Untitled Texas Attorney General Opinion ( 1978 )

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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
p. 5120
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.
P- 5121
Honorable Jose A. Gamez - Page 3 (B-13013)
Attorney General of Texas
APPROVED:
C. ROBERT HEATH, Chairman
Opinion Committee
p. 5122