June 22, 1987
Honorable David Cain Opinion NO. JM-724
Chairman
Transportation Committee Re: Whether surplus lines carriers
Texas House of Representatives under article 1.14-2 of the Insur-
P. 0. Box 2910 ance, Code are eligible to act as
Austin, Texas 78769 sureties on performance and payment
bonds under article 5160, V.T.C.S.
Dear Representative Cain:
You ask whether a surplus lines insurance carrier, as defined in
article 1.14-2 of the Insurance Code, can act as a surety on the
performance and payment bonds required from contractors on certain
public projects by article 5160, V;T.C.S. We conclude that such bonds
cannot be executed by surplus lines carriers.
Article 5160, V.T.C.S.. at subdivision A, provides:
Any person or persons, firm, or corporation,
hereinafter referred to as 'prime contractor,'
entering into a formal contract in excess of
$25,000 with this State, any department, board or
agency thereof; or any county of this State,
department, board or agency thereof; or any
municipality of this State, department, board or
agency thereof; or any school district in this
State, common or independent, or subdivision
thereof; or any other governmental or quasi-
governmental,,authoritywhether specifically named
herein or not, authorized under any law of this
State, general or local, to enter into contractual
agreements for the construction, alteration or
repair of any public building or the prosecution
or completion of any public work, shall be
required before commencing such work to execute to
the aforementioned governmental authority or
authorities, as the case may be, the statutory
bonds as hereinafter prescribed, but no
governmental authority may require a bond if the
contract does not exceed the sum of $25,000. Each
such bond shall be executed by a corporate surety
.
Honorable David Cain - Page 2 (JM-724)
or corporate sureties duly authorized to do
business in this State. In the case of contracts
of the State or a department, board, or agency
thereof, the aforesaid bonds shall be payable to
the State and shall be approved by the Attorney
General as to form. In case of all other con-
tracts subject to this Act, the bonds shall be
payable to the governmental awarding 'authority
concerned, and shall be approved by it as to form.
Any bond furnished by any prime contractor in an
attempted compliance with this Act shall be
treated and construed as in conformity with the
requirements of this Act as to rights created,
limitations thereon. and remedies provided.
(Emphasis added).
V.T.C.S. art. 5160.
This statute, where applicable, requires a Contractor to furnish:
(1) a performance bond in the amount of the contract and conditioned
upon the faithful performance of the work in accordance with the
persons, specifications, and contract documents, for the protection of
the governmental client and (2) a payment bond in the amount of the
contract, for the protection of those furnishina labor and materials
on the project. See generally Greenvill; Independent School
694 S.W.2d 410 (Tex. App. - Dallas
ngleside v. Stewart, 554 S.W.2d 939
(Tex. Civ. App. - Corpus Christ1 1977, writ ref'd n.r.e.).
Contractors subject to the bonding requirements in article 5160
may purchase the necessary bonds from guaranty, fidelity, or surety
companies. The bonds are furnished in return for a cash payment equal
to a percentage of their face value. At present, the Insurance Board
indicates that performance and payment bonds typically are available
for a cash payment equal to five to ten percent of fair value of the
bond. We can find no authority for the proposition that a corporate
surety is required by the Insurance Code tom furnish a payment or
performance'bond; thus, if the surety b~elievesthe risk of default is
too great, it may refuse to issue a bond.
The bonds specified in article 5160 must be executed by a
corporate surety or sureties "duly authorized to do business in [the]
state." V.T.C.S. art. 5160. The making of a contract of guaranty or
suretyship -- the essence of executing a performance or payment bond
-- is an "act of insurance." Ins. Code art. 1.14-1, 92(a)(2). "Acts
of insurance" can only be done by entities authorized by the Insurance
Board pursuant to the provisions of the Insurance Code. Ins. Code
art. 1.14-1, §3. (Article 2.01 of the Business Corporation Act
provides that no corporation may be organized or obtain any authority
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Honorable David Cain - Page 3 (JM-724)
to transact business in Texas under the terms of the Business
Corporation Act if any of its purposes is to operate any insurance
company of any type or character. Bus. Corp. Act art. 2.01(B)(4)(d)).
Thus, to obtain authorization to do business as a corporate surety, a
certificate of authority must be obtained from the Insurance Board.
Ins. Code art. 1.14, 81. An authorized corporate surety is regulated
as a property and casualty insurance company in accordance with the
provisions of subchapter B of the Insurance Code. Ins. Code art.
5.13. The bond of a surety company duly qualified to do business in
the state is conclusive proof that a contractor has met the
requirements of article 5160. Ins. Code art. 7.19-1.
A surplus lines carrier is denominated specifically in the
Insurance Code as an unauthorized insurer -- one operating without the
required certificate of authority. Ins. Code art. 1.14-2, 54(b).
Surplus lines carriers furnish "types" ("lines") of insurance coverage
which cannot be obtained with diligent effort from authorized
insurers. Ins. Code art. 1.14-2, 953, 5. See also 28 T.A.C. 6915.7,
15.8 (1981) (the regulations implementing the surplus lines carrier
provisions of the Insurance Code). Only insurance agents specifically
licensed by the Insurance Board to issue surplus lines policies may
provide such insurance. Ins. Code art. 1.14-2. 54(a). We note that
the Insurance Code relieves the Insurance Board of any responsibility
to determine the financial condition or claims practice of any unauthor-
ized surplus lines insurer whose policies are sold by a licensed
agent. Ins. Code art. 1.14-2, §8(f). The duty of the Insurance Board
to evaluate the financial conditions of an authorized insurer is one
of the principal means used by the state to protect those who rely on
insurance coverage. See, e.g., Ins. Code arts. 1.10 (general duties
of the Insurance Board); 1.15 (duty of Insurance Board to periodically
examine the condition of carriers); and 1.32 (duty to take steps to
correct hazardous financial and business conditions of insurers).
Accordingly, we find that the kinds of corporate sureties
"authorized to do business in the state" so as to be able to execute
suitable payment bonds acceptable under article 5160, V.T.C.S., are
only those companies authorized to furnish insurance in accordance
with the provisions of the Insurance Code. An authorized corporate
surety must possess a certificate of authority issued by the Insurance
Board. The Insurance Code is the only source for a comprehensive
statutory definitive meaning of an "authorized corporate surety" and
its provisions control the meaning of that term in article 5160. - e
City-of Baytown v. Angel, 469 S.W.2d 923 (Tex. Civ. App. - Houston
[14th Dist.] 1971, writ ref'd n.r.e.); Commercial Standard Fire and
Marine Co. v. Commissioner of Insurance, 429 S.W.2d 930 (Tex. Civ.
APP. - Austin 1968, no writ); 53 Tex. Jur. 2d Statutes 1161.
p. 3370
Honorable David Cain - Page 4 (JM-724)
SUMMARY
Article 5160. V.T.C.S., requires contractors on
certain public projects in certain circumstances
to execute performance and payment bonds furnished
by corporate sureties authorized to do business in
the state. Surplus lines insurance carriers
(including sureties), as defined in article 1.14-2
of the Insurance Code, are not authorized to
engage in the act of furnishing insurance, such as
surety bonds, in the state, and may not furnish
the bonds required by article 5160, V.T.C.S.
Jz&
JIM MATTOX
Attorney General of Texas
JACK HIGHTOWER
First Assistant Attorney General
MARY KELLER
Executive Assistant Attorney General
JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Don Bustion
Assistant Attorney General
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