Untitled Texas Attorney General Opinion

.

September 1, 1989

Mr. J. E. Birdwell, Jr. Opinion No. JR-1092

Chairman

Texas Agricultural Re: Liability of members of

Finance Authority the board of directors of the

P. 0. BOX 12847 Texas Agricultural Finance

Austin, Texas 78711 Authority (RQ-1637)

Dear Mr. Birdwell:

You inquire about the personal liability of board

members of the Texas Agricultural Finance Authority, a

public authority within the Department of Agriculture

established by the Texas Agricultural Finance Act. Agric.

Code 55 58.001-58.039; see Tex. Const. art. III, 5 52-a

(legislature may provide for creation of programs to. foster

growth of agricultural enterprises). The purposes of the

authority are stated in section 58.021 of the Agriculture

Code:

(a) In order to promote the expansion,

development, and diversification of produc-

tion, processing, marketing, and export of

Texas agricultural products, the authority

shall design and implement programs to

provide financial assistance to eligible

agricultural businesses, including programs:

(1) to make or acquire loans to

eligible agricultural businesses:

(2) to make or acquire loans to

lenders to enable those lenders to make

loans to eligible agricultural businesses;

(3) to insure, coinsure, and

reinsure, in whole or in part, loans to

eligible agricultural businesses;

(4) to guarantee, in whole or in

part, loans to eligible agricultural

businesses: and

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Mr. J. E. Birdwell - Page 2 (JM-1092)

(5) to administer or participate in

programs established by another person to

provide financial assistance to eligible

agricultural businesses.

The board may issue revenue bonds to provide funds to carry

out any of these purposes. Agric. Code 5 58.033.

Since the board of directors of the Agricultural

Finance Authority will be responsible for handling a

substantial amount of money, questions have arisen about

board members' exposure to liability. Your first question

is as follows:

May the Board be found personally liable

for causes of actions arising out of the

performance of board duties?

We assume that you are concerned about personal

liability for negligence in handling funds-, not liability

for intentional violations of the civil or criminal law, or

actions taken in bad faith. See Brad

(Tex. 1890) (comptroller's chief clIrkvliab?z ;o'~h~."st~~~

for funds he embezzled): %oraer Index. School Dist. v.

Dickson 52 S.W.Zd 505 (Tex. Civ. App. - Amarillo 1932, writ

ref*d) ischool trustees personally liable for unauthorized

action taken for corrupt motives): Grimm v. Arizona Bd. of

Pardons and Paroles, 564 P.2d 1227 (Ariz. 1977) (members of

parole board may be personally liable for reckless decision

in releasing prisoner).

Section 58.016(e) of the code provides as follows:

The board members, administrator, and

staff of the authority may not be personally

liable for bonds issued or contracts executed

by the authority and shall be exculpated and

fully indemnified in the documents relating

to any bonds except in the case of fraudulent

or wilful misconduct on the part of the

individual seeking exculpation or indemni-

fication.

This exculpatory provision protects board members from

liability to members of the public for bonds issued or

contracts executed, with the exceptions stated. They are

also protected by the doctrine of official immunity

recognized by the Texas courts. See Attorney General

Opinion JM-404 (1985). A public officer is not ordinarily

liable for mistaken judgment in performing discretionary

acts within the course and scope of his public duties. See

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Mr. J. E. Birdwell - Page 3 (JM-1092)

generallv CamDbell v. Jones, 264 S.W.Zd 425 (Tex. 1954) ;

Rains v. SimDson, 50 Tex. 495 (1878); Torres v. Owens, 380

S.W.Zd 30 (Tex. Civ. App. - Corpus Christi 1964, writ ref'd

n.r.e.). He will be liable for mistaken judgment or

unauthorized acts if he acts willfully or maliciously.

CamDbell v. Jones, m; Stein v. Hiahland Park IndeD.

School Dist., 540 S.W.Zd 551 (Tex. Civ. APP. - Texarkana

1976), aff'd, 574 S.W.Zd 807 (Tex. Civ. App. - Texarkana

1978, writ dism'd). The doctrine of official immunity does

not bar a suit to enjoin a public official's unauthorized

act, nor does it apply to ministerial functions. See Texas

Hiahwav Comm*n v. Texas Ass'n of Steel ImDorters, 372 S.W.Zd

525 (Tex. 1963); Rains v. SimDson, SuDra; Attorney General

Opinion JM-404.

