Untitled Texas Attorney General Opinion ( 1991 )

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DAN MORALES December 18.1991
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GENERAL
Honorable Joe Lucas Opinion No. DM-70
El Paso County Attorney
Room 201, City-County Building Re: Whether Local Government Code
El Paso, Texas 79901 section 282.024 in itself exempts
municipal purchases of excess or
surplus insurance. from competitive
bidding, and related questions
@Q-127)
Dear Mr. Lucas:
Your questions relate to the provisions of a 1985 amendment to the statutes
governing purchases by municipalities. Those provisions, now codified as section
252.824 of the Local Government Code. state:
This chapter does not prevent a municipality from selecting
a licensed insurance broker1 as the sole broker of record to
obtain proposals and coverages for excess or surplus insurance
that provides necessary coverage and adequate limits of
coverage in structuring layered excess coverages in all areas of
risk requiring special consideration, including public official
liability, police professional liability, and airport liability.2 The
broker may be retained only on a fee basis and may not receive
1We note at the outset that we tind nothing in Texas law specifically providiq for kensure as
an “insuraoce broker.” See Ins. Code arts. 21.07 (licensing of iesurancc “agents’), 21.14 (licensing of
-local r-ding agents” and “solicitors”). You do not spcdscaliy ask about the. effect, if any, of this
appareot aoomdy in section 252.024, and we do not address it here.
Z”AnI-‘polieyironcthatprovidestbattheiPrurcrirliablconlyforthcucessaboveand
beyond that which may be colkctcd on other insurance. BmwnsviUe Fabdcs, Inc. v. Guy Ins. Gx, 550
S.WJd 332,337 (Tex. Cii. App.--Corpus Christi 1977, tit reed n.r.e.).
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Honorable Joe Lucas - Page 2 (DM-70)
any other remuneration from any other source. (Footnotes
added.)
Chapter 252 of the Local Government Code, the chapter to which section 252.024
refers, generally requires that municipal contracts requiring expenditures in excess
of stated amounts be let pursuant to the competitive bidding procedures provided
for in the chapter. Ia! Q 252.021.
You state:
The Director of Risk Management for the City of El Paso is of
the opinion that the concept of “layered excess coverages” in
Section 252.024 is broad enough to allow the City to obtain
proposals through a licensed broker (in lieu of the bid process)
for all insurance coverages in excess of a given retention amount
or in excess of a large deductible.
You ask specifically in this regard: “What are the retention and deductible amounts
the coverage must be in excess of?” You conclude in the brief submitted with your
request that section 252.024 “exempts municipalities from competitively bidding any
insurance that exceeds the stated retention or deductible amounts in an insurance
policy.” We disagree.
Concededly, the language of section 252.024 is susceptible of various possible
constructions. Parsing that language to read that nothing in chapter 252 prevents a
municipality from selecting a broker “to obtain. . . coverages for excess or surplus
insurance” arguably supports the interpretation of the provisions offered by the city’s
director of risk management. In our opinion, however, section 252.024 should be
construed more narrowly. Actual purchases of such insurance continue to be subject
to the applicable notice and bidding procedures provided for in chapter 252. See id.
8s 252.021, 252.041, 252.043; see alro Attorney General Opinion MW-494 (1982)
(construing similar predecessor language in county purchasing statute to subject
insurance purchases to competitive bidding). While other provisions of chapter 252
may permit such purchases to be made without competitive bidding in particular
cases, see, e.g., id. 5s 252.021 (establishing the threshold purchase amounts for
purposes of competitive bidding requirements), 252.002(7) (sole-source exemption),
we do not believe section 252.024 itself operates to exempt such purchases from
competitive bidding.
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Exceptions, particularly when they are added by amendment, are generally to
be narrowly construed. See, e.g., City of Corpus Christi v. L. C. McClaugheq, 284
S.W.2d 927, 928-29 (Tex. Civ. App.--San Antonio 1955, writ refd).’ Also, there is a
strong public policy favoring the competitive bidding of public purchases that makes
us additionally cautious in construing exceptions to the requirements. The purpose
of the requirements “is to stimulate competition, prevent favoritism and secure the
best work and materials at the lowest practicable price, for the best interests and
benefit of the taxpayers and property owners.” Sterett v. Bell, 240 S.W.2d 516, 520
(Tex. Civ. App.--Dallas 1951, no writ) (quoted in Texas Highwq Comm’n v. Texas
Ass’n of Steel Importers, 372 S.W.2d 525,527 (Tex. 1963)).
