          THE      ATJTORXEY‘GENERAI.
                       OFTEXAS




Board of Insur8nce Comml8sioner8
land Office Building
Austin, Texas              oplnlon lo. v-863
                           Re: Authority of a stock fire
                               and casualty insurance com-
                                p6ng and8 county mutual
                                insurance comjmny to enter
                               'lntormtu8lreln8uranco
                                agreerent, and related
Dear Hr. Butler:                quertlonr .
          By letter of April 18, 1949, you request an
oplnlon concerning the legality of a proposed relnaur-
ante sgreenent between ALsro Casxnlty Company, a capi-
tal 8tock oorapenyIncorporated under the provl81ona of
Chapters 2, 11, and 18 of Title 78, Vernonla Civil
Statutea, and Berar County Hutual Insurance Colnpang,
8 county 8mtual insurance co8rpanyIncorporated and
licensed under the provisions of Artlole 486Oa-20,
as amended, Vernon's Olvll Ststutes.
          Your letter ral8ea these 8peolflc   questlonsr
         .l. IS each conrpengauthorized to enter
     into the agreement?
          2. If 80, vbst %haiwcter of risks" of
     the stock corpsny my themturlcompsng    aa-
     sum3 to reinsure under the agreement?
          3. Ylll t&e agree8ent. if authoriced, re-
     lieve the stock colnparyof the relnasuranoeor
     unearned pre8tiwnreserve requirement imposed
     by Sections 7, 8, and 9 of Article 4682, Ver-
     non's Civil Ststutes, a8 to the buslnes.880
     reinsured?
          4. If 80, will the assumption b7 the
     n~tual oompany to reinsure the risks of the
     stock company Unpose s statutory obligation
     on the former to mintsin 8uch e re8erve on
     the brrsiness80 relnnsuredby It'?
                                                                *
                                                                    ,



Ron. George B. Butler, p8ge 2 (v-863)

          5. I? luthorlsed, vi11 th el88u8ptlon by
     the mtual wmpeny to reinsure risks a? the
     stock CoBpay itpore on the latter 8 ststptory
     obligation to ulntaln  a reserve in the amount
     of $1.00 per huudred of the tot81 exposure re-
     insured by the m&X81 carpuy a8 e contingent
     liablllty Of the stock Company 88 8 policy-
     holder of the mutual eo8pany by virtue of or
     in liOU Of th0 48808880nt lirbility Of POliCy-
     holder8 o?.the mutual plrderthe term8 of ertl-
     cle 4860s~20, Vernonsr Civil Statute87
%'h8conditional MturO of the vsrlour question8 is apparent,
and their pertinence 18 indicated bv ths term of the e-
greement and the vsrlous applicable statutes.
          !Pheagreement is esaenti8lly a predetermined pl8n
designed to establl8h mutual obligations of the companle8
to each other as to individual risks or portions thereof
selected by each as original or direct insurer and Shifted
or 'ceded' to the other a8 rdmnarer, 88 evidence by 8 list,
called a 'bordereau," prepared monthly end passed br the
direct vrlting insurer to the other as relnsurer.  &ch
COml~llJOblig8tOS itself to accept such risk8 e8 4l'Oi8-
posed upon It by the other In consideration of the mutual
obligations undertaken and fn conslderetlon of the relln-
qulshment or 'cession" of the premium charged by the direct
vrlting company tar thst portion of each rlbk "ceded," mf-
nu8 a stipulated "CDEWi88ioP." Be contract Is subject to
cancelletlon upon rtfpulated notice by either party..
          All 8t8tutoPy references vi11 be to yernon'a
CIvilStatutes unless otherwise Indicated.
          We will Initially conslder~your first question
from the Standpoint of the 8tock company. finexhibit from
it8 l&St am-1   StrteHeIltindfC4StOStfratit VritOtl the kinds
of Insurance clarbified es “fire and B18rlnemunder Article
4919, as vOl1 es e number Of W3Ualty liIiS8,including ailtO
end ot&er liability and workmen08 oompensatlon~in8urance.
4rticle 4919, dealing vith companies Rltlng  'so-calledfire
tid m8rlne lines, expressly authori8ea such e oomprny "to
cause Itself to be so Insured again8t a&. loss 6r~r18kn+t
may have Incurred in the course of its bUSine88. . D o To
the Same efiect is Article 4932# authorizing fire 8nd merino
companies to reinsure "in any other insurable company l?gal-
ly atithori8edto do business in this state0    It Ii neces-
sarily implied th8t 8Wh other companies are generally,au-
thorieed to 80Cept 8UCh risks as a reinnrurer. Aa to ths
other kin88 of insurance vrltten bg the stock company, there
being no'SW&tUtory e;rpreSsfOnon the SUbjOet, the rUl0 i8
stated in 46 Corpus Jurls Secyndum, lWo Section 12218
Bon. George B. Butler, page 3 (V-863)


