.

September 1, 1989

Mr. J. E. Birdwell, Jr. Chairman Texas Agricultural Finance Authority P. 0. BOX 12847 Austin, Texas 78711

DearMr. Birdwell: Opinion No. JR-1092

Re: Liability ofmembers of theboard ofdirectors of the Texas Agricultural Finance Authority (RQ-1637)

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 forcreation ofprograms to. foster growth ofagricultural enterprises). The purposes of the authority are stated insection 58.021 of the Agriculture Code:
(a) Inorder topromote the expansion,

development, and diversification of production, 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, inwhole or in part, loans to eligible agricultural businesses;
(4) toguarantee, in whole or in part, loans to eligible agricultural businesses: and

p. 5716Mr. J. E. Birdwell -Page 2 (JM-1092)

(5) to administer orparticipate in programs established by another person to provide financial assistance to eligible agricultural businesses.

The board may issue revenue bonds toprovide funds to carry out any of these purposes. Agric. Code 558.033.

Since the board of directors of the Agricultural Finance Authority will be responsible for handling a substantial amount ofmoney, questions have arisen about board members' exposure to liability. Your first question isas follows:

May the Board be foundpersonally liable for causes of actions arising out of the performance ofboard duties?

We assume that you are concerned about personal liability fornegligence inhandling funds-,not liability for intentional violations of the civil or criminal law, or actions taken inbad 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 forcorrupt motives): Grimm v. Arizona Bd. of Pardons and Paroles, 564 P.2d 1227 (Ariz. 1977) (members of parole board may bepersonally liable for reckless decision inreleasing prisoner).

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

The board members, administrator, and staff of the authority may notbe personally liable forbonds issued orcontracts executed by the authority and shall be exculpated and fully indemnified in the documents relating to anybonds except inthe case of fraudulent
orwilful misconduct on the part of the individual seeking exculpation or indemnification.
This exculpatory provision protects board members from liability to members of the public forbonds 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 isnot ordinarily liable for mistaken judgment in performing discretionary actswithin the course and scope ofhis public duties. See

P- 5717Mr. J. E. Birdwell -Page 3 (JM-1092)

generallv CamDbell v.Jones, 264 S.W.Zd 425 (Tex. 1954); Rains v. SimDson, 50Tex. 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 ofofficial immunity does not bar a suit to enjoin apublic official's unauthorized **act,** nor does itapply toministerial 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 liability. Barlow v. Fitzaerald aenerally Civ. Prac. &Rem. Cod; forconduct ofpublic servants). from suit f&z personal 457U.S. 800 (1982); see ch. 104 (state liability

accountable to the state Public officers aremoreover forpublic funds in their custody. &.% Brown v. Sneed suDra; Attorney General Opinions JM-153 (1984): O-637; (1945); 42Tex. 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 (actionby district or county attorney to compel local officer to perform duty to collect or safeguard public funds), 402.026 (actionby attorney general to recover state funds). Aboard member's liability to the state for state funds isnot affected by section 58.016(e) of the code.

Your second question isas 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 toyour first question we found that both the statute and the common lawaccord board **members** considerable immunity from **liability to**  members of the public. We assume that theboard is interested in increasing its protection from liability only inthe areaswhere it isnot immune, that is, its liability to the public, ifany,which is not

P. 5718Mr. J. E.Birdwell -Page 4 (JM-1092)

covered by the immunity provisions, and its accountability to the state forpublic funds.

The State Employee Bonding Act, which prescribes uniform standards forthe bonding of state officers and employees, includes the following definition:

'Bond'means any agreement under which an insurance company becomes obligated as surety topay, within certain limits, loss caused by the dishonest acts ofofficers and employees,
or to pay for loss caused by failure of officers oremployees to faithfully perform the duties of the offices orpositions held.

V.T.C.S. art. 6003b, § 3(a).

Each director of the Texas Agricultural Finance Authority isrequired to execute a surety bond inthe amount of $25,000 conditioned on faithful performance of the duties ofdirector. Agric. Code 5 58.012(d). The cost of the $25,000 bond ispaid by the authority. L& This provision sets a limit on the expenditure the authority maymake to purchase surety bonds for its **members.** &% Tex. Const. art. III, § 44; Attorney General opinion H-533 (1975). Accordingly, the board is not authorized topay more in surety bond premiums for itsmembers than the premium for a $25,000 bond.

Youhave not asked us to consider a specific kind of insurance coverage. Inaddressing your question wewill use errors and omissions coverage as an illustration. Our answer does not apply to a particular insurance contract, and theboard's power to enter into any such contract will depend inpart onwhether itsstatute permits itto accept the specific contract provisions.

Errors and omissions coverage isa formof malpractice insurance designed to protect an insured from the consequences ofhis negligent acts, errors, and omissions. It does not ordinarily cover dishonesty, intentional fraud, or criminal ormalicious 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 (2drev. ed. 1982). We assume, forpurposes of this opinion, that an errors and omissions policy could be written to cover the board's liability to the state aswell as tomembers of the public.

P. 5719Mr. 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 forboard members.

me authoritv has alloowers necessarv to accomolish the ournoses andoroarams of the authoritv. includina theDower:

. . . . (7) toprocure insurance andpay premiums on insurance of any type, in amounts, and from insurers as the board considers necessarv and advisable to accomplish anyof itspurposes. (Emphasis added.)

