Untitled Texas Attorney General Opinion

• Court: Texas Attorney General Reports
• Decided: July 2, 1995
• Docket: DM-326
• Status: Published

Opinion

QBfficeof tfy I?lttornep Qkneral %tate of Pr;exas DAN MORALES ATTORNEY GENERAL March 21995

Honorable Kim Brimer Opiion No. DM-326 Chair Committee on Business & Industry Re: Whether the legislature constitutionally Texas House of Representatives Itlay establish 8 guaranty association for the P.O. Box 2910 workers’ compensation liabilities of political Austin, Texas 78768-2910 subdivisions in which the membemhip would be mandatory and as to which the funding would come through assessments imposed on the membership (RQ-742)

You have informed us that a subcommittee of the Committee on Business & In- dustry (the “committee”) has proposed a recommendation for the protection of the self- insurance timds of political subdiisions and the insurance pools of political subdivisions. Specifically, the subcommittee proposes that the legislature

[clreate a guaranty association specitkally for public insurance pools and public self-insurers separate from the Texas Property and Cast&y Insurance Guaranty Association. Membership in this as- sociation would be mandatory. The association will pay claims in the event that assets of an insolvent pool or self-insurer are insufiicient to pay claims.

You indicate that the membership would fimd the guamnty association through assessments.

You evidently are concerned about the constitutionality of legislation such as that proposed, should the kgish~ture enact it. You therefore ash whether the Texas Constitution prohibits the legislature from establishing a guaranty association for the workers’ compensation liabilities of certain political subdivisions in which the membership would be mandatory and which would derive its funding through assessments imposed on the membership. In our opinion, if the legislature were to enact the proposal you have described, the resulting codification would violate article III, section 52(a) of the constitution.

From your description of the proposed guaranty association, we understand that it would be similar to, although separate f+om, the Texas Property and Casualty Insurance Guaranty Association (the “association”), created pursuant to section 6 of the Property and Casualty Insurance Guaranty Act, Ins. Code art. 21.28-C. Section 6 requires every HonorableKimBrimer - Page 2 (DM-326)

entity that writes certain kinds of insurance, including workers’ compensation insurance, see Ins. Code $21.28-C, $9 3,6, to become a member of the association, see id. 3 6. The association is required to pay in full all of a member insurer’s covered claims’ that meet certain requirements if the member insurer is placed in temporary or permanent receivership under a court order or in conservatorship by the commissioner of insurance. Id. 8 8(a). To pay its obligations, the association assesses its member insurers. Id. fj 8(c).

You have cited article III, sections 52, 60, and 61 of the Texas Constitution. Article 52(a) provides as follows:

Except as otherwise provided by this section, the Legislature shall have no power to authorize any county, city, town or other political corporation or subdivision of the State to lend its credit or to grant public money or thing of value in aid of, or to any individual, association or corporation whatsoever, or to become a stockholder in such corporation, association or company. However, this section does not prohibit the use of public timds or credit for the payment of premiums on nonassessable life, health, or accident insurance policies and am&y contracts issued by a mutual insurance company authorized to do business in this State.

Article III, sections 60 and 61 of the constitution are substantially identical, although section 60 pertains to “counties and other political subdivisions,” while section 61 pertains to “cities, towns, and villages.” Essentially, sections 60 and 61 empower the legislature to enact laws enabling each county, municipality, or other political subdivision of the state to provide workers’ compensation insurance for its employees. Sections 60 and 61 tinther authorize the legislature to “provide suitable laws for the administration of such insurance” in the political subdivisions “and for the payment of the costs, charges, and premiums on such policies of insurance and the benefits to be paid thereunder.“2 Tex. Const. art. III, 9 61; 6 id. $60.

‘In gcncral,a “cowred claim” is “an unpaid claim of an insuredor third-partyliabilityclaimant thatarisaoutofandiswithinthearvuagcandnotinexassoftheapplicablelimitsofaninsurancc policy to which this Act applies, issaed or assomcd (wherebyan assumptioncertificateis issuedto the insurrd)byaninsumlicensedtodobusincscinthisstate,itthatinsurcrkcomesanimpaircdinsurrrand the third-partyclaimantor liabilityclaimantor insuredis a residentof this stateat the time of the insured event, or the propertytium which the claim arises is pumancotly locatedin this 6tatc.” Ins Cnde art 21.28-C. 8 S(8).