         "As a goner81 rule, under e geuelul par-
     er to make contracts of ipl)uranae,an lnsur-
     ance ca8pamy Is euthorl8ed to relmure Its
     rl8k8   or tkm risks   Of other 808p&dOS.”
He therefore canelude th8t the stock oampany ray enter
Into 8 reciprocal relu8urauoe lg r eemntvlth another CO+
P-s*
         The subject of the county m&u81 aooeptlng qc
oedlug reinsurence is expressly treeted In Section 2q
of Prtlcle 48608-20, vhlch provider8
         "County Rut901 Izuswenee Capan     msy
     reinsure any or 411 of their risks lgelnst
     any or 411 hesards vhlah they ere p8rmitted
     to inrure agaainstvlth any other eorpsny or
     oo8panle8o
        "They shall iwve power awl euthorlty to
     m8ke and cuter into mutual oti reolprooal re-
     Insurance contreets vlth other Companle8 on
     the,mutual or oo-operative plan; provided
     that no Oouuty Mutual shall vrlte or assume
     the relnaurance on any other property than
     the property it is perrtltted to iMure, or
     on property situeted Outside of th8 &ate of
     %X88, and Vhen 8UCh a &tZ.Ut~&tUal rein-
     8ures the ~praperty, of another C*nf,    it
     sball~not by reason of rmch fact be, or be-
     care&-momberm? partner, of 8uch other     Com-
     peq, but z&all mily become liable ?or,the
     losaea of suoh other hmpany es rpeaified in
     the iontract of lnterinsurence end not other-
     vise; and provided fbrther, that a COunty
     Mutual shall only h8ve euthorlty to reinsure
     the risk8 of another   Compeny in comlderetlon
     of.the feet that stiohother comp8ny retiures
     it8 riSk8; &lidiOr the WPOSO     -itU) pSy Or
     eOllO& additional 4880888088t8   end/Or prOmi-
     'ama88 the CaSO my be."
          The first paregreph of Section 20 lp p eer s
                                                     to
authorlse the County Hut\lsl to procure relnsurance of
Its risk8 with other ins~rence compani88 vlthout qusli-
fleetion as to the type of such OthOi'iS8Uranae Uompa-
ties. The second paregreph, dealing vlth +e~~accept-
anae of relnsurance  'obligationsby county mutuel conpa-
                                                            c




Eon. Qeorge   B. Butler, page 4 (V-863)


riles*or other ln8uzance oump8nier Is less elea~ in
respect to the type of oapany vhose rlaks  th8 sounty
mutrvlwby reineuro.   That peSSibl0 ubispity reises the
8uia question SUbrittOd by you.
         You here advised PI t&t you interpret the
phrase %a the mtuel or aeeperatlve plu' to quall?y
the vord %mpenie8*    inediately preceding, ia 8UCh 8
ray es to make th@ first part  of the second paregreph
read8
          "They shall hsve power end luthority to
      make and enter Into mutual or reciprocal re-
      inruranre contrects vlth other Compenler
                  on the mutual or co-operative

