                         QBfficeof tfp !Zlttornep @eneral
                                 iMate of Qexae
DAN MORALES                           September 21,1992
 ATTORNEY
      GENERAL


     Mr. Skip Meno                             Opinion No. DM-165
     Commissioner
     Texas Education Agency                   Re: Whether a school district can require
     1701 North Congress Avenue               a corporate surety to be sufficiently solvent
     Austin, Texas 78701-1494                 to issue bid, performance, or payment
                                              bonds without reinsurance, and related
                                              questions (RQ-98)

     Dear Commissioner Meno:

              You ask whether school districts in this state may require corporate sureties
     on bid bonds, payment bonds, and performance bonds to be sufficiently solvent
     under the Texas Insurance Code to issue these bonds without the necessity for
     reinsurance. If school districts may not require sufficient financial solvency without
     need for reinsurance, you ask whether school districts may require either (1) that a
     reinsurance company underwriting a bond be admitted and authorized to do
     business in Texas, or (2) that the reinsurer meet minimum financial standards set by
     the district. In light of recent changes in the laws governing the procurement and
     submission of bid bonds, payment bonds, and performance bonds on public
     improvement projects, we conclude that a school district may not establish minimum
     financial standards for reinsurance companies. However, because these laws
     require a reinsurance company underwriting any portion of a performance or
     payment bond which exceeds ten percent of a surety company’s capital and surplus
     to be “duly authorized, accredited, or trusteed to do business in this state,” a school
     district may reject any such bond which does not meet this requirement.

             The answers to your questions are governed by article 5160, V.T.C.S., and
     section 7.19-1 of the Insurance Code. Both provisions were amended during the
     most recent session of the Texas Legislature. See Acts 1991, 72d Leg., ch. 242,
     86 11.28, 11.29, at 1067-68 (amending both); Acts 1991, 72d Leg., 2d C.S., ch. 12,
     0 5.01, at 319 (amending art. 7.19-1). Article 5160 requires any person or persons,
     firm, or corporation entering into a contract with a governmental entity, including a
     school district, for the construction, alteration, or repair of any public building or
     public work valued in excess of $25,000, to execute a performance bond and a
     payment bond in the amount of the contract. V.T.C.S. art. 5160, sub& A. The 1991

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Mr. Ship Men0 - Page 2                 W-165)




amendment to article 5160 requires each such bond to be executed by a corporate
surety or sureties in accordance with section 1 of article 7.19-l of the Insurance
Code. Prior to the amendment, the statute provided only that such corporate
sureties be “duly authorized to do business in this State.

       Prior to its amendment in 1991, article 7.19-l provided the following, in
pertinent part:

              Whenever any bond . . . is, by law or the charter, ordinances,
         rules and regulations of a municipaLity, board, body,
         organixation, court, judge or public officer, required or
         permitted to be made, given, tendered or filed, and whenever
         the performance of any act, duty or obligation, or the refraining
         from any act, is required or permitted to be guaranteed, such
         bond . . . may be executed by a surety company duly quali6ed to
          do business in this state; and such aecution by wch conpany of
         such bond.. .shaZl be in all mpects a full and complete
         comphnce with every law, charter, nrle or ngdation that such
         bond...shallbeexecuredbyonesuretyorbyoneormoresuretier,
         or that such SW&S shall be trdents, or househokien, or
         jkeholdem, or either, or both, or pess       any other quab@ation
          and all courts, judges heads of departments, boards, bodies,
          municipalities, and public officers of every character shaZZaccept
          andtnxtsuch bond... when so executed by such company, IIS
          confkning to, and fully and complete@ comp&ing With, ewy
          requirement of every such law, &Her, onihance, rule, or
          ni?gdion.

Ins. Code art. 7.19-l (pre-1991 language) (emphasis added).

        The courts uniformly held that this version of article 7.19-1 and its statutory
predecessor allowed local officials no discretion to determine the Cnancial solvency
of surety companies. See Z&matZonaZ Fidelity Ztu. GJ. v. Sheriff of Dollar Cbu@,
476 S.W.2d 115, (Tex. Civ. App.-Beaumont 1972, writ ref d n.r.e.); Peep&x v. Nogel,
137 S.W.2d 1064 (Rx. Civ. App.-Galveston 1940, writ dism’d). The courts
reasoned that local officials, no matter how sincere, were ill-equipped to perform
this function and that these matters were for the determination of experts employed
by the commissioner of insurance. ZntemaffonuZFidel&y Insurance Co. Come-
quently, if the bonds were in proper form and properly executed, approval by the
local official was ministerial, absent some fact that would justify a refusal to

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Mr. Skip Meno - Page 3                (IX-165)




approve. Lawyers Surety Corp. v. Ran&in, 500 S.W.2d 181 (Tex. Civ. App.-Houston
[14th Dist.] 1973, writ refd n.r.e.). The courts were not unsympathetic to the
dilemma of local governments, but conceded that any deficiencies in this system
could only be addressed by the legislature. ZntemutiornaZ
                                                        Fidelity Znsmmce Co.

