.




                              September 1, 1989



    Mr. J. E. Birdwell, Jr.          Opinion No. JR-1092
    Chairman
    Texas Agricultural               Re:   Liability of members of
      Finance Authority              the board of directors of the
    P. 0. BOX 12847                  Texas Agricultural    Finance
    Austin, Texas 78711              Authority   (RQ-1637)

    Dear Mr. Birdwell:

          You inquire about the personal    liability   of board
    members of the Texas Agricultural     Finance Authority,     a
    public authority   within the Department    of    Agriculture
    established by the Texas Agricultural Finance Act.     Agric.
    Code 55 58.001-58.039; see Tex. Const. art. III, 5 52-a
    (legislature may provide for creation of programs to. foster
    growth of agricultural  enterprises).  The purposes of the
    authority are stated in section 58.021 of the Agriculture
    Code:

                (a) In order to promote the expansion,
            development, and diversification of produc-
            tion, processing,   marketing, and export of
            Texas agricultural   products,  the authority
            shall design and      implement programs   to
            provide   financial assistance   to  eligible
            agricultural businesses, including programs:

                     (1) to make or acquire      loans     to
               eligible agricultural businesses:

                     (2) to make or acquire loans to
               lenders to enable those lenders to make
               loans to eligible agricultural businesses;

                     (3) to   insure,    coinsure,  and
               reinsure, in whole or in part, loans to
               eligible agricultural businesses;

                     (4) to guarantee,  in    whole or in
               part, loans     to eligible     agricultural
               businesses: and




                                    p. 5716
Mr. J. E. Birdwell - Page 2   (JM-1092)




                 (5) to administer or participate in
           programs established by another person to
           provide financial assistance to eligible
           agricultural businesses.

The board may issue revenue bonds to provide funds to     carry
out any of these purposes.  Agric. Code 5 58.033.

     Since the board of directors     of the Agricultural
Finance Authority   will be responsible   for handling   a
substantial amount of money,  questions have arisen  about
board members' exposure to liability.  Your first question
is as follows:

             May the Board be found personally liable
        for causes of actions arising out of the
        performance of board duties?

     We assume that you are concerned       about   personal
liability for negligence  in handling  funds-, not liability
for intentional violations of the civil or criminal law, or
actions taken in bad faith. See Brad
(Tex. 1890) (comptroller's chief clIrkvliab?z ;o'~h~."st~~~
for funds he embezzled):    %oraer Index. School Dist. v.
Dickson  52 S.W.Zd 505 (Tex. Civ. App. - Amarillo 1932, writ
ref*d) ischool trustees personally liable for unauthorized
action taken for corrupt motives):  Grimm v. Arizona Bd. of
Pardons and Paroles, 564 P.2d 1227 (Ariz. 1977) (members of
parole board may be personally liable for reckless  decision
in releasing prisoner).

     Section 58.016(e) of the code provides as follows:

           The board members,    administrator,    and
        staff of the authority may not be personally
        liable for bonds issued or contracts executed
        by the authority and shall be exculpated   and
        fully indemnified in the documents    relating
        to any bonds except in the case of fraudulent
        or wilful misconduct   on the part of the
        individual seeking exculpation   or indemni-
        fication.

     This exculpatory provision protects board members   from
liability to members   of the public   for bonds  issued or
contracts executed, with the exceptions   stated. They are
also protected   by the    doctrine  of official    immunity
recognized  by the Texas courts.      See Attorney   General
Opinion JM-404 (1985). A public officer is not ordinarily
liable for mistaken   judgment in performing   discretionary
acts within the course and scope of his public duties.    See



                              P- 5717
 Mr. J. E. Birdwell - Page 3    (JM-1092)




 generallv CamDbell v. Jones,   264 S.W.Zd 425 (Tex. 1954) ;
 Rains v. SimDson, 50 Tex. 495 (1878); Torres v. Owens,    380
 S.W.Zd 30 (Tex. Civ. App. - Corpus Christi 1964, writ ref'd
 n.r.e.).    He will be liable for mistaken      judgment   or
 unauthorized acts if he acts willfully      or maliciously.
 CamDbell v. Jones, m;       Stein v. Hiahland   Park IndeD.
 School Dist., 540 S.W.Zd 551    (Tex. Civ. APP. - Texarkana
 1976), aff'd, 574 S.W.Zd 807    (Tex. Civ. App. - Texarkana
 1978, writ dism'd).  The doctrine of official immunity does
 not bar a suit to enjoin a public official's    unauthorized
 act, nor does it apply to ministerial functions. See Texas
 Hiahwav Comm*n v. Texas Ass'n of Steel ImDorters, 372 S.W.Zd
 525 (Tex. 1963); Rains v. SimDson, SuDra; Attorney   General
 Opinion JM-404.