To accomplish itspurposes and implement itsprograms, the authority must handle state funds allocated to it for those purposes. Webelieve itmay take reasonable steps to protect the interest of thepublic and the state in these funds, including the purchase of insurance to protect against loss of the funds through the board's own negligence. Boardmembers arepersonally liable for their
own negligence inhandling 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 inthe fundsheld by theboard might bemuch better protected by an insurance policy than by a suit for negligence against boardmembers whomay not have sufficient funds topay 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 forapublic officer would be agrant of public funds in violation ofarticle 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 thegovernmental entity aswell as the individual officer might have an interest in insuring against a loss of public funds through the officer's

PO 5720Mr. J. E. Birdwell -Page 6 (JM-1092)

negligence.1 Nor are these opinions consistent with more recent statements of the lawby the courts and this office,
as an examination of their reasoning will show.

Attorney General Opinion C-506 (1965) found unconstitutional a statute requiring acounty 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 isnot liable for the tortious ornegligent 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 51and 52,of the Texas Constitution, concluding that "it would likewise be a violation of the same constitutional provisions for acounty topay the premiums on an insurance policy which had as its purpose the paying of aclaim 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, orby county-paid private counsel, incertain lawsuits. m Local Gov't Code 5 157.061 (formerly codified asV.T.C.S. art. 332~). The opinion stated that "there isno constitutional prohibition against the use of public funds to defend a county's interest ina legal contest, even ifthe county isnot named
asaparty 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 actedwithin the proper scope of his authority in the performance ofpublic duties. Id. at 3; see also Attorney General Opinions JM-755 (1987);H-887 (1976);H-544 (1975);
seeaenerallv Citv of Corsicana v. Babb, 290 S.W. 736 (Tex.Comm'n App. 1927, judgm't adopted) (citymay employ

1. Attorney General Opinion NW-276 (1980), in concluding that apurchase oferrors 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 andpaid forwith public funds. This observation suggests that errors and omissions insurance could be provided atpublic expense if necessary toprotect retirement funds.

P. 5721Mr. J. E. Birdwell -Page 7 (JM-1092)

attorney to defend policemen indicted forkilling a person while attempting to arrest him): Chandler v. Saenz, 315 S.W.2d 87 (Tex. Civ.App. - SanAntonio 1958,writ ref'd n.r.e.) (citycouncil may use public funds todefend suit contesting twoyear terms forcity 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 inthat statute. Civ. Prac. &Rem. Code ch. 101;M id. 55 101.021, 101.025. InHarris Countv v. Dowlearn, 489 S.W.Zd 140 (Tex.Civ.App. -Houston [14thDist.] 1972,writ ref'd n.r.e.), the court concluded that the Tort Claims Act did not authorize agrant ofpublic funds to individuals in violation of article III, sections 51and 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 inrepresenting public servants in suits arising from their negligence in performing public duties. In. a proper case, the expenditure ofpublic funds topay for the individual's legal representation and damages does not violate the constitution. We overrule the statements in Attorney General Opinion C-506 and itsprogeny that the purchase of errors and omissions insurance coverage for a public officer oremployee violates the constitution unless it ispart of compensation.

Article III, sections 51and 52,of the Texas Constitution do not prohibit the authority frombuying errors and omissions insurance toprotect the state, ormembers of the public in cases outside of the immunity provisions, from loss of its funds through the negligence ofboard members. If the board determines ingood 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 isas follows:

Are Board members state employees for purposes of Chapter 104. State Liability for Conduct of Public Servants, of the Civil Practice andRemedies Code?

P. 5722Mr. J. E. Birdwell -.Page 8 (JM-1092)

Section 104.001 of the Civil Practices and Remedies Code provides inpart:

In a cause of action based on conduct described inSection 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, orany other officer of a state agency, institution, ordepartment.
Section 104.002 provides as follows:

The state is liable for indemnification under this chapter only if the damages are based on an act oromission by the person in the course and scope of theperson's office, employment, or contractual performance foror service onbehalf of the agency, institution,
ordepartment and if:

(1) the damages arise out of a cause of action fornegligence, except a wilful
orwrongful act oran act ofgross negligence; 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 inbad faith, with conscious indifference or reckless disregard: or
(3) indemnification is inthe interest of the state asdetermined by the attorney general orhis designee.

See also Civ. Prac. &Rem. Code §104.003 (limits on state liability for indemnification).

Members of theboard ofdirectors of the Texas Agricultural Finance Authority are covered by chapter 104of the Civil Practices andRemedies Code. Although aboard **member** isprobably not an employee within section 104.001(l), he is *Ia member of the governing board, orany other officer of
astate agency, institution, or department . . . .'I See.

p. 5723Mr. J. E. Birdwell -Page 9 (JM-1092)

,

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

(purposes of board), 58.022 (powersof theboard). Directors of the authority are therefore covered by chapter 104of the Civil Practices andRemedies Code.

SUMMARY

Members of theboard of the Texas Agricultural 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 beheld personally liable to members of thepublic forerrors or omissions inthe issuance of bonds or the execution of contracts which do not constitute fraudulent
orwillful conduct.

TheAuthority may use public funds to purchase for its directors insurance to protect the state's or the public's interest inthe funds ithandles.

Members of the board of directors of the Texas Agricultural Finance Authority are covered by chapter 104 of the Civil Practice and Remedies Codewhich indemnifies employees, members of a governing board, and other officers of a state agency, institution, or department incertain causes ofaction.

JIM MATTOX Attorney General ofTexas

MARY KELLER First Assistant Attorney General

LOUMCCREARY 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