Honorable Kim Brimer Chair Committee on Business Industry Texas House of Representatives P.O. Box 2910 Austin, Texas 78768-2910
Re: Whether the legislature constitutionally may establish a guaranty association for the workers' compensation liabilities of political subdivisions in which the membership would be mandatory and as to which the funding would come through assessments imposed on the membership (RQ-742)
Dear Representative Brimer:
You have informed us that a subcommittee of the Committee on Business Industry (the "committee") has proposed a recommendation for the protection of the self-insurance funds of political subdivisions and the insurance pools of political subdivisions. Specifically, the subcommittee proposes that the legislature
[c]reate a guaranty association specifically for public insurance pools and public self-insurers separate from the Texas Property and Casualty Insurance Guaranty Association. Membership in this association would be mandatory. The association will pay claims in the event that assets of an insolvent pool or self-insurer are insufficient to pay claims.
You indicate that the membership would fund the guaranty association through assessments.
You evidently are concerned about the constitutionality of legislation such as that proposed, should the legislature enact it. You therefore ask 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 from, 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.
You have cited article
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 funds or credit for the payment of premiums on nonassessable life, health, or accident insurance policies and annuity 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 further 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." Tex. Const. art.
At the time this office issued Attorney General Opinion O-5315 and the electorate voted to add sections 60 and 61 to the constitution, courts and this office construed article III, section 52 strictly to preclude any expenditure of public funds to an individual, association, or corporation whatsoever. See, e.g., San Antonio Indep. Sch. Dist. v. Board of Trustees,
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. City of Lubbock,
In this particular case, however, we conclude your proposal contravenes article III, section 52(a) as a matter of law. We base our conclusion on judicial and attorney general decisions applying the section to mutual insurance companies. 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 company that operates on the basis of assessments. See 2 GEORGE J. COUCH, CYCLOPEDIA OF INSURANCE LAW § 19:18, at 685 (2d ed. 1984) (stating that mutual company may operate on basis of cash premiums, assessments, 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 conditioned upon persons holding similar contracts." Id. § 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 concerned, stockholders, the same as stockholders in a stock corporation." Id. at 681; see MICHAEL C. THOMSETT, INSURANCE DICTIONARY 134 (1989) (defining "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 commonly known as "nonassessable" 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 "assessment company").
We turn to the judicial decisions to which we alluded earlier. In City of Tyler v. Texas Employers' Insurance Ass'n,
The court noted that the TEIA required its subscribers to pay a proportionate share of any assessment the TEIA levied to cover its losses and expenses. City of Tyler,
In Lewis v. Independent School District,
This office 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
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 1-2. Under a supplemental agreement, members of the fund agreed annually to pay into the fund sums calculated with reference to each member's actual expense and loss experience. Supplement to Attorney General Opinion H-338A (1974) at 1-2. The opinion concluded that the fund did not contravene article III, section 52's prohibition against the lending of credit. Attorney General OpinionH-338A, at 2. Rather, the opinion stated, the amended fund 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 constitution indicates that these decisions and opinions correctly state the law. In an apparent belated response to the court's holdings in City of Tyler v. Texas Employers' Insurance Ass'n,
For this office now to conclude that a political subdivision may purchase an assessable insurance policy from an association similar to a mutual insurance 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 constitution approving the use of public funds 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 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 III, section 52(a) of the constitution for two reasons. First, the obligation to pay assessments to a mutual insurance company, which we contend the guaranty association is, constitutes an unconstitutional 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.
Yours very truly,
DAN MORALES Attorney General of Texas
JORGE VEGA First Assistant Attorney General
SARAH J. SHIRLEY Chair, Opinion Committee
Prepared by Kymberly K. Oltrogge Assistant Attorney General
[1] In general, a "covered claim" is "an unpaid claim of an insured or third-party liability claimant that arises out of and is within the coverage and not in excess of the applicable limits of an insurance policy to which this Act applies, issued or assumed (whereby an assumption certificate is issued to the insured) by an insurer licensed to do business in this state, if that insurer becomes an impaired insurer and the third-party claimant or liability claimant or insured is a resident of this state at the time of the insured event, or the property from which the claim arises is permanently located in this state." Ins. Code art.
[2] We note that, pursuant to its authority under sections 60 and 61 of the constitution, the legislature has enacted section
(1) becoming a self-insurer;
(2) providing insurance under a workers' compensation insurance policy; or
(3) entering into an interlocal agreement with other political subdivisions providing for self-insurance.
See also Attorney General Opinion H-338A (1974) (describing interlocal agreement as providing for self-insurance and as not inconsistent with "lending of credit" provisions of Texas Constitution article
[3] We further note that the TEIA is authorized to pay dividends to its subscribers. See V.T.C.S. art. 8308, § 16. Additionally, in any meeting of the subscribers, each subscriber is entitled to one vote, except that an employer of five hundred covered employees is entitled to two votes and an employer is entitled to one vote for every five hundred covered employees thereafter. Id. § 8.