. 

September 1, 1989 

Mr. J. E. Birdwell, Jr. 

Chairman 

Texas Agricultural 

Finance Authority 

P. 0. BOX 12847 

Austin, Texas 78711 

Dear Mr. Birdwell: 

Opinion No. JR-1092 

Re: Liability of members of 

the board of directors 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 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 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, 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 indemnification. 

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 

P- 5717 
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 

liability. Barlow v. Fitzaerald 

aenerally Civ. Prac. & Rem. Cod; 

for conduct of public servants). 

from suit f&z personal 

457 U.S. 800 (1982); see 

ch. 104 (state liability 

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 §!j 41.009 

(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 consequences 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 premiums 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 

PO 5720 
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 unconstitutional 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 concluding 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 Constitution 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 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 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 Agricultural 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 *Ia member 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 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 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