Texas Court Denies Insurer’s Reinsurance Tax Break Argument

A Texas appeals court has ruled that an insurer can’t recoup premium taxes reluctantly paid on reinsurance agreements with two public employee self-insured risk pools on the grounds that the risk pools aren’t insurers.

In a case appealed from a Travis County district court, the Texas Court of Appeals, Third District, in Austin, denied the petition of Argonaut Insurance Co. and Argonaut Great Central Insurance Co. (jointly Argonaut) that it should be able to recover more than $1 million in taxes paid on reinsurance premiums collected under agreements with the Texas Association of Public Educators Interlocal Agreement Self-Insurance League (TAPE) and the Texas Association of Political Subdivisions Interlocal Agreement Self-Insurance League (TAPS).

Argonaut had argued that the premiums paid by TAPE and TAPS were reinsurance premiums, which may be excluded from taxation under certain circumstances, and not insurance premiums, which are taxable under state law.

After an audit of premiums paid by the two risk pools to Argonaut for the years 2006 through 2009, the state Comptroller “disallowed Argonaut’s classification of the premiums received from TAPE and TAPS as reinsurance premiums on the ground that under Comptroller Rule 3.831, for premiums to qualify as paid for reinsurance, the transaction must occur between two licensed insurance companies,” the court opinion states.

“TAPE and TAPS provide several types of coverage, including general liability, automobile liability, property damage, and inland marine. They collect premiums from the members and are directly liable to the members for covered losses,” according to the court opinion.

They are not, however, licensed insurance companies. Therein lies the problem for Argonaut, according to the court.

“Under the terms of the contracts, Argonaut agreed to indemnify TAPE and TAPS for losses under certificates, or policies, issued to participating members under the interlocal agreements. TAPE and TAPS agreed to cede to Argonaut 100% of the premiums received on policies issued to their members. For accounting purposes, Argonaut booked all premiums, losses, and expenses associated with the agreements with TAPE and TAPS as reinsurance income and expense,” the opinion states.

However, because TAPE and TAPS could not be classified as licensed insurers under state law, the Comptroller determined that “the premiums they paid to Argonaut were not reinsurance but were to directly insure risks.”

Therefore, no premium tax credits were allowed in this case.

Argonaut paid the total amount assessed but took the case to district court, which denied the company’s motion.

In its appeal, “Argonaut argues that the trial court erred in denying its motion for summary judgment and granting that of the Comptroller. Its arguments are premised on the contention that the contracts between Argonaut and TAPE and TAPS are agreements for reinsurance,” the appeals court noted.

Argonaut also argued that whether or not the risk pools are insurance companies is beside the point because Argonaut’s contracts with the two “embodied all the characteristics of reinsurance and arguing that governmental risk pools are authorized to purchase reinsurance.”

The court pointed out, however, that the “tax exclusion at issue applies, for purposes of the property and casualty insurance premium tax, to premium receipts received from another authorized insurer for reinsurance.”

Therefore, based on its reading of the law, the court concluded “that the trial court did not err in granting the Comptroller’s motion for summary judgment and denying Argonaut’s motion.”

Argonaut Insurance Co. et al. v. Glenn Hegar et al., case number 03-13-00619-CV.