2We note that, porsmt to its authorityondu sections 60 and 61 of the conslilotion, the legidahm has caackd section SO4.011of the LaborCode. See AttorneyGmfa’alOpinion H-338 (1974) at 3 (concluding that statutorypredcwswr to section 504.011 was constitodooal). Section 504.011 rcqohes everypolitical sobdivisionto

extendworkers’compwaationboncfiu to its employeesby: (1) becominga self-insuroc

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The electorate adopted article III, section 60 in 1948 and section 61 in 1952. Prior to the adoption of these sections, counties and municipalities were precluded from purchasing workers’ compensation insurance for their employees, This office concluded in Attorney General Opinion O-779 that a county had no duty to provide workers’ com- pensation insurance for its employees. The opinion noted that a county and its political subdivision were immune from liability to employees, Attorney General Opiion O-779 (1939) at 1-2. Siiarly, in Attorney Generai Opiion O-53 15 this office concluded that a county wmmissioners court was not authorized to purchase workers’compensation insurance for county employees. The opinion appears to rely on three rationales: first, a wtmty is not liable in damages for injuries sustained as a wnseqrence of its employees’ tortious or negligent acts, Attorney General Opinion O-53 15 (1943) at 2; second, no law authorizes wunties to purchase workers’ compensation for its employees, id. at 3; and third, article III, section 52 prohibits a wunty from expending public timds on donations and gratuities, id.

At the time this office issued Attorney General Opiion O-53 15 and the electorate voted to add sections 60 and 61 to the wnstitution, wurts and this office. wnstrued article III, section 52 strictly to preclude any expenditure of public funds to an individual, association, or corporation whatsoever. See, e.g., San Anfonio Indep. Sch. Dist. v. Board OfTiusrees, 204 S.W.2d 22,25 (Tar. Civ. App.-El Paso 1947, writ refd n.r.e.); Bkmdv. City of Tqior, 37 S.W.2d 291, 292-93 (Lax. Cii. App.-Austin 1931) afld sub nom. Lhis v.Civ of Twlor, 67 S.W.2d 1033 (1934); Attorney General Opiions O-5386 (1943) at 2; O-3145 (1941) at l-2; O-2629 (1940) at 2. In part, the legislature may have proposed to add to article III, section 60 and later section 61 to circumvent section 52’s proscription of such a use of county or municipal frmds. See Tex. Const. art. III, 5 60 Interpretive Commentary and Comment-l%2 Amendment; id. $61 Interpretive commentary.

In recent years, the courts and this office have taken a more liberal view of article III, section 52(a), interpreting the section to permit grants or loans to a private individual, association, or corporation so long as the grant or loan serves a public purpose. See Davis v. Ciy ofLubbock, 326 S.W.Zd 699,709 (Iex. 1959); SrcCrev. Cify ofAustin, 331 S.W.Zd 737, 742 (Tex. 1960); Byrd v. City ofDalhs,6 S.W.Zd 738, 740 (Tex. 1928); Harris Count v. Dowlearn, 489 S.W.2d 140, 144 (Tex. Civ. App.-Houston [14th Dist.] 1972, writ ref d n.r.e.); see also Anomcy General Opinions TM-1229 (1990) at 3-5 (and

(focdnotecontinued) (2) mml inmanceunduaworkedcompcmationbuancepolicy, OI

(3) enteringinto an int&cal agmementwith otherpolkid subdihions providingfor self-insmwxc. See also AttomeyGeneralOpinionH-338A(1974) (dcsziing interlocalagmemcntas providingfor self- insura~ and as not inconsistentwith ‘hding of credit”provisionsof Texas Constitutionarticle III, sation 52).

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sources cited therein); JM-1209 (1990) at 1 (and sources cited therein); JM-1199 (1990) at 1 (and sources cited therein); 1 GEORGED. BRADEN,THJZCONST~I’UTION OFTHESTATE OF ‘&XAS: AN ANNOTATEDAND COMPARATIVE AlULYSIS 233-34 (1977). Under the more liberal interpretation, a court might conclude that article III, section 52(a) authorizes the legislature to require a county or municipaiity to pay assessments to a guaranty association such as that proposed ifthe legislature has determined such payments serve a public purpose and sufBcient controls are in place to ensure the public purpose is accomplished.

