Untitled Texas Attorney General Opinion ( 1958 )

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