                           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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HonorableKimBrimer       - Page 3           (DM-326)




        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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HonorableKimBrimer      - Page 4           (DM-326)




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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Honorable Rim Brimer - Page 6              (DM-326)




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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HonorabJeKimBrimer     - Page 7          (DM-326)




                                  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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