[author: Matthew Burrows - Law Clerk]

A Texas appeals court affirmed a summary judgment that rejected an attempt by two insurers to recover more than $1.1 million for taxes, penalties, and interest on certain reinsurance agreements. Argonaut Insurance Company and Argonaut Great Central Insurance Company (jointly “Argonaut”) provided insurance to two self-funded government risk pools formed on behalf of Texas counties and school districts. These risk pools provided various insurance products to their membership. As part of a reinsurance arrangement with these risk pools, Argonaut agreed to provide indemnity for losses accumulated under member insurance policies in return for member premium payments. Argonaut considered these premium payments non-taxable “reinsurance income,” but the Texas Comptroller rejected this classification finding that “for premiums to qualify as paid for reinsurance, the transaction must occur between two licensed insurance companies.”

On appeal, all parties agreed that the main issue centered on “whether the premiums received by Argonaut from [the risk pools] are premiums received from another insurer for reinsurance.” Argonaut argued that the agreements with the risk pools have reinsurance characteristics, a factor that outweighs whether or not the risk pools are licensed insurance companies. The court found that while a risk pool “is expressly authorized to purchase reinsurance, it is also expressly declared not to be insurance or an insurer” under Texas insurance and tax codes. For these reasons, the court affirmed the trial court’s grant of summary judgment for the Texas Comptroller. Argonaut Ins. Co. et al. v. Hegar et al., No. 03-13-00619-CV (Tex. Ct. App. June 24, 2015).