        Your questions are prompted by the concerns expressed by some school
districts that state law provides little control over the financial condition of
companies that reinsure portions of the risk undertaken by surety companies
executing performance and payment bonds under article 5160. It is suggested that
state laws do not require reinsurers of surety companies to be licensed in Texas and
do not prescribe minimum capital and surplus requirements for reinsurers.
ConsequentIy, there is great concern that reinsurers may be incapable of paying
claims on surety bonds offered to school districts and that the school districts
themsehres wiII be required to pay any such losses.

       The 1991 amendment of article 7.19-l addresses several of these concerns.
The amendment redesignated the above-quoted language as subsection (a), added a
new subsection (b), and inserted the words “except as provided by Subsection (b) of
this section” before the first italicized phrase above. Subsection (b) provides the
foIIowing in pertinent part:

              (b) Ifanyhnd . ..isinanamountinexcessof          lopercent
         of the surety company’s capital and surplus, the municipality,
         board, body, organization, court, judge, or public officer may
         require, as a condition to accepting the bond.. .written
         certiilcation that the surety company has reinsured the portion
         of the risk that exceeds 10 percent of the surety company’s
         capitai and surplus with one or more reinsurers who are duly
         authorized, accredited, or trusteed1 to do business in this state.




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h4r.SkipMeno     - Page 4                   (IN-165)




          For the purposes of this subsection, the amotmt reinsured by any
          reinsurer may not exceed 10 percent of the reinsurer’s capital
          and surplus. The State Board of Insurance shall furnish, on
          request, the amount of the allowed capital and surplus as of the
          date of the last annual statutory Cnancial statement for a surety
          company or reinsurer authorized and admitted to do business in
          this state.

Ins. Code art. 7.19-l(b) (footnote added).

        ‘Ihe 1991 amendments to articles 5160 and 7.19-l accomplish several things.
First, they authorize local officials to obtain information from the Department of
Insurance regarding the condition of the surety company’s capital and surplus for
pmposes of dete rmining whether to consider requiring the surety company to obtain
reinsurance. Second, article 7.19-1 effectively authorizes political subdivisions to
require that corporate sureties secure reinsurance for the portion of any risk that
exceeds ten percent of the surety company’s capital and surphrs. Third, article 7.19-
1 requires reinsurers to be “duly authorized, accredited, or trusteed to do business in
this state.*

       Although the recent changes in article 5160 and 7.19-1 delegate some control
to local officials, the primary responsibility for monitoring the financial condition of
surety companies hnnishing bonds under article 5160 -and now reinsurers
underwriting such bonds - remains with the Department of Insurance. In view of
the department’s continuing role in the process, particularly where reinsurers are
concerned, we are reluctant to conclude that political subdivisions are delegated
greater authority to regulate surety companies submitting bonds under article 5160
or their reinsurers. Furthermore, since the legislature has expressly conferred on
some political subdivisions the authority to establish financial criteria for surety
companies providing performance and payment bonds, see, eg., Local Government
Code section 271.025(e) (enacted in 1989, authorizing a county with a population of
2.2 million or more and certain special districts to impose such criteria), we do not
interpret the 1991 amendments to article 5160 and article 7.19-1 as impliedly
conferring such authority on other political subdivisions with regard to reinsurers.




         %4lthough the 1991 legishtion deleted from article 5160 the rqldrcmeot that P corporate
surety he duly authorized to do bwioess in Texas, a&section (a) of article 7.19-l retains this
qualificatioo.


                                          p. 869
Mr. Skip Meno - Page 5                  CM-165)




        Accordingly, your first question-whether      a school district may require
corporate sureties to be sufficiently solvent to issue bonds without reinsurance -
may be answered in the negative. Your second question - whether school districts
may require reinsurance companies to be admitted and authorized to do business in
Texas - is resolved by subsection (b) of article 7.19-l. School districts may reject
surety bonds, any portion of which exceeds ten percent of the surety company’s
capital and surplus, that are underwritten by reinsurers that are not duly authorized,
accredited, or trusteed to do business in this state. Your Snal inquiry-whether
school districts may establish minimum financial requirements for reinsurers-is
answered in the negative.

                                 SUMMARY

               Surety companies furnishing bid bonds, performance bonds,
          and payment bonds under article 5160, V.T.C.S., must be duly
          authorized to do business in Texas. Ins. Code art. 7.19-l(a).
          School districts may require corporate sureties to obtain
          reinsurance for any portion of the risk that exceeds ten percent
          of the surety’s capital and surplus. Reinsurers of such bonds
          must be “duly authorized, accredited, or trusteed” to do business
          in Texas. Id. art. 7.19-l(b). A school district may reject a surety
          bond which does not meet these requirements. School districts
          may not forbid surety companies from obtaining reinsurance in
          accordance with article 7.19-l. or establish minimum financial
          standards for reinsurers underwriting such bonds beyond those
          permitted by article 7.19-1.




                                                  DAN      MORALES
                                                  Attorney General of Texas




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Mr. Skip Meno - Page 6                CM-165)




WILL PRYOR
First Assist& Attorney General

MARY KELLER
Deputy Assistant Attorney General

RENEAHIcK!5
Special Assistant Attorney General

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Steve Arag&
Assistant Attorney General




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