      Federal courts, however, use a different       test of
 official immunity.   See Attorney General Opinion JM-404.
 Administrative officers who perform discretionarv  functions
 have only a qualified    immunity from suit f&z personal
 liability. Barlow v. Fitzaerald    457 U.S. 800 (1982); see
 aenerally Civ. Prac. & Rem. Cod; ch. 104 (state liability
 for conduct of public servants).

       Public officers are moreover   accountable to the state
  for public  funds in their custody.     &.% Brown v. Sneed
  suDra; Attorney    General Opinions JM-153     (1984): O-637;
  (1945); 42 Tex. Jur.3d Government Tort Liabilitv 5 60, at
>.117. Cf. Tex. Const. art. III, § 20 (discharge); id. art.
  IV, 5s 24, 25   (custodians of funds): Gov't Code    §!j41.009
  (action by district    or county attorney to compel      local
  officer to perform    duty to collect or safeguard      public
  funds), 402.026 (action by attorney general to recover state
  funds). A board member's liability to the state for state
  funds is not affected by section 58.016(e) of the code.

       Your second question is as follows:

              May the Board increase its protection
          from liability  and at the same time limit
          its exposure from liability,   in either an
          official   or    individual   capacity,  by
          increasing the amount of its surety bond
          coverage from $25,000 to $lOO,OOO? or by
          obtaining additional insurance coverage?

      In answer to your first question we found that both the
 statute and the common law accord board members considerable
 immunity from liability  to members of the public. We assume
 that the board   is interested in increasing its protection
 from liability only in the areas where it is not immune,
 that is, its liability to the public, if any, which is not



                                P. 5718
Mr. J. E. Birdwell - Page 4    (JM-1092)




covered by the immunity provisions,   and its   accountability
to the state for public funds.

      The State Employee    Bonding Act, which prescribes
uniform standards  for the bonding   of state officers and
employees, includes the following definition:

           'Bond' means any agreement under which  an
        insurance company becomes obligated as surety
        to pay, within certain limits, loss caused by
        the dishonest acts of officers and employees,
        or to pay for loss caused by failure of
        officers or employees  to faithfully perform
        the duties of the offices or positions held.

V.T.C.S. art. 6003b, § 3(a).

      Each director    of the Texas Agricultural     Finance
Authority is required to execute a surety bond in the amount
of $25,000 conditioned on faithful performance of the duties
of director.   Agric. Code 5 58.012(d).    The cost of the
$25,000 bond is paid by the authority. L&     This provision
sets a limit on the expenditure the authority may make to
purchase surety bonds for its members.  &% Tex. Const. art.
III, § 44;    Attorney    General  opinion    H-533  (1975).
Accordingly, the board is not authorized     to pay more   in
surety bond premiums for its members than the premium for a
$25,000 bond.

     You have not asked us to consider   a specific kind of
insurance coverage.  In addressing your question we will use
errors and omissions   coverage   as an illustration.    Our
answer does not apply to a particular insurance    contract,
and the board's power to enter into any such contract will
depend in part on whether  its statute permits it to accept
the specific contract provisions.

     Errors and omissions coverage is a form of malpractice
insurance designed   to protect   an insured from the con-
sequences of his negligent acts, errors, and omissions.    It
does not ordinarily cover dishonesty, intentional fraud, or
criminal or malicious   acts. See St. Paul Ins. v. Bonded
Realtv, 578 S.W.Zd 191 (Tex. Civ. App. - El Paso), ti
ref'd n.r.e. oer curiam,     583 S.W.Zd   619  (Tex.   1979);
Attorney  General opinion H-1042     (1977); 13A G. Couch,
Cyclopedia of Insurance Law, § 48:166, at 166 (2d rev. ed.
1982). We assume,    for purposes  of this opinion, that an
errors and omissions   policy could be written to cover the
board's liability to the state as well as to members of the
public.




                               P. 5719
Mr. J. E. Birdwell - Page 5     (JM-1092)




     You direct our attention to section     58.022(7) of the
Agriculture Code as a possible     source    of authority  to
purchase insurance for board members.

        me authoritv   has all oowers necessarv   to
        accomolish the ournoses  and oroarams of the
        authoritv. includina the Dower:

             . . . .

              (7) to procure insurance and pay pre-
           miums on insurance     of any type,     in
           amounts, and from insurers as the board
           considers  necessarv   and advisable    to
           accomplish any of its purposes.  (Emphasis
           added.)

