 F.2d 371 (1929)'.
      “Like Lloyd’s    Associations,      they ‘ire unincorporated
or voluntary   associations,      organized    for a scheme of mutual
insurance .‘I Cooley’s     Briefs    on Insurance,   2d Edition=
I, P. 70.
        But the distinguishing     feature of a mutual as a type
of carrier     is that.mutual   companies assume liability   in
their    corporate    capacity which is controlled   by and with
profits    .to policyholders,   Instead of stockholders.

       Reciprocals      are only “mutual in the sense that. each
policyholder      in the arrangement       is Insured by all the others,
and in turn also insures          them to a stipulated    extent,”
Property     Insurance,    iby SD S, Huebner, pm 84 (1938)i pee
Columblan Protective         Ass In O v O McGoldrick,  54 N.E.2d 351,
Ct, of Appeals of N.Y, (1944) /

       “Virtually  all exahanges issue policies   under which
the subscriber    participates  in profits or savings   D a ,‘I,
Best ‘a Insurance ,Reports - Fire and Casualty,    pO 557 B,
i 19b7 I 0
        “The subscribers%        a reciprocal     exchange are not
 only policyholders      thereat   and as such entitled        to the
 protection   afforded    by the~policies      and required      to pay
 the premiums stipulated        in the, policies;     but they also
 own the insurance      business    just as stockholders       own their
 corporation   O They are the owners of their           Insurance    ex-
,change, and as such are entitled          to reap the      rofits   ac-
 cruing from the oneration        of their insurance
 are also required-to       pay the.ir pro rata part of the losses
 and expenses    incurred    at the’,exchange *‘I Wilson v. Marshall,
 218 S,W,2d 345 (Tex, Civ, App, 1949, no writ).

       Any question    of the Legislature’s    intention   in this re-
gard was foreclosed      by the 1937 amendment{ express);y      placing
reciprocals    for the first    time under the ‘coverage,      pro-
visions;    however,   the language of the exemption remained un-
changed o Under theses circtistances,        we. must conclude   ‘that
the Legislature      had no intention    of exempting reciprocals,




                                -1363-
                                                                       -9
.




    Honorable    Clay   Cotten,.   page 7                       M-281



          Carrying     forward this reasoning        to Article     7064 as
    presently    written,     we find that since Lloyds and recipro-
    cals are expressly        named as taxable     entities,     the phrase
    “purely   cooperative      or mutual fire     insurance     companies”
    must be construed        to provide    an exemption      to the taxation
    of “every insurance        corporation”    or    any other organiza-
    tion or concern       transacting     the business    of fire    q . .U

           To hold otherwise   would be to attribute    to the Legis-
    lature   the Intent of taxing reciprocals     on their   fire
    bu.siness at the beginning    of Article  7064 and of exempt-
    ing them at the end of the same Article.         Consequently,
    such a construction     must be rejected.   .53 Tex. Jur.2d
    272, Statutes,    Sec. 182.

            “Statutes    granting   exemptions     from taxation    must be
    strictly     construed    and the burden is upon the person clalm-
    ing such exemption from taxation             to bring himself    clearly
    within    the exemption statute c In considering            a claim of
    exemution from taxation.          the axemotion     law must be strictlv
    construed     and doubts resolved        against   such claim.”     Texas ~”
    Employers’ Insurance         Association     v. City of Dallas,     -.2d
    614 (Tex, Civ. App. 192& err.             ref .,).

          It is ~also pertinentin         a constructlon    of the statute
    that effect   be given to all        laws and provisions     bearing
    on the same subject    as being        In para materia,   although
    passed at different    times or        sessions  of the Legislature.
    53 Tex. Jur.2d 280, Statutes,           Sec. 186.

           House Bill    Number 95, enacted       in 19 9 (Acts,        46th
    Legislature,     R.S. 1939, Chapt. 8, p. 417 3 , substantially
    amended the laws pertaining          to reciprocals       and attributed
    to them some of the characteristics             of certain      mutual in-
    surers as described       in:the    Attorney   General’s      .Opinion of
    December 21, 1936, supra Q This 1936 Opinion was the basis
    for holding     that mutuals did not come within the ,,exemption,
    In 1955, Senate Bill       Number 15, (Acts,        54th Legislature,
    R,S, 1955, Chapt. 117, p. 413) subjected               reciprocals      to
    essentially     the same requirements        as are imposed upon stock
    Insurers * For example,         the 1955 amendment of Article            19.11
    of the Insurance      Code made Articles        5.12 and 5e49 applicable
    to reciprocals.       Article    5.12 assesses      “an additional”        tax
    on “the gross motor vehicle          insurance     premiums, of afl in-
    surers”     to supersede    the tax formerly       ‘collected      upon fire




                                       - 1364-
                                                                              .   .




Honorable    Clay Cotten,     page 8                         M-281



premiums    of automobile  insurance        for   the   support    of   the
Board of    Insurance  Commissioners."

        Article    5.49 assesses     a tax 'not exceeding      an addi-
 tional   one and one-fourth        (1 and $)     per scent of the gross
fire..          insurance     premiums" for the Fire Insurance
Division      Fund.    An "additional"    tax on gross premiums pre-
supposes      the basic gross premium tax assessed          reciprocals
 in Article     7064, as that Article         rohiblts   any taxes other
 than those imposed by Article          706 .t and the "maintenance
taxes specially        levied   under the laws of this State         ., ~ .'

       Further evidencing    the legislative       intent was the
1955 amendment to Article       5.50 of the Insurance. Code, which
specifically   applies    the "additional"      tax on gross pre-
miums "to a purely cooperative        inter-insurance     and reeipro-
cal exchange carried      on by the members thereof       solel{  for
the protection    of their   propekty and not for profit.

       The general     law and practice      of treating   reciprocals
the same as mutual and stock,:,bompanies           for tax purposes
finds legal     recognition     in f&era1      law also,   The Revenue
Act of 1962 (Pub. L. 87-834fi:Sec.           8) eliminated    prior    pro-
visions   which excluded       "mu:tiual insurance    companies which
are inter-insurers        or reciprocal     underwriters,,  and sub-
stituted     rovisions     authorizing    a normal tax e D ."'-26
U,S,C.A.   i 821, p. 184, historical          note to 1962 amendments.

                            SUMMARY
                            -------
            In accord with Article         7064, Taxation
      General,  V.A.C.S.,     reciprocal      or inter-in-
      surance exchanges      must pay a gross receipts
      tax on all fire     insurance     premiums and are
      not a non-profit      "purely    cooperative     or mu-
      tual fire   insurance"     company so as to come
      within the exemption       of Article     7064.
                        _
                                    Re      tfully    submitted,          '



                                                  C. MARTIN
                                                  General of Texas




                                   -1365-
.      .




    Honorable     Clay   Cotten,   page 9             ~-281


    Prepared      by CHARLEST. ROSE
    Assistant      Attorney General

    APPROVED:
    OPINION COMMITTEE

    Hawthorne Phillips,    Chairman
    Kerns Taylor,   Co-Chairman
    John Grace
    Harold Kennedy
    Ralph Rash
    Alfred Walker

    A. J. Carubbi,   Jr.
    Executive Assistant        Attorney     General




                                          -1366-

            .,.
