                                  ATTORNEY GENERAL OF TEXAS
                                                GREG         ABBOTT




                                                    March 24,2003



The Honorable Rodney Ellis                                    Opinion No. GA-0045
Chair, Senate Committee on
   Government Organization                                   Re: Whether Exchanges of the Farmers Insurance
Texas State Senate                                           Group of Companies@ are “authorized insurers”
P.O. Box 12068                                               that are required to file withdrawal plans under
Austin, Texas 7871 l-2068                                    article 21.49-2C of the Texas Insurance Code;
                                                             whether their proposed refusal to renew policies of
                                                             homeowners in Texas would violate state law; and
                                                             whether the Commissioner       of Insurance may
                                                             impose a moratorium on the approval of a plan for
                                                             withdrawal    (RQ-0620-JC)

Dear Senator Ellis:

         You have asked three questions regarding the proposed withdrawal of the Farmers Insurance
Group of Companies@* (“Farmers”) from the Texas homeowners’ insurance market.* A brief
submitted on behalf of Farmers states that “[olnly two companies have announced that they will no
longer . . . offer a renewal of existing policies - Farmers Insurance Exchange and Fire Insurance
Exchange [the Exchanges] .” Rogers Brief, supra note 1, at l-2. “The two Exchanges are insuring
entities who sometimes do business under the federally registered service mark ‘Farmers Insurance
Group of Companies@. “’Id at 2. A brief received from the Texas Department of Insurance (“TDI”)
provides further background:      “Farmers Group, Inc. is a Nevada corporation and is the parent
company of both Farmers Insurance Exchange and Fire Insurance Exchange . . . . The Exchanges
are foreign insurers that are domiciled in California and licensed to do business in Texas as




           “‘There is no legal entity known as Farmers Group or Farmers Insurance Group of Companies@.               Farmers
Insurance Group of Companies@ is not now, nor has it ever been licensed to transact the business of insurance in any
state in the United States. It is, however, a federally registered service mark registered with the United States Patent and
Trademark office used for business promotional activities by certain of the Farmers Insuring Entities.            It is also a
collective internal designation used as a general reference denoting the Farmers Insuring Entities.” Brief from Thomas
T. Rogers, Jackson Walker, L.L.P., to Honorable John Comyn, Texas Attorney General at 2 n. 1 (Nov. 25,2002) (on file
with Opinion Committee) [hereinafter Rogers Brief).

          *See Letter from Honorable Rodney Ellis, as Chair of the Senate Committee on Finance (currently Chair of the
Senate Committee on Government Organization), to Honorable John Comyn, Texas Attorney General (Sept. 27,2002)
(on file with Opinion Committee) [hereinafter Request Letter].
The Honorable      Rodney Ellis - Page 2              (GA-0045)




reciprocal exchange insurers pursuant to Chapter 19 of the Texas Insurance Code.“3 Therefore, our
answers apply only to Farmers Insurance Exchange and Fire Insurance Exchange.4

        You first ask whether the Exchanges’ proposed refusal to renew the policies of 700,000
homeowners in Texas would violate state law. See Request Letter, supra note 2, at 1. On September
24,2002, Farmers, d/b/a the Exchanges, announced that it would not renew current homeowners’
insurance policies beginning in November 2002. This decision would have affected approximately
700,000 households. See TDI Brief, supra note 3, at 2. Under the terms of article 19.12(a) of the
Insurance Code, reciprocal exchange insurers are “exempt from the operation of all insurance laws
of this State except as in this Chapter specifically provided, or unless reciprocal or inter-insurance
exchanges are specifically mentioned in such other laws.” TEX. INS. CODE ANN. art. 19.12(a)
(Vernon Supp. 2003).

