The opinion
The Attorney General of Texas
November 24, 1980
MARK WHITE
Attorney General
Honorable Joseph N. Murphy, Jr. Opinion No. Ml+‘-276
Executive Director
Employees Retirement System Re: Liability for mismanagement of
18th & Brazca Streets Employees Retirement System op
Austin, Texas 78701 Teacher ~Retirement System funds
and related questions
Honorable Bruce Hineman
Acting Executive Secretary
Teacher Retirement System
1001Trinity
Austin, Texas 78701
Gentlemen:
You have asked what the liability of your respective systems would be
if an investment or benefit program were negligently administered by an
officer or employee, and whether the systems might purchase “errors and
omissions” insurance to protect system employees, committee members, and
officers against personal liability.
The Teacher Retirement System and the Employees Retirement
System are state agencies. ‘Teacher Retirement System v. Duckworth, 264
S.W. 2d 98 (Tex. 1954). See Farrar v. Board of Trustees of Employees
Retirement System, 243 ST 2d 688 (Tex. 1951). Cf. Boles v. Board of
Firemen, Policemen and Fire Alarm Operators’ Trustees, 308 S.W. 2d 904
ITex. Civ. App. - San Antonio 1957, writ rePd). As instrumentalities of the
state, the systems themselves are not liable for the torts of their officers or
employees in the absence of a constitutional or statutory requirement to the
contrary. e Lowe v. Texas Tech University, 540 S.W. 2d 297 (Tex. 1976);
52 Tex. Jur. 2d State of Texas S50, at 761. Cf. Teacher Retirement System
v. Neill, 563 S.W. 2d 873 (Tex. Civ. App.-Waco 1978, writ rePd nr.e.);
Comanche County v. Burks, 166 S.W. 470 (Tex. Civ. App. - Fort Worth 1914,
writ ref’d).
Except for statutory provisions that require the systems to correct any
unauthorized changes or errors in their records that would increase or
decrease the entitlement of members, and to adjust future payments
accorditlgly “so far aa practicable,” we have found no existing laws that
would deprive the systems of their governmental immunity defense to civil
actions for negligence in the fiscal management or disposition of assets. -See
p. 880
Honorable Joseph N. Murphy, Jr.
Honorable Bruce Hineman
Page Two (NW-276)
V.T.C.S. art. 6228a, SlO; Educ. Code 53.59(p). Cf. V.T.C.S. art. 6252-19 (Texas Tort
Claims Act). You specifically ask about article6252-26, V.T.C.S. That statute does
not deprive state agencies, their officers or employees of governmental immunity. It
is designed to furnish a legal defense to officers and employees charged by third
parties with negligence in the performance of official duty, and to furnish a measure
of indemnity if the defense is unavailing. -See Day and Jacobs, Sovereign Immunity, 31
Baylor L. Rev. 389 (1979).
Every public officer is legally bound to faithfully perform the duties of his office
and is liable to the state if he falls to do so, causing it injury. Brown v. Sneed, 14 S.W.
248 (Tex. 1890). See .W. 2d 499 (Tex. 1935); Bolton v. State, 154
S.W. 1197 (Tex. &iii. V.T.C.S. art. 6228a, SlO; Penal Code $39.01
Educ. Code S3.06. But absent an aoolicable statute. a oubllc officer in Texas is not
generally responsible to members of-the public for acts-performed within the course
and scope ! of his public duties, or for failure to properly discharge discretionary duties
owed the public - at least where he does not act willfully or with malice. See
&q&l -v.CorpusJones, 264 S.W. 2d 425 (Tex. 1954); Torres v. Owens, 380 S.W. 2d 30 (TX
Christi 1964, writ rePd n.r.e.1; 47 Tex. Jur. 2d Public Officers S130,
at 167-70: Cf. Borger Independent School District v. Dickson, 52 S.W. 2d 505 (Tex. Civ.
App. - A mslo 1932, writ ref’d); Grimm v. Arizona Board of Pardons and Paroles, 564
P. 2d 1227 (Ariz. 1977).
Both retirement systems are established as corporate entities by constitutional
sanction, and the standard of care to be exercised by the trustees of each in the
investment of trust funds is set out by the constitution and statutes. Tex. Const. art.
XVI, 967; V.T.C.S. art. 6228a, SS2, 7A; Educ. Code SS3.01, .60. Prior to the time a
right vests in beneficiaries to have funds paid over, the monies managed by the
respective trustees are public funds, not private funds. See City of Dallas v.
Trammell, 101 S.W. 2d 1009 (Tex. 1937); Devon v. City of San Asnio, 443 S.W. 2d 598
(Tex.m. App. - Waco 1969, writ rePd); Lack v. Lack, 584 S.W. 2d 896 (Tex. Civ.
App. - Dallas 1979, writ rePd n.r.e.); Cook v. Employees Retirement System of Texas,
514 S.W. 2d 329 (Tex. Civ. App. - Texarkana 1974, writ rePd n.r.e.). Cf. Conlen Grain
and Mercantile, Inc. v. Texas Grain Sorghum Producers Board, 519 ST 2d 620 (Tex.
1975). It follows that the failure of a trustee to faithfully perform his duty with
respect thereto is actionable not at the instance of injured employees or beneficiaries,
but at the instance of the state. -See Tex. Const. art. IV, S25; V.T.C.S. art. 4400.
In many respects “errors and omissions” insurance coverage is similar to a
faithful performance bond, but its purpose is not the same. Faithful performance
bonds are contracts of fidelity insurance. Great American Indemnity Company v.
w, 229 S.W. 2d 850 (Tex Civ. App. - Austin 1950, writ ref’d). See Tolbert v.