You further construe the phrase "Comp8nies on the mutual
or cooperative plan" to mean county mutuals, end In rup-
port of ouch oon8truetlon you refer ua to the definition
of "Count Mutual Inwrancb Companies" in Section 1 of
Article 486OS-20 68,
          RC~panIe8 organized for the purpO88 of
      insurance on the mutuel or cooperetlve plan
      against loas or damage by $3~   lightning
      gas explosion, theft, vlndrto: and hi&    ind
      for all or either of such purposes.' (~hasir
      supplied.)
         There Is no tidamental reason thy a mutual end 4
stock company may not mutually reillsureeach other. Each
fs e corporate entity, entirely eapable, in the eyes oi
the lav, of nklng 'contract8mutually b8nefltlal to each.
The phrase, 'on the mutual or cooperatlv8 plen,” can 4180
be read to modl?y 'to make and enter into mutual or re-
ciprocal relnsurance cmtract8.”   These phreres are not
necessarily redundant, slnae one may refer to the re-
insurance contract vhile the other m8y refer to thedv;;-
all plan uader vhlch the contrect 18 to be rade.
finltlon in Section 1 is of doubtfil value since on its
face It describes mutual comp8niea vhlch ere not nec88-
serlly "County Mutu818." It does not attempt to set
out vh8t er8 companles "on ths mutual or coopentlv8
plan,' but, conversely, merely states in 8ff8et tbt
to be a county lutuel insurance company, th",coapaay must
operete "on the mutual or cooperetlve plea,
Hon..Qeorge B. Butler, page 5 (V-863)


           m       rosining      proViaiN8     Of the second     pars-
graph, upon eare?ul umlyslr, do not exclude the porei-
blllty of reciprocal relnrormce vlth other tlmn l coun-
ty mtnal.   bcept as limited by the lndlvldrul oomp8ny
oherter,   411 oeuaty       mutual8 are limited to         the   same
olmraokr        of risk8   on   the   sue   kind   s?   property. Yet
the rt8tute tirefalls prohibits rein8wanae of lny prop-
erty other than the property the oounty mutual Is per-
mitted to ln8ure, inferring     the poselblllty of reln-
SUMNO    dealings vlth companies having no nuch lirita-
tiona * The c~picuow        4bSOnCO of qualifying dO8igMtiOM
VhOrOVer  the VOrd “my”         is used tends to negetlve an
Intention to lkit the reinsuranae pover to reclproca-
tlon vlth only 'caupty mutual" or other "mutual" or "coop-
8MtiV8"   CO8JlNiOS;  Bin08   such 8 lirltation ceuld hV8
been   easily     expressed.

         In this connection,ve note that by ACta 1947,
50th Legislature, p* ngo ohapter 36~~ Art. &86Oa-20 V&S
~aplenaed
        SQ that the vord "Qampany" is defined to “refer
t0 Sad imolude Eblltype8 Of OFganiTi&tiOM, 4880Cistitill8,
dOlQ%%&iOSOr gFOUp8 sUbj&%t t0 the pl’OVi8iOM Of thl8
Aot.”  (~haS18 SUpplied). -8VbF,          it 18 to be noted
that the definition of the word “Company”     does not ex-
clude other types of organizations but laerelyincluirzizi
Fhose subject to the provl81ona of "this acten The con-
tOXt.iItUSt
          McO888rily be coMid8r8d in dOtOrI&iing th8
meaning of rGompanyA as used in various provisions of
the lav.
         we0 therefore9 cOnClud8 that the rOaiproC81 re-
insuFance contemplated by the statute 1s not limited ox-
pressly or by necessary Smplicetlon to county mutual8 or
other ia-    or eoaperatlve plan companies9 end In the
absence of such limitation v8 conclude that the stock end
the mutual oempany ury e&oh enter into the agreement.
The egrsement purport8 to oentemplate r8alprooetlon, co-
operation,and mutuality In the exoh8nge of relnsurenoe
obligetions su??iciently to meet the loose standards of
the statute.
         Your second question appear8 to be ensvered by
the OXpreSS forma of Section 20, heretofore quoted
vhiah, taken together vlth Seation la of Article &Oa-
200 .Fefera to the various etatut   prescribhg  the has-
ards against vhlch fire and vlndstom insurance compa-
nies b#eat      in Texas may insure and refers to Section
1 of Artiele 86Oa-20 in determining the klnda of prop-
erty vhich pay be so ln8ured. It vould uuduly lengthen
                                                             ,