         Section 2 1.49-2B of the Insurance Code governs cancellation and nonrenewal of certain
property and casualty policies, including homeowners’ policies. See id. art. 21.49-2B, § 2(2). By
its terms, it is expressly applicable to reciprocal exchange insurers. See id. art. 2 1.49-2B, 9 1(l)(C).
Under the terms of this provision, an insurer “shall renew a policy on its expiration, at the option of
the insured, unless the insurer has mailed written notice of nonrenewal to the insured not later than
the 30th day before the date on which the policy expires.” Id. art. 21.49-2B, 8 5 (emphasis added).
The Exchanges’ refusal to renew policies of homeowners in Texas would not violate state law,
provided that the Exchanges follow the notice provision.

         You next ask whether the Exchanges constitute “authorized insurers” who are required to file
a plan for withdrawal under article 2 1.49-2C of the Insurance Code. See Request Letter, supra note
2, at 1. Such a plan must be “constructed to protect the interests of the people of this state” and must
meet certain statutory requirements. TEX. INS. CODE ANN. art. 21.49-2C(a)( 1) (Vernon Supp. 2003).
Article 2 1.49-2C is not included in chapter 19’s list of statutes to which reciprocal exchanges are
subject, nor does article 21.49-2C itself specifically mention reciprocal exchange insurers as
“authorized insurers.” Id. art. 19.12(b)(1)-(2); art. 21.49-2C. Because article 21.49-2C does not
apply to reciprocal exchange insurers, the Exchanges would not be required to file a plan for
withdrawal from the Texas homeowners’ market.

        Your final question is whether the Commissioner of Insurance (“the Commissioner”) could
impose a moratorium on the approval of the Exchanges’ plan for withdrawal. See Request Letter,
supra note 2, at 1. Under article 21.49-2C(g), the Commissioner may impose a moratorium of up
to two years “on the approval of plans for withdrawal or implementation of plans to restrict the
writing of new business.” TEX. INS. CODE ANN. art. 21.49-2C(g) (Vernon Supp. 2003). To impose
a moratorium, the Commissioner is required to find


           3Brief from Sara Shiplet Waitt, Senior Associate Commissioner, Texas Department of Insurance, to Susan
Gusky, Chair, Opinion Committee, Office of Attorney General at 1 (Dec. 9, 2002) (on tile with Opinion Committee)
[hereinafter TDI Brief].

          4See Farmers Insurance Group of Companies@, at http://www.farmers.com/FarmComm/content/CClOl15.isp
(listing Farmers Insurance Exchange and Fire Insurance Exchange as reciprocals) (last visited Mar. 24,2003).
The Honorable   Rodney Ellis - Page 3           (GA-0045)




                after notice and public hearing that a catastrophic event has occurred
                and that as a result of the event, the relevant line of insurance is not
                reasonably expected to be available to a substantial number of
                policyholders or potential policyholders in this state, or in the case of
                personal lines of . . . residential property insurance, in a rating
                territory.

Id. In order for the Commissioner to impose a moratorium on an insurer, the insurer must first be
subject to article 21.49-2C. Because the Exchanges are reciprocal exchange insurers that are not
subject to article 2 1.49-2C, they are not subject to a moratorium issued by the Commissioner. See
id. arts. 19.12(a), 21.49-2B, 6 5.
The Honorable Rodney Ellis - Page 4          (GA-0045)




                                       SUMMARY

                       The refusal of Farmers Insurance Exchange and Fire Insurance
               Exchange to renew the policies of Texas homeowners would not
               violate state law, provided that the Exchanges follow the notice
               procedure set forth in article 21.49-2B, section 5 of the Insurance
               Code. The Exchanges would not be required to file a plan for
               withdrawal from the Texas homeowners’ insurance market, as they
               are reciprocal exchange insurers that are not regulated by article
               21.49-2C of the Insurance Code. Nor are reciprocal exchange
               insurers subject to a moratorium issued by the Commissioner        of
               Insurance.

                                             Very truly yours,




BARRY R. MCBEE
First Assistant Attorney General

DON R. WILLET
Deputy Attorney General - General Counsel

NANCY S. FULLER
Chair, Opinion Committee

Rick Gilpin
Assistant Attorney General, Opinion Committee