In this particular case, however, we conclude your proposal wntravenes article III, section 52(a) as a matter of law. We base our conclusion on judicial and attorney generai decisions applying the section to mutual insuranw wmpanies. We also rely upon the history of a 1986 amendment to section 52(a).

In our opinion, the guaranty association your committee has proposed is analogous to a mutual insurance wmpany that operates on the basis of assessments. See 2 GEORGE J. COUCH, CYCLOPEDIAOF hmRANCE LAW 5 19:18, at 685 (2d ed. 1984) (stating that mutual company may operate on basis of cash premiums, assemments, or premium notes, or any combination of these). A mutual insurance company is one “in which the members mutually contribute to the payment of losses and expenses, and in which the indemnity or benefit to accrue is wnditioned upon persons holding similar wntracts.” Id. 8 19:14, at 680. Thus, a mutual company is one in which a member is both insurer and insured. Id. Consequently, “the policyholders are, so far as rights and remedies are wncerned, stockholders, the same as stockholders in a stock corporation.” Id. at 681; see Mrw C. ~OMSElT, INSURANCEDIC~ONARY 134 (1989) (defkring “mutual company” as “type of insurance company that is owned entirely by the policyholders, in proportionate shares”).

A mutual insurance company that operates on the basis of cash premiums issues what is wmmonly known as “nonassessablen policies. 2 COUCH,supra, $ 19:19, at 686. An owner of a nonassessable policy has no further obligation to contribute for the duration of the policy. Id. On the other hand, a mutual insurance company that operates on the basis of assessments “is dependent upon the collection of an assessment upon persons holding similar contracts.” Id. $ 19.42, at 704; see THOMSETT,supra, at 16 (defining ‘Lassessmentcompany”).

We turn to the judicial decisions to which we alluded earlier. In C@Yof Tyler v. Tern Employers’Insurance Ass’n, 288 S.W. 409 (Tex. Comm’n App. 1926, judgm’t adopted), the Texas Commission of Appeals considered whether an incorporated munici- pality may subscribe to the Texas Employers’ Insurance Association (the “TBIA”), an association to which employers that are subject to the workers’ compensation laws may subscribe. Id. at 411; see V.T.C.S. art. 8308, 8 7 (authorizing any employer who may be subject to workers’ compensation laws to subscribe to TEIA).

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The court noted that the TEL4 required its subscribers to pay a proportionate share of any assessment the TEL4 levied to cover its losses and expenses.3 Ciry of Tyler, 388 SW. at 41 l-12; see V.T.C.S. art. 8308, 8 15 (requiring TEIA to make assessment for amount necessary to pay losses in any year in which admitted assets in excess of unearned premiums are insufficient to pay incurred losses and expenses). The court cited two reasons article III, section 52 prohibited municipalities from subscribing to such an association. Fist, the court found that the TEL4 “is a corporation engaged in the insurance business on the mutual plan, whose subscribers are stockholders in such corporation.” C@J of Tyler, 388 S.W. at 412. Because article III, section 52 forbids the legislature from authorixing a political corporation to become a stockholder in an association or corporation, the wurt held that article III, section 52 precludes a municipality from becoming a member of the TIBIA. Id. Second, the court determined that, because a subscriber to the TEIA was obligated to pay assessments to wver the TEIA’s losses, any municipality that subscribes to the TEIA lends its credit in violation of article III, section 52. Id.

In Lewis v. ZnakpendeniSchool District, 161 S.W.2d 450 (Tex. 1942), the Texas Supreme Court reaflkmed its conclusions in Ciry of Tyler and other cases that the “clear and unambiguous” language of article III, section 52 “prohibits cities 6om becoming members of a mutual insurance association whose subscribers are stockholders in such company.” Lewis, 161 S.W.2d at 452.

This 05ce has concluded that a political subdivision’s purchase of assessable insurance coverage is tantamount to a lending of credit in contravention of article III, section 52. See, e.g., Attorney General Opinions H-1300 (1978) at 1; H-755 (1975) at 2; H-365 (1974) at 1. In Attorney General Opiion H-338 this 051~ wnsidered whether political subdivisions might participate in the Texas Municipal League’s Worhmen’s Compensation Joint Insurance Fund (the “fund”). The opinion determined that the iimd approximated some form of mutual insurance. Attorney General Opinion H-338 (1974) at 17-18. “[The fund] calls for the payment of premiums based on predicted, not actual, experience with the investment of unused funds, with profits to be returned to members as a reduction in premiums at some tinure time.” Id. The opinion concluded that the fund violated article III, section 52 of the constitution. Id.