Federal courts, however, use a different test of

official immunity. See Attorney General Opinion JM-404.

Administrative officers who perform discretionarv functions

have only a qualified immunity from suit f&z personal

liability. Barlow v. Fitzaerald 457 U.S. 800 (1982); see

aenerally Civ. Prac. & Rem. Cod; ch. 104 (state liability

for conduct of public servants).

Public officers are moreover accountable to the state

for public funds in their custody. &.% Brown v. Sneed

suDra; Attorney General Opinions JM-153 (1984): O-637;

(1945); 42 Tex. Jur.3d Government Tort Liabilitv 5 60, at

>.117. Cf. Tex. Const. art. III, § 20 (discharge); id. art.

IV, 5s 24, 25 (custodians of funds): Gov't Code §!j41.009

(action by district or county attorney to compel local

officer to perform duty to collect or safeguard public

funds), 402.026 (action by attorney general to recover state

funds). A board member's liability to the state for state

funds is not affected by section 58.016(e) of the code.

Your second question is as follows:

May the Board increase its protection

from liability and at the same time limit

its exposure from liability, in either an

official or individual capacity, by

increasing the amount of its surety bond

coverage from $25,000 to $lOO,OOO? or by

obtaining additional insurance coverage?

In answer to your first question we found that both the

statute and the common law accord board members considerable

immunity from liability to members of the public. We assume

that the board is interested in increasing its protection

from liability only in the areas where it is not immune,

that is, its liability to the public, if any, which is not

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Mr. J. E. Birdwell - Page 4 (JM-1092)

covered by the immunity provisions, and its accountability

to the state for public funds.

The State Employee Bonding Act, which prescribes

uniform standards for the bonding of state officers and

employees, includes the following definition:

'Bond' means any agreement under which an

insurance company becomes obligated as surety

to pay, within certain limits, loss caused by

the dishonest acts of officers and employees,

or to pay for loss caused by failure of

officers or employees to faithfully perform

the duties of the offices or positions held.

V.T.C.S. art. 6003b, § 3(a).

Each director of the Texas Agricultural Finance

Authority is required to execute a surety bond in the amount

of $25,000 conditioned on faithful performance of the duties

of director. Agric. Code 5 58.012(d). The cost of the

$25,000 bond is paid by the authority. L& This provision

sets a limit on the expenditure the authority may make to

purchase surety bonds for its members. &% Tex. Const. art.

III, § 44; Attorney General opinion H-533 (1975).

Accordingly, the board is not authorized to pay more in

surety bond premiums for its members than the premium for a

$25,000 bond.

You have not asked us to consider a specific kind of

insurance coverage. In addressing your question we will use

errors and omissions coverage as an illustration. Our

answer does not apply to a particular insurance contract,

and the board's power to enter into any such contract will

depend in part on whether its statute permits it to accept

the specific contract provisions.

Errors and omissions coverage is a form of malpractice

insurance designed to protect an insured from the con-

sequences of his negligent acts, errors, and omissions. It

does not ordinarily cover dishonesty, intentional fraud, or

criminal or malicious acts. See St. Paul Ins. v. Bonded

Realtv, 578 S.W.Zd 191 (Tex. Civ. App. - El Paso), ti

ref'd n.r.e. oer curiam, 583 S.W.Zd 619 (Tex. 1979);

Attorney General opinion H-1042 (1977); 13A G. Couch,

Cyclopedia of Insurance Law, § 48:166, at 166 (2d rev. ed.

1982). We assume, for purposes of this opinion, that an

errors and omissions policy could be written to cover the

board's liability to the state as well as to members of the

public.

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Mr. J. E. Birdwell - Page 5 (JM-1092)

You direct our attention to section 58.022(7) of the

Agriculture Code as a possible source of authority to

purchase insurance for board members.

me authoritv has all oowers necessarv to

accomolish the ournoses and oroarams of the

authoritv. includina the Dower:

. . . .

(7) to procure insurance and pay pre-

miums on insurance of any type, in

amounts, and from insurers as the board

considers necessarv and advisable to

accomplish any of its purposes. (Emphasis

added.)