                               ,L &,’   ,.,




Eon.   George   B. Butler, page 6 (V&3)


this O'~biniOR
             t0 qUOt0 Or di@St SuOh St8tatOS 8nd ve Vi11
assume that your board my 8atl8?eatorlly determine the
propriety of speoiilc Item8 by such referewe es indl-
Q&ted.
         Yoar third quOSt%QP et the time it v88-88ked v88
governed by 3eotlea~ 7, 8 ead 9 of Artiole 4682, prowrib-
iag the duties Of the Beard Of InNMSiOO COUiSSiOaOrS, v&oh
provide:
               *7. 3hll csloulate reserve on fire In-
       8uraace0- For every ao8pmy. dolag fix-elnaur-
       NC0 bUSiM88 ir this 3trte, h8 ShEi CSlOU-
       late the rein8uranoe reserve for unexpired
       fire risks by t8klng ?Uty per sent of the
       premium received on 811 unexpired rlsk8 that
       have less th8n One yur       to ruu, end 4 pro
       r8t8 of all premium8 received en risk8 tht
       luve more tbanone year to rvn. When th8 re-
       lnsurenc8     reserve, 8818ul8ted es above, Is
       less t&in forty per cent of 411 the premlumn
       received during the year, the relasurence re-
       serve in this ease ah811 be the vhole of the
       pMdUM        reuelved On 4ll of it8 IlllOXptiOd
       risks. For every oomprry transecting 8x1~
       kind Of iMtlrsnC0 bUSiM88 in th.i.8     3t8t0, for
       vhloh no bIt@iS 18 preserlbed by lav, h8 S&11
       celaulate the relasurenoe reserve upon the
       88me b88i8 prescribed in this 4rtiole as t0
       c0apan188 transaetlng     fire lnsurence busl-
       ness.
           "8. 3hQl ohsrge    premium8. - In M8rlne
       and inland in8ur8noe, he ah811 oh8rge 011 the
       prenium8 reoeived   on uuexpbed risks es 4 re-
       lnmrance    reserve.

            '9. When comp8ny18~c8pital is wired.-
       Revlng ohargedageinste a~              other then
       life, the reizmurance reserve, es~pre8orlbed
       by the lam of this State, and eddlng thereto
       al1 other debts~8nd alelm lg8in8t the aomp8-
       nj, h. Shs&   in -80 h0 ?indrthS 08pit81
       stock 0r th0 ocmpnny hpalred to the extent
       of twenty per cent give notloe to the oomp8ny
       to m&e good its vhole oapitel stook vlthin
       Sixty,drg8, Nd, if this 18 not done, h8
       Sbs11'requlre the company to ceese to do bus-
       iness VltJxLnthis State, and ah811 theaeupon,
           .




tin;   George Bi Butler, page 7 (V-863)



       in the Case the corpuy Is org4nlsed ander 4th
       thorlty o? the State, lnedl8tely inrtitute
       leg81 proceedln8a to determine vhet farther
       ah811 be dose in the case.”
m    ebete stetutes uke the rintenance of the required re-
serves a oondltlon of rolveaoy, IIIour eplaloa the re-
serves 8ust be Prlnhlned by the reinsurer or th8 relasur-
ed or in the lg@egate betveen the&
                third question v&r caked, hovever, prier te
           fcotar
the enactment of 3ePrte Bill 192, 51st bglrletare, 3ec-
tlon 16 of vhlch reads, in part,   es ?ollowr:
            "County Mutu81 Insur8nce Companies ah811
       8~lntein et all times unearned premium reserves
       for 811 tmerpired risks by reserving 502 of
       the unearned portion of premiUm8 collected l$-
       ter the effective &to of thlr Aot oa bu83qte88
       In forae or vrltten thereefter having tvo yurs
       or less to runI and by reserrimg  4 pro .mfi8of
       411 premiUm8 00118oted on risks that hve more
       tivm  tvo yeers to run. o o o
          u8 BSSWPO tbst the 8b88nCO Of r88Orve rOqUirOmeIlt8
under the old law on county mutu81 comp8nies prompted your
third question, but the hbove enaotrent has now placed cer-
tain reserve requlrements upon such companies,      We heve
been referred by th8 proponent8 of this agreement to the
prectlce of yopr Board in llloving e reserve     reduction vhere
reinsurenae is ceded, bat you edvise tbt such preetice bs
been epplied only to the extent th8t the reln8urlng comp8ny
18 subject to stetutory re5erv8     requirements end thps the
ml1 statutory reserve is &a feet, nint8ined by the oom-
pmles vhlch are parties to the relnrUr8nce transection,
either by one or th8 other    or in the eggreg8te betveen them.
It now seem8 tint your cited preetlce of ellewing 8 reserve
reduction oELeccoUnt of reln8urance     is eppllcable to th8
extent tht reserve8 ere reqrriredof these cemp8nler by lav.
Tow prectlee vi11 nov epply to those companies to th8t ex-
tent to vhich they ere requeed by rktUte to m8lntrln re-
serves,  lpearing in alnd that the full required r888rve as
to each comp8ny mU8t be m8fntalned by one or th8 other or
In the 8gBregate betveen them under your prectice.
         Our conclusion regarding the third qUO8tiOn diSpOS-
es of the fourth, since the latter question is predicated
on a negetlve an8ver to the third,
RN.      -orgo     B. Butler,       page 8 W-863)


