                            June 22, 1987




Honorable David Cain               Opinion NO.   JM-724
Chairman
Transportation Committee           Re: Whether surplus lines carriers
Texas House of Representatives     under article 1.14-2 of the Insur-
P. 0. Box 2910                     ance, Code are eligible to act as
Austin, Texas   78769              sureties on performance and payment
                                   bonds under article 5160, V.T.C.S.

Dear Representative Cain:

     You ask whether a surplus lines insurance carrier, as defined in
article 1.14-2 of the Insurance Code, can act as a surety on the
performance and payment bonds required from contractors on certain
public projects by article 5160, V;T.C.S. We conclude that such bonds
cannot be executed by surplus lines carriers.

    Article 5160, V.T.C.S.. at subdivision A, provides:

            Any person or persons, firm, or corporation,
         hereinafter referred to as 'prime contractor,'
         entering into a formal contract in excess of
         $25,000 with this State, any department, board or
         agency thereof; or any county of this State,
         department, board or agency thereof; or any
         municipality of this State, department, board or
         agency thereof; or any school district in this
         State, common or independent, or subdivision
         thereof; or any other governmental or quasi-
         governmental,,authoritywhether specifically named
         herein or not, authorized under any law of this
         State, general or local, to enter into contractual
         agreements for the construction, alteration or
         repair of any public building or the prosecution
         or completion of any public work, shall be
         required before commencing such work to execute to
         the aforementioned governmental authority or
         authorities, as the case may be, the statutory
         bonds   as   hereinafter    prescribed,   but   no
         governmental authority may require a bond if the
         contract does not exceed the sum of $25,000. Each
         such bond shall be executed by a corporate surety
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Honorable David Cain - Page 2 (JM-724)




          or corporate sureties duly authorized to do
          business in this State. In the case of contracts
          of the State or a department, board, or agency
          thereof, the aforesaid bonds shall be payable to
          the State and shall be approved by the Attorney
          General as to form. In case of all other con-
          tracts subject to this Act, the bonds shall be
          payable to the governmental awarding 'authority
          concerned, and shall be approved by it as to form.
          Any bond furnished by any prime contractor in an
          attempted compliance with this Act shall be
          treated and construed as in conformity with the
          requirements of this Act as to rights created,
          limitations thereon. and      remedies provided.
          (Emphasis added).

V.T.C.S. art. 5160.

     This statute, where applicable, requires a Contractor to furnish:
(1) a performance bond in the amount of the contract and conditioned
upon the faithful performance of the work in accordance with the
persons, specifications, and contract documents, for the protection of
the governmental client and (2) a payment bond in the amount of the
contract, for the protection of those furnishina labor and materials
on the project.         See generally Greenvill; Independent School
                                    694 S.W.2d 410 (Tex. App. - Dallas
                                   ngleside v. Stewart, 554 S.W.2d 939
(Tex. Civ. App. - Corpus Christ1 1977, writ ref'd n.r.e.).

     Contractors subject to the bonding requirements in article 5160
may purchase the necessary bonds from guaranty, fidelity, or surety
companies. The bonds are furnished in return for a cash payment equal
to a percentage of their face value. At present, the Insurance Board
indicates that performance and payment bonds typically are available
for a cash payment equal to five to ten percent of fair value of the
bond. We can find no authority for the proposition that a corporate
surety is required by the Insurance Code tom furnish a payment or
performance'bond; thus, if the surety b~elievesthe risk of default is
too great, it may refuse to issue a bond.

     The bonds specified in article 5160 must be executed by a
corporate surety or sureties "duly authorized to do business in [the]
state." V.T.C.S. art. 5160. The making of a contract of guaranty or
suretyship -- the essence of executing a performance or payment bond
-- is an "act of insurance." Ins. Code art. 1.14-1, 92(a)(2). "Acts
of insurance" can only be done by entities authorized by the Insurance
Board pursuant to the provisions of the Insurance Code. Ins. Code
art. 1.14-1, §3.     (Article 2.01 of the Business Corporation Act
provides that no corporation may be organized or obtain any authority




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Honorable David Cain - Page 3   (JM-724)




to transact business in Texas under the terms of the Business
Corporation Act if any of its purposes is to operate any insurance
company of any type or character. Bus. Corp. Act art. 2.01(B)(4)(d)).
Thus, to obtain authorization to do business as a corporate surety, a
certificate of authority must be obtained from the Insurance Board.
Ins. Code art. 1.14, 81. An authorized corporate surety is regulated
as a property and casualty insurance company in accordance with the
provisions of subchapter B of the Insurance Code. Ins. Code art.
5.13. The bond of a surety company duly qualified to do business in
the state is conclusive proof that a contractor has met the
requirements of article 5160. Ins. Code art. 7.19-1.

     A surplus lines carrier is denominated specifically in the
Insurance Code as an unauthorized insurer -- one operating without the
required certificate of authority. Ins. Code art. 1.14-2, 54(b).
Surplus lines carriers furnish "types" ("lines") of insurance coverage
which cannot be obtained with diligent effort from authorized
insurers. Ins. Code art. 1.14-2, 953, 5. See also 28 T.A.C. 6915.7,
15.8 (1981) (the regulations implementing the surplus lines carrier
provisions of the Insurance Code). Only insurance agents specifically
licensed by the Insurance Board to issue surplus lines policies may
provide such insurance. Ins. Code art. 1.14-2. 54(a). We note that
the Insurance Code relieves the Insurance Board of any responsibility
to determine the financial condition or claims practice of any unauthor-
ized surplus lines insurer whose policies are sold by a licensed
agent. Ins. Code art. 1.14-2, §8(f). The duty of the Insurance Board
to evaluate the financial conditions of an authorized insurer is one
of the principal means used by the state to protect those who rely on
insurance coverage. See, e.g., Ins. Code arts. 1.10 (general duties
of the Insurance Board); 1.15 (duty of Insurance Board to periodically
examine the condition of carriers); and 1.32 (duty to take steps to
correct hazardous financial and business conditions of insurers).

     Accordingly, we find that the kinds of corporate sureties
"authorized to do business in the state" so as to be able to execute
suitable payment bonds acceptable under article 5160, V.T.C.S., are
only those companies authorized to furnish insurance in accordance
with the provisions of the Insurance Code. An authorized corporate
surety must possess a certificate of authority issued by the Insurance
Board. The Insurance Code is the only source for a comprehensive
statutory definitive meaning of an "authorized corporate surety" and
its provisions control the meaning of that term in article 5160. - e
City-of Baytown v. Angel, 469 S.W.2d 923 (Tex. Civ. App. - Houston
[14th Dist.] 1971, writ ref'd n.r.e.); Commercial Standard Fire and
Marine Co. v. Commissioner of Insurance, 429 S.W.2d 930 (Tex. Civ.
APP. - Austin 1968, no writ); 53 Tex. Jur. 2d Statutes 1161.




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Honorable David Cain - Page 4     (JM-724)




                                SUMMARY

            Article 5160. V.T.C.S., requires contractors on
         certain public projects in certain circumstances
         to execute performance and payment bonds furnished
         by corporate sureties authorized to do business in
         the state.    Surplus lines insurance carriers
         (including sureties), as defined in article 1.14-2
         of the Insurance Code, are not authorized to
         engage in the act of furnishing insurance, such as
         surety bonds, in the state, and may not furnish
         the bonds required by article 5160, V.T.C.S.

                                          Jz&



                                           JIM     MATTOX
                                           Attorney General of Texas

JACK HIGHTOWER
First Assistant Attorney General

MARY KELLER
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Don Bustion
Assistant Attorney General




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