To accomplish its purposes and implement its programs,

the authority must handle state funds allocated to it for

those purposes. We believe it may take reasonable steps to

protect the interest of the public and the state in these

funds, including the purchase of insurance to protect

against loss of the funds through the board's own

negligence. Board members are personally liable for their

own negligence in handling funds and would remain liable

whether or not they are covered by errors and omissions

insurance. Nonetheless, the state#s and the public's

interest in the funds held by the board might be much better

protected by an insurance policy than by a suit for

negligence against board members who may not have sufficient

funds to pay the judgment.

Several prior opinions of this office have stated

categorically that errors and omissions coverage for public

officers and employees would benefit only those persons and

not the governmental entity that they serve. See. e.a.,

Attorney General Opinions NW-276 (1980); M-441 (1969); C-607

(1966); C-506 (1965). The opinions go on to conclude that

an expenditure of public funds to provide errors and

omissions coverage for a public officer would be a grant of

public funds in violation of article III, sections 51 and

52, of the Texas Constitution unless the premiums are paid

as a form of compensation. w Attorney General Opinions

MW-276, MW-156 (1980); H-1042 (1977). These opinions do not

consider whether the governmental entity as well as the

individual officer might have an interest in insuring

against a loss of public funds through the officer's

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Mr. J. E. Birdwell - Page 6 (JM-1092)

negligence.1 Nor are these opinions consistent with more

recent statements of the law by the courts and this office,

as an examination of their reasoning will show.

Attorney General Opinion C-506 (1965) found unconstitu-

tional a statute requiring a county to pay premiums on an

errors and omissions insurance policy for the county clerk.

The opinion based its conclusion on the rule "that a county

is not liable for the tortious or negligent acts of its

officers, agents or employees.11 Attorney General Opinion

C-506,.at 2. It then reasoned that payment of a damages

claim arising out of the county clerk's performance of

his official duties would constitute a gift or grant in

violation of article III, sections 51 and 52, of the Texas

Constitution, concluding that "it would likewise be a

violation of the same constitutional provisions for a county

to pay the premiums on an insurance policy which had as its

purpose the paying of a claim predicated on facts which

generated no county liability." L at 3.

Subsequent authorities have modified the rule on which

Attorney General Opinion C-506 based its conclusion. Letter

Advisory No. 24 (1973) held constitutional a statute that

would provide for the defense of county officials and

employees by district or county attorneys, or by county-paid

private counsel, in certain lawsuits. m Local Gov't Code

5 157.061 (formerly codified as V.T.C.S. art. 332~). The

opinion stated that "there is no constitutional prohibition

against the use of public funds to defend a county's

interest in a legal contest, even if the county is not named

as a party to the suit." Letter Advisory No. 24, at 2. The

county attorney could represent a county official

employee if the county's interests are at stake and g:

believes in good faith that the officer or employee has

acted within the proper scope of his authority in the

performance of public duties. Id. at 3; see also Attorney

General Opinions JM-755 (1987); H-887 (1976); H-544 (1975);

see aenerallv Citv of Corsicana v. Babb, 290 S.W. 736

(Tex. Comm'n App. 1927, judgm't adopted) (city may employ

1. Attorney General Opinion NW-276 (1980), in con-

cluding that a purchase of errors and omissions coverage for

trustees of state retirement systems would benefit only the

trustees, stated that the systems were already protected by

performance bonds required of the trustees and paid for with

public funds. This observation suggests that errors and

omissions insurance could be provided at public expense if

necessary to protect retirement funds.

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Mr. J. E. Birdwell - Page 7 (JM-1092)

attorney to defend policemen indicted for killing a person

while attempting to arrest him): Chandler v. Saenz, 315

S.W.2d 87 (Tex. Civ. App. - San Antonio 1958, writ ref'd

n.r.e.) (city council may use public funds to defend suit

contesting two year terms for city officers).

Moreover, the legislature has adopted the Tort Claims

Act, authorizing the use of public funds to reimburse

individuals injured by the negligence of governmental

employees and waiving its immunity from suit and from

liability to the extent set out in that statute. Civ. Prac.