Subsequently, in Attorney General Opinion H-338A this office considered whether a revamped fund contravened article III, section 52. Attorney General Opinion H-338A (1974) at l-2. Under a supplemental agreement, members of the timd agreed annually to pay into the 8md sums calculated with reference to each member’s actual expense and loss expe-riwce. Supplement to Attorney General Opinion H-338A (1974) at l-2. The opinion concluded that the timd did not contravene article III, section 52’s prohibition

3We timher note that the TEIA is authorizedto pay dividendsto ia subscribers.See V.T.C.S. art 8308, 5 16. Additionally,in any meetingof the subscribers,each s&scriberis entitled to one vote, araptthatanemploycroffmhundrrd~anployeesismtitledtotwovotesandancmployeris entiUedu,onevoteforcvcryfivehundred~nnployeesthereafter. Id. 58.

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against the lending of credit. Attorney General Opinion H-338A, at 2. Rather, the opinion stated, the amended find had “more nearly. the characteristics of self- insurance.”Id.

None of the judicial decisions or attorney general opinions that we have just cited have been overruled. Moreover, we believe the history of the addition of the last sentence to subsection (a) to article III, section 52 of the wnstitution indicates that these decisions and opinions wrrectly state the law. In an apparent belated response to the court’s holdings in Ciry of Tyler v. Texus Employers’Insurance Ass’n, 288 SW. 409 (Tex. Comm’n App. 1926, judgm’t adopted), and L.ewis v. Indepe~nt School Districi, 161 S.W.2d 450 (Tex. 1942), the legislature proposed in 1985 to amend article III, section 52(a) by authorizing the use of public funds for the purchase of certain nonassessable insurance policies from mutual insurance wmpanies. See Texas Legislative Council, Analyses of Proposed Constitutional Amendments Appearing on the November 4, 1986, Ballot 1’5 (Sept. 1986); see also House Comm. on Insurance, Bill Analysis, H.J.R. 73, 69th Leg. (1985). In our opinion, the legislature, by passing a resolution to amend section 52(a) in this fashion, and the electorate, by approving the amendment, intended to alter the law, as interpreted in C@ of Tyler and Lewis, but only to the extent the law precluded a political subdivision from purchasing certain nonassessable insurance policies from mutual insurance companies. See 12A TFX. JUR. 3D Conslituticma~Luw 5 23, at 326 (1993) (stating that constitutional provision is to be wnstrued in light of voters’ intention). We do not believe the legislature and electorate intended to authorize a political subdivision to purchase any assessable insurance policy from a mutual insurance company.

For this 05ce now to conclude that a political subdivision may purchase an assessable insurance policy from an association similar to a mutual insuranw company would be to disregard existing precedent and the 1985 amendment to article III, section 52(a) of the constitution. Relevant to the situation here, the Texas Supreme Court expressly has concluded that a political subdivision may not subscribe to a mutual insurance association that operates on the basis of assessments. Furthermore, the electorate has adopted an amendment to the wnstitution approving the use of public 8mds only for the payment of certain nonassessable insurance policies. In light of these compelling facts, we must conclude that the subcommittee’s proposal to establish a guaranty association, to rewire public insurance pools and public self-insurers to join the association, and to fimd the association through assessments on the members would, if enacted, violate article III, section 52(a) of the constitution for two reasons. Fii, the obligation to pay assessments to a mutual insurance company, which we contend the guaranty association is, constitutes an unwnstitutional lending of credit. Second, membership in a mutual insurance company that operates on the basis of assessments is tantamount to holding stock in a corporation, association, or company.

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SUMMARY

A proposal to establish a guaranty association, to require public insurance pools and public self-insurers to join the association, and to fund the association through assessments on the members would, if enacted, violate article JU, section 52(a) of the Texas Constitution for two reasons. Fi, the obligation to pay assessments to a mutual insurance company, such as the guaranty association, constitutes an unwnstitutional lending of credit. Second, membership in a mutual insurance. wmpany that operates on the basis of assessments is tanta- mount to holding stock in a wrporation, association, or company.

DAN MORALES Anomey General of Texas

JORGE VEGA Fii Assistant Attorney General

SARAH J. SHJRLBY Chair, Opinion Committee

Prepared by Kymberly K. Ohrogge Assistant Attorney General

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