      To accomplish its purposes and implement its programs,
the authority must handle state funds allocated to it for
those purposes.   We believe it may take reasonable steps to
protect the interest of the public and the state in these
funds, including the purchase of insurance to protect
against   loss of    the funds through     the board's     own
negligence.   Board members are personally  liable for their
own negligence   in handling   funds and would remain   liable
whether or not they are covered by errors and omissions
insurance.    Nonetheless,   the state#s and the      public's
interest in the funds held by the board might be much better
protected   by an insurance policy than by a suit for
negligence against board members who may not have sufficient
funds to pay the judgment.

     Several prior opinions of this office have stated
categorically that errors and omissions coverage for public
officers and employees would benefit only those persons      and
not the governmental entity that they serve.          See. e.a.,
Attorney General Opinions NW-276 (1980); M-441 (1969); C-607
(1966); C-506 (1965). The opinions go on to conclude        that
an expenditure    of public   funds    to   provide  errors  and
omissions coverage for a public officer would be a grant of
public funds in violation of article III, sections 51 and
52, of the Texas Constitution    unless the premiums are paid
as a form   of compensation.  w     Attorney General    Opinions
MW-276, MW-156 (1980); H-1042 (1977). These opinions do not
consider whether   the governmental    entity as well as the
individual   officer  might  have   an    interest  in insuring
against   a loss of public      funds through the officer's




                               PO 5720
Mr. J. E. Birdwell - Page 6    (JM-1092)




negligence.1  Nor are these opinions consistent with more
recent statements of the law by the courts and this office,
as an examination of their reasoning will show.

     Attorney General Opinion C-506 (1965) found unconstitu-
tional a statute requiring  a county to pay premiums on an
errors and omissions insurance policy for the county clerk.
The opinion based its conclusion on the rule "that a county
is not liable for the tortious or negligent      acts of its
officers, agents or employees.11    Attorney General  Opinion
C-506,.at 2.   It then reasoned that payment    of a damages
claim arising  out of the county clerk's performance       of
his official duties would constitute    a gift or grant    in
violation of article III, sections   51 and 52, of the Texas
Constitution,  concluding  that "it would likewise be a
violation of the same constitutional provisions for a county
to pay the premiums on an insurance policy which had as its
purpose the paying of a claim predicated on facts which
generated no county liability." L     at 3.

     Subsequent authorities have modified the rule on which
Attorney General Opinion C-506 based its conclusion.    Letter
Advisory No. 24 (1973) held constitutional    a statute that
would provide  for the defense    of county officials      and
employees by district or county attorneys, or by county-paid
private counsel, in certain lawsuits. m    Local Gov't Code
5 157.061 (formerly codified as V.T.C.S.   art. 332~).     The
opinion stated that "there is no constitutional   prohibition
against the use of public     funds to defend     a county's
interest in a legal contest, even if the county is not named
as a party to the suit." Letter Advisory No. 24, at 2. The
county attorney   could represent   a county official
employee if the county's interests are at stake and g:
believes in good faith that the officer or employee        has
acted within  the proper scope of his authority       in the
performance of public duties.   Id. at 3; see also Attorney
General Opinions JM-755 (1987); H-887 (1976); H-544    (1975);
see aenerallv Citv of Corsicana v. Babb, 290 S.W. 736
(Tex. Comm'n App. 1927, judgm't adopted)    (city may employ



     1. Attorney General Opinion NW-276 (1980), in con-
cluding that a purchase of errors and omissions coverage for
trustees of state retirement systems would benefit only the
trustees, stated that the systems were already protected  by
performance bonds required of the trustees and paid for with
public funds.   This observation  suggests that errors and
omissions insurance could be provided at public expense   if
necessary to protect retirement funds.




                              P. 5721
Mr. J. E. Birdwell - Page 7   (JM-1092)




attorney to defend policemen   indicted for killing a person
while attempting  to arrest him): Chandler v. Saenz,      315
S.W.2d 87 (Tex. Civ. App.    - San Antonio  1958, writ  ref'd
n.r.e.) (city council may use public    funds to defend  suit
contesting two year terms for city officers).

     Moreover, the legislature has adopted the Tort Claims
Act, authorizing   the use of public    funds to reimburse
individuals   injured by the negligence    of   governmental
employees and waiving   its immunity from suit and from
liability to the extent set out in that statute. Civ. Prac.
& Rem. Code ch. 101; M   id. 55 101.021, 101.025.  In Harris
Countv v. Dowlearn, 489 S.W.Zd 140 (Tex. Civ. App. - Houston
[14th Dist.] 1972, writ ref'd n.r.e.), the court concluded
that the Tort Claims Act did not authorize a grant of public
funds to individuals in violation of article III, sections
51 and 52, of the Texas Constitution.  See also Civ. Prac. &
Rem. Code ch. 104.