& Rem. Code ch. 101; M id. 55 101.021, 101.025. In Harris

Countv v. Dowlearn, 489 S.W.Zd 140 (Tex. Civ. App. - Houston

[14th Dist.] 1972, writ ref'd n.r.e.), the court concluded

that the Tort Claims Act did not authorize a grant of public

funds to individuals in violation of article III, sections

51 and 52, of the Texas Constitution. See also Civ. Prac. &

Rem. Code ch. 104.

Since Attorney General Opinion C-506 was issued, the

legislature, the courts, and the opinions of this office

have recognized that a governmental entity may have an

interest in representing public servants in suits arising

from their negligence in performing public duties. In. a

proper case, the expenditure of public funds to pay for the

individual's legal representation and damages does not

violate the constitution. We overrule the statements in

Attorney General Opinion C-506 and its progeny that the

purchase of errors and omissions insurance coverage for a

public officer or employee violates the constitution unless

it is part of compensation.

Article III, sections 51 and 52, of the Texas Constitu-

tion do not prohibit the authority from buying errors and

omissions insurance to protect the state, or members of the

public in cases outside of the immunity provisions, from

loss of its funds through the negligence of board members.

If the board determines in good faith that purchase of such

insurance is necessary and advisable to carry out its

purposes, it may spend public funds for the premiums.

Attorney General Opinions MW-276, MW-156, H-1042, M-441,

C-607 and C-506 are overruled in accordance with this

opinion.

Your third question is as follows:

Are Board members state employees for

purposes of Chapter 104. State Liability for

Conduct of Public Servants, of the Civil

Practice and Remedies Code?

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Mr. J. E. Birdwell -.Page 8 (JM-1092)

Section 104.001 of the Civil Practices and Remedies

Code provides in part:

In a cause of action based on conduct

described in Section 104.002, the state shall

indemnify the following persons for actual

damages, court costs, and attorney's fees

adjudged against:

(1) an employee, a member of the

governing board, or any other officer of a

state agency, institution, or department.

Section 104.002 provides as follows:

The state is liable for indemnification

under this chapter only if the damages are

based on an act or omission by the person in

the course and scope of the person's office,

employment, or contractual performance for or

service on behalf of the agency, institution,

or department and if:

(1) the damages arise out of a cause

of action for negligence, except a wilful

or wrongful act or an act of gross negli-

gence; or

(2) the damages arise out of a cause

of action for deprivation of a right,

privilege, or immunity secured by the

constitution or laws of this state or the

United States, except when the court in

its judgement or the jury in its verdict

finds that the person acted in bad faith,

with conscious indifference or reckless

disregard: or

(3) indemnification is in the interest

of the state as determined by the attorney

general or his designee.

See also Civ. Prac. & Rem. Code § 104.003 (limits on state

liability for indemnification).

Members of the board of directors of the Texas Agricul-

tural Finance Authority are covered by chapter 104 of the

Civil Practices and Remedies Code. Although a board member

is probably not an employee within section 104.001(l), he

is *Iamember of the governing board, or any other officer of

a state agency, institution, or department . . . .'I See.

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Mr. J. E. Birdwell - Page 9 (JM-1092)

,

-, Agric. Code 55 58.012(a) (membership of board), 58.021

(purposes of board), 58.022 (powers of the board). Directors

of the authority are therefore covered by chapter 104 of the

Civil Practices and Remedies Code.

SUMMARY

Members of the board of the Texas Agri-

cultural Finance Authority may be found

personally liable for causes of action in

favor of the state arising out of the

performance of board duties, but board

members, acting within the scope of their

office, will not be held personally liable to

members of the public for errors or omissions

in the issuance of bonds or the execution of

contracts which do not constitute fraudulent

or willful conduct.

The Authority may use public funds to

purchase for its directors insurance to

protect the state's or the public's interest

in the funds it handles.

Members of the board of directors of the

Texas Agricultural Finance Authority are

covered by chapter 104 of the Civil Practice

and Remedies Code which indemnifies employees,

members of a governing board, and other

officers of a state agency, institution, or

department in certain causes of action.

JIM MATTOX

Attorney General of Texas

MARY KELLER

First Assistant Attorney General

LOU MCCREARY

Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLIZY

Special Assistant Attorney General

RICK GILPIN

Chairman, Opinion Committee

Prepared by Susan L. Garrison

Assistant Attorney General

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