             -,SOlUti-    Of th0 fifth -  fiul qUO8tiOn
depend8     upon vhether Artlole 486&-20 eakrpl4tOS'een-
Idgent      llablllty On the pert Of the rOia8m'0dStOCk
            cad cm vhetbr r~oh~rein8eed a-       beoemer 4
hzor          pollqholder of the m-1     by vlrtae of the
SktUtO. m     St4tUtO 008krpbtOS   Oapu OVBOFS:O? inStir-
eble property 88 8aberr of the mtul.     Only 'pollcy-
holder8' are '&xprOSSlysubjo& t0 a oeatiBge8t.liability
In Sectlonr 6 uad a(r),. The lien remrlag such lirbll-
lty etteohe8 only to rwl and perrwel   property lnsur8d,
ReiamFeda hare been  held rot to be "polioyholder8*
vlthla the 8eealag of ether regulatory 8trtute8. Cvn-
        v. Bembllc In8. Co., 127 hr. 499, 94 3.m
        6, Per a m      J 1   Section 20 eontemplates
e r~oi roul oon:eat iy &~e      of vhlch th, eamtty
ml-          not be 8 me8bor or pertaor of the reoipro-
c4Btlngecmpeny. It appear8 to eontapletetbat Oaoh am-
peny shall bOar the charges ega$xut it, looklng to ltr
ovn resoUrcea-endaemborrhip for rPBdr to meet them.
We, thereforo, oanolude tht the 8tOCk Co8pCn~ in lto
t8pscity es 4 rOiMUMd   i8 aOt required by St4tUtO t0
maintain 4 rosorvo           to meet oomtingent liabiliti88          lm-
posed by th8 rtatuto on polloyholder8 es 8emberr.                    ft
ny, of oourss, voluntarily oontreot to do 80.




               A stook fire ead carrririty
                                         bSur&IWO             cob
         paayeadecwatymtual                ioSPrmo0     Qempeay
         are not prohibitedby rtetuto fro3 entorlng
         Into.8mutualrotasureaee            egroement. A ts.
         4919. 4932. 4060s~20. v.C.3.:46              cJ.35~.
               A   oouuty   mttul     i.llS&~CO   OorpuJ      84s
         roh8uro 8Wh risk8 Of &~Stook fir0 8nd ml-
         Ualty inrllrenoo company es the eormty autual
         la8~00    acRpra) 18 luthorl8od  by StStUtO
         to iaiurees 8.direot lnsaror. Art.    486Ob20,
         VS.                                .
               Va der
                   th e
                      lSt&bliShO~ pl'Wti80 Of the
         Board Of     hNMN0          CariSSiOlAWS,     th0    pI1-
         earned premlUm r68orros roqulrod by 8tetuto
         aunt k ralatelaod by the reiaourlag co8peay
Ron. Goorge B. Butler,,page 9 (V-863)



     or by the reinsured company or in the aggregate
     b8tVOen them.

         A stock fire and oasoqlty bumrance oom-
     pany IS not required by St8tUtO t0 maintain 4
     retserve equal to 4 mpollcyholders' contingent
     &ssesement llablllty 4.8 a mOmb8r Of a OOtInty
     mutual Insurance company by reason of being
     r8insur8dby   the county mutual insuranc8 Cam-




                            Yours very truly,

                            ATTORREY ffEREFUiL
                                             OF 'PEJCAS


R#:bh:gw
                                I?ed&&niOl
                                Assistant


                            /cfiikdBk
                                I)avldB. Irons
                             AdmInistrative ABBiSkrnt

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