.
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
p. 5716
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
P. 5718
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.
P. 5719
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.
P. 5721
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?
P. 5722
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.
p. 5723
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
P. 5724