November 13, 1978

Ms. Jane Nelson, Secretary 
Department of Commerce and Consumer Affairs 
State Capitol 
Pierre, South Dakota 57501

Official Opinion No. 78-53

Authority to issue nonassessable policies

Dear Ms. Nelson:

You have requested an official opinion from this office based on the following factual situation:

FACTS: 

A domestic mutual insurer has applied to the Division of Insurance for authority to issue nonassessable policies.  SDCL 58-5-37 provides “after a domestic mutual insurer has established the surplus prescribed in § § 58-5-21 and 58-5-22, and has authority to issue nonassessable policies, it may, with the director's approval, . . .” The Division of Insurance is satisfied that the applicant has established the surplus prescribed.

Based on the above facts, you ask the following question:

QUESTION: 

What is the meaning of the phraseology in SDCL 58-5-37 “and has authority to issue nonassessable policies”?

SDCL 58-5-37 provides: 
    
After a domestic insurer has established the surplus prescribed in § § 58-5- 21 and 58-5-22, and has authority to issue nonassessable policies, it may, with the director's approval, extinguish the contingent liability resulting from assessment of its members and thereafter issue nonassessable policies; provided that the director shall revoke the authority of a domestic mutual insurer to issue policies without contingent liability if at any time the insurer's assets are less than the sum of its liabilities and the surplus required for such authority, or if the insurer, by resolution of its board of directors approved by a majority of its members, requests that the authority be revoked.  During the absence of such authority the insurer shall not issue any policy without providing therein for the contingent liability of the policyholder, nor renew any policy which is renewable at the option of the insurer without endorsing the same to provide for such contingent liability.

Professor Robert Keaton notes at page 20 of his basic text on Insurance Law, 1971 Edition, that mutual insurance organizations are essentially based upon a system in which the shareholder is both an insurer and an insured.  Some of these mutual companies have operated by levying an assessment after losses have been determined; whereas the other approach for mutual companies would be that each member pays a premium in advance and if an adequate reserve has been built up, the mutual would be permitted to issue nonassessable policies.  Professor Keaton notes that the bulk of insurance coverage written by mutual insurance companies is nonassessable and that this nonassessable arrangement is made possible by the fact that before nonassessable insurers are licensed they must meet in general the same financial requirements stipulated for stock insurers.

The first portion of SDCL 58-5-37, cited above, as noted in the facts above, is the source of confusion in this matter.  Does the reference there to “and has authority to issue nonassessable policies” require an additional authority to be granted by the director of insurance, or does the language automatically grant authority in the event the minimum surplus prescribed in 58-5-21 and -22 has been established?  It is my view that the language referring to authority to issue nonassessable policies requires that in addition to the surplus minimum prescribed in sections 58-5-21 and -22, the insurer must have specific authority granted by the director to issue such nonassessable policies.

If the intent of the Legislature were to have made the authority to issue nonassessable policies equivalent to the establishment of the minimum surplus required in § § 58-5-21 and -22, they could easily have done so and if they would have intended that, the phrase “and has authority to issue nonassessable policies” would not have been necessary or appropriate. Consequently, I can only assume that the Legislature intended this to be a separate matter of authority to be granted to mutual insurers over and above the meeting of the minimum surplus requirements.  This position, in my opinion, is not only most consistent with Chapter 58-5, but also with Chapter 58-6, relating to the standards and procedures for the granting of certificates of authority to insurance companies.  As noted in SDCL 58-6-41, certificates should specify the kinds of insurance which the insurer is authorized to transact in South Dakota.  Read together with SDCL 58-5-37, it would appear to me that the Legislature intended this matter of nonassessable policies as being a matter upon which specific authority should be granted and that if such authority were not granted, the individual would stand in violation of Chapter 58-6.

Respectfully submitted,

William J. Janklow
Attorney General

WJJ:DOC:jo