Standard Accident Insurance Co., 223 S.W. 2d 617 (Tex. 1949); Southernirety Co. v.
Austin. 17 S.W. 2d 774 (Tex. Comm’n ADD. 1929). Errors and omissions coveraze is a
formof malpractice insurance designed tb’protect an insured from the consequeices of
negligence for which ha is himself liable. It &es not ordinarily cover dishonesty,
p. 881
Honorable Joseph N. Murphy, Jr.
Honorable Bruce Hineman
Page Three (MN-276)
intentional fraud, or criminal or malicious acts. See St. Paul Insurance Co. v. Bonded
Realt Inc., 578 S.W. 2d 191(Tex. Civ. App. - El Paso), writ rerd n.r.e., 583 S.W. 2d 619
iTZi?h Attorney General Opinion H-1042 (1977); 13 G. Couch, Cyclopedia of
Insurance Law, S48:165, at 607 (2d ed. 1965). Faithful performance bonds, on the other
hand, cover those acts as well as negligence and are designed to protect the person to
whom the bcmd is given, not the officer or employee whose faithful performance is
guaranteed.
Any purchase of errors and omissions coverage for officers and employees would
inure solely to the pecuniary benefit of the officers and employees thereby protected,
not to the benefit of the retirement systems. The systems are already protected.
Each system is specifically empowered to require performance bonds of trustees and
employees,in such amounts as the respective boards &em necessary (and to pay the
premiums for them). V.T.C.S. art. 6228a, Slh Educ. Code S3.61. See V.T.C.S. art.
6003b. The purchase of errors and omissions coverage would serve-& direct public
purpose. The Texas Constitution prohibits the expenditure of public funds for other
than public purposes. Tex. Const. art. III, SS51, 52. However, when insurance is
properly purchased for officers and employees as an element of their compensation, no
other public purpcae need be shown. Attorney General Opinion H-1042 (1977).
The purchase of errors and omissions coverage as additional compensation for
officers lws been upheld where expressly authorized by law. Attorney General
Opinions MW-156 (1980); H-1042 (1977). See Byrd v. City of Dallas, 6 S.W. 2d 738 (Tex.
1928). Purchases of insurance as anTemerit of employee compensation can be
impliedly authorized also. Attorney General Opinion M-989 (1971). In most cases there
is no implied authority on the part of state agencies to provide additional insurance to
officers and employees as an element of compensation because the amounts and types
of compensation to be paid most state officers and employees are fixed by the biennial
Appropriations Act. See V.T.C.S. arts. 6252-11 (Position Classification Act of 1960,
681313 (salaries of stateofficers and employees), 6813~ (travel expenses and group
insurance premiums). We have concluded, however, that the Employees Retirement
System and the Teacher Retirement System are authorized to furnish such insurance to
compensated offiears and employees as an element of their compensation if they
choose to do so. -See Attorney General Opinion M-949 (1971).
The current Appropriations Act makes provisions for contributions by the state
to match contributions required of the members of each system, but it contains no
provision for the administrative expenses of either system. Acts 1979, 66th Leg., ch.
843, at 2627, 2770. As a consequence, the systems are not governed by articles 6813b,
6813c, or 6252-11, V.T.C.S., or by the Appropriations Act in fixing compensation.
Attorney General Opinion M-949 (1971). See Attorney General Opinion H-681 (1975).
The amounts and types of compensation to- paid by the systems to their officers and
employees are governed instead by the statutes generally governing the systems.
p. 882
Honorable Joseph N. Murphy, Jr.
Honorable Bruce Hineman
Page Four (MN-276)
The trustees of both systems are expressly authorized by their statutes to
approve the compensation of persons employed by the systems so long as the rates and
amounts approved are not greater than those paid for similar services performed for
the state. V.T.C.S. art. 6228a, S6A(b)7; Educ. Code S3.590’). Although the total
compensation they may pay an officer or employee is thus limited, the forms in which
compensation may be paid are not. Cf. Attorney General Opinion MW-136 (1980). In
our opinion, the trustees of the Teacher Retirement System and the Employees
Retirement System, if they choose, may purchase errors and omissions insurance to
protect compensated officers and employees as a part of the officers’ or employees’
total compensation. We note, however, that trustees of the Teacher Retirement
System and some trustees of the Employee Retirement System are required by statute
to serve without compensation. Educ. Code S3.59(f); V.T.C.S. art. 6228a, S6A(b)3. -See
Attorney General Opinion H-958 (1977).
SUMMARY
Aside from requirements that they correct any errors in
their records and adjust future payments accordingly, the
Teacher Retirement System and the Employees Retirement
System have no civil liability under current law for the
negligent management of trust assets or benefit programs.
They are agencies of the state. The systems may nevertheless
require faithful performance bonds of officers and employees
(and pay the premiums), but they may provide errors and
omissions insurance to officers and employees cmly as an
element of compensation.
bw-dbw-dg
Attorney General of Texas
JOHN W. FAINTER, JR.
First Assistant Attorney General
RICHARD E. GRAY III
Executive Assistant Attorney General
Prepared by Bruce Youngblood
Assistant Attorney General
p. 883
, .
Honorable Joseph N. Murphy, Jr.
Honorable Bruce Hineman
Page Five W-2761
APPROVED:
OPINION COMMlTTEE
Susan L. Garrison, Acting Chairman
Jon Bible
Ride Gilpin
Nancy Lynch
Bruce Youngblood
p. 884