# The Attorney General of Texas

November 24, 1980

MARK WHITE Attorney General

Honorable Joseph N.Murphy, Jr. Executive Director Employees Retirement System 18th&Brazca Streets Austin, Texas 78701 Opinion No. Ml+‘-276

Re: Liability for mismanagement of Employees Retirement System op Teacher ~Retirement System funds

Honorable Bruce Hineman Acting Executive Secretary Teacher Retirement System 1001 Trinity Austin, Texas 78701 and related questions

Gentlemen:

You have asked what the liability ofyour 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 oftheir officers or employees in the absence ofaconstitutional orstatutory requirement to the contrary. e Lowe v. Texas Tech University, 540S.W. 2d297 (Tex. 1976); 52Tex. Jur. 2dState ofTexas 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, 166S.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 inthe fiscal management ordisposition of assets. See

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p. 880Honorable 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 islegally bound to faithfully perform the duties of his office and isliable to the state if he falls to doso, causing it injury. Brown v.Sneed, 14S.W. 248 (Tex. 1890). See S.W. 1197(Tex. &iii. .W. 2d499 (Tex. 1935);Bolton v.State, 154 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 and scope owed the 

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at 167-70: App. - A P. 2d1227responsible to members of-the public for acts-performed within the course

!of his public duties, or for failure to properly discharge discretionary duties public - at least where he does not act willfully or with malice. See

v. Jones, 264S.W. 2d425 (Tex. 1954);Torres v. Owens, 380S.W.2d 30 (TX

-Corpus Christi 1964,writ rePd n.r.e.1; 47Tex. Jur. 2dPublic Officers S130, Cf. Borger Independent School District v.Dickson, 52S.W.2d505(Tex. Civ. mslo 1932,writ ref’d); Grimm v.Arizona Board ofPardons and Paroles, 564 (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, 101S.W.2d 1009(Tex. 1937);Devon v. City of San Asnio, 443 S.W.2d598 (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 ofTexas, 514S.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, 519ST 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 ofinjured employees orbeneficiaries, but at the instance ofthe 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., 223S.W. 2d 617(Tex. 1949);Southernirety Co. v. Austin. 17S.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. 881Honorable 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., 578S.W.2d 191(Tex. Civ. App.-ElPaso), writ rerd n.r.e., 583S.W.2d619 iTZi?h Attorney General Opinion H-1042 (1977); 13 G. Couch, Cyclopedia of Insurance Law, S48:165,at 607 (2ded. 1965). Faithful performance bonds, onthe other hand, cover those acts as well as negligence and are designed to protect the person to whom the bcmdis 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 asan element oftheir compensation, no other public purpcae need beshown. 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, 6S.W.2d738(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 ofstate 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 doso. 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. Asa consequence, the systems are not governed byarticles 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 bythe systems to their officers and employees are governed instead bythe statutes generally governing the systems.

p. 882Honorable 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 ofpersons employed by the systems solong asthe 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 isthus 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. 

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Attorney General ofTexas

JOHN W.FAINTER, JR. First Assistant Attorney General

RICHARD E.GRAYIII Executive Assistant Attorney General
Prepared byBruce 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

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