     Since Attorney General Opinion C-506 was issued, the
legislature, the courts, and the opinions of this office
have recognized   that a governmental entity may have an
interest in representing   public servants in suits arising
from their negligence in performing public duties.      In. a
proper case, the expenditure of public funds to pay for the
individual's   legal representation   and damages does not
violate the constitution.    We overrule the statements    in
Attorney General Opinion C-506 and its progeny      that the
purchase of errors and omissions insurance coverage for a
public officer or employee violates the constitution   unless
it is part of compensation.

     Article III, sections 51 and 52, of the Texas Constitu-
tion do not prohibit the authority   from buying errors and
omissions insurance to protect the state, or members of the
public in cases outside   of the immunity provisions,   from
loss of its funds through the negligence of board members.
If the board determines in good faith that purchase of such
insurance is necessary   and advisable   to carry out its
purposes, it may spend public     funds for the premiums.
Attorney General Opinions MW-276, MW-156, H-1042,     M-441,
C-607 and C-506 are overruled     in accordance   with this
opinion.

     Your third question is as follows:

            Are Board members   state employees  for
        purposes of Chapter 104. State Liability for
        Conduct of Public Servants,    of the Civil
        Practice and Remedies Code?




                              P. 5722
Mr. J. E. Birdwell -.Page 8   (JM-1092)




     Section 104.001 of the   Civil Practices   and   Remedies
Code provides in part:

           In a cause of action based on conduct
        described in Section 104.002, the state shall
        indemnify the following persons   for actual
        damages, court costs, and attorney's     fees
        adjudged against:

               (1) an employee,   a member   of    the
           governing board, or any other officer of a
           state agency, institution, or department.

     Section 104.002 provides as follows:

           The state is liable for indemnification
        under this chapter only if the damages are
        based on an act or omission by the person   in
        the course and scope of the person's  office,
        employment, or contractual performance for or
        service on behalf of the agency, institution,
        or department and if:

               (1) the damages arise out of a cause
           of action for negligence, except a wilful
           or wrongful act or an act of gross negli-
           gence; or

               (2) the damages arise out of a cause
           of action   for deprivation  of a right,
           privilege,   or immunity secured by the
           constitution or laws of this state or the
           United States,  except when the court  in
           its judgement or the jury in its verdict
           finds that the person acted in bad faith,
           with conscious  indifference  or reckless
           disregard: or

              (3) indemnification is in the interest
           of the state as determined by the attorney
           general or his designee.

See also Civ. Prac. & Rem. Code § 104.003 (limits on     state
liability for indemnification).

     Members of the board of directors of the Texas Agricul-
tural Finance Authority  are covered by chapter 104 of the
Civil Practices and Remedies Code. Although a board member
is probably not an employee within   section 104.001(l),  he
is *Iamember of the governing board, or any other officer of
a state agency,  institution, or department . . . .'I See.



                              p. 5723
    Mr. J. E. Birdwell - Page 9      (JM-1092)
,




    -,    Agric. Code 55 58.012(a) (membership of board), 58.021
    (purposes of board), 58.022 (powers of the board). Directors
    of the authority are therefore covered by chapter 104 of the
    Civil Practices and Remedies Code.

                           SUMMARY

              Members of the board of the Texas Agri-
           cultural   Finance Authority    may be    found
           personally liable for causes of action       in
           favor of the state       arising out of     the
           performance   of   board duties,    but   board
           members, acting within the scope of their
           office, will not be held personally liable to
           members of the public for errors or omissions
           in the issuance of bonds or the execution    of
           contracts which do not constitute    fraudulent
           or willful conduct.

               The Authority  may use public   funds to
           purchase  for its    directors insurance   to
           protect the state's or the public's  interest
           in the funds it handles.

              Members of the board of directors of the
           Texas Agricultural    Finance Authority    are
           covered by chapter 104 of the Civil Practice
           and Remedies Code which indemnifies employees,
           members  of a governing    board, and    other
           officers of a state agency, institution,    or
           department in certain causes of action.




                                        JIM     MATTOX
                                        Attorney General of Texas

    MARY KELLER
    First Assistant Attorney General

    LOU MCCREARY
    Executive Assistant Attorney General

    JUDGE ZOLLIE STEAKLIZY
    Special Assistant Attorney General

    RICK GILPIN
    Chairman, Opinion Committee

    Prepared by Susan L. Garrison
    Assistant Attorney General

                                     P. 5724