The provisions of section 252.024 were first adopted in 1985 as part of a bill
that substantially rewrote former article 2368a, V.T.C.S., and other statutes
governing city and county purchasing. Acts 1985, 69th Leg., ch. 505, at 2090. In
1987, article 2368a was codified, without substantive change, in chapter 252 of the
Local Government Code. Acts 1987, 70th Leg., ch. 149, at 707. The language of
former article 2368a, providing for municipal competitive bidding requirements and
exceptions thereto, is worth noting:
The term “exempted procurements” shall include any of the
following:
(1) procurements made in case of public calamity . . . ;
.. . .
(6) the purchase of land or right-of-way.
Acts 1985, 69th Leg., ch. 505, 5 1, at 2090. The list of exempted procurements did
not include any specific references to insurance purchases.
Except in the case of exempted procurements, no city [with a
stated population] shah make a contract requiring an
expenditure or payment [in stated amounts]. . . without first
3The contrary rule, calling for liberal construction of exceptions intended to remedy individual
hardships, would not, we think, apply in interpreting section 252.024. See Caddy v. First Nat’1 Bank, 283
SW. 277,280 (Tex. Civ. App.--Beaumont 1923, no wit).
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Honorable Joe Lucas - Page 4 (DM-70)
submitting such proposed contract to competitive sealed bidding
or competitive sealed proposals.4
Id 5 2, at 2091.
If the legislature had intended generally to exempt excess or surplus
insurance purchases from the competitive bidding requirements now codified in
chapter 252, we think it would have specifically listed such kinds of purchases among
the “exempted procurements” provided for at the time the provisions now codified in
section 252.024 were adopted. No substantive change was intended when the above-
referenced provisions of former article 2368a were codified as part of Local
Government Code chapter 252. Local Gov’t Code 8 1.001; see id. !jQ252.021
(“municipality must comply with the procedure prescribed by this chapter for
competitive sealed bidding or competitive sealed proposals”), 252.022 (“chapter does
not apply to an expenditure for” listed items, which were set out as “exempted
procurements” in former article 2368a).
We note, too, that your question -- what retention or deductible amounts the
coverage must be in excess of in order for the purchase of that coverage to be
exempt from the competitive bidding requirements -- in itself reveals a major
difficulty in construing section 252.024 as itself exempting municipal purchases of
surplus or excess insurance from the competitive bidding requirements. The section
provides no guidelines as to what basic coverage amounts a municipality would have
to obtain in order to qualify for the exemption for surplus or excess coverage. Your
brief suggests that section 252.024 “exempts municipalities from competitively
bidding any insurance that exceeds the stated retention or deductible amounts in an
insurancepolicy.” (Emphasis ours.) If this were the case, municipalities could avoid
competitive bidding for virtually all insurance purchases by purchasing minimal
basic coverage or self-insuring in only token amounts and characterizing all
additional coverages as “excess or surplus” coverages. We do not believe the
legislature intended this result.
The kinds of risks to be insured against that are within the scope of section
252.024 are those kinds requiring “special consideration,” where “layered excess
4A municipality may use the competitive sealed proposal procedure only for “high technology
procurements.” See now Local Gov’t Code $8 252.021, 252.042. Compare id 8 262.030 (permitting
counties to use the alternative competitive sealed proposal procedure for both high technology items
and insurance).
p. 353
Honorable Joe Lucas - Page 5 (DM-70)
coverages” might be the most suitable method of insuring against them. We think
the provisions of section 252.024 address the concern that municipalities might have
lacked sufficient flexibility under traditional competitive bidding parameters in
obtaining these sorts of insurance. Case law construing the traditional competitive
bidding requirements indicates that contact with potential providers outside the
statutory notice and bidding process might run afoul of those requirements. See
Sterrett v. Bell, supra, at 520 (“competitive bidding. . . requires that all bidders be
placed upon the same plane of equality”). In “structuring” the coverages in question,
however, such contacts with potential providers may be necessary in order to find
out what might be available in the market, so as to be able to properly formulate bid
specifications, and in order to locate and alert potential bidders outside the
circulation range of the medium of notice, ie. “a newspaper published in the
municipality.“s See Local Gov’t Code 0 252.041 (notice provisions).
Again, we construe section 252.024 narrowly. Section 252.024 permits muni-
cipalities, notwithstanding the traditional competitive bidding requirements in
chapter 252, to engage a “sole broker of record” to determine what sorts of excess or
surplus coverages suitable to the municipality’s needs are available and to solicit
proposals regarding such kinds of coverage. Prior to the enactment of this
provision, under the law of competitive bidding as developed by the courts, such
activities may have been restricted. 6 Section 252.024 does not supplant, but rather
supplements, the traditional competitive bidding provisions of chapter 252. Actual
purchases of insurance remain subject to the applicable notice and bidding
requirements of the chapter. The resolution of such questions as what precise kinds
of surplus and excess coverage are embraced by those provisions, and what
particular kinds of activities a “sole broker of record” would be authorized to pursue,
would depend in part on the facts of the particular case.
You also ask for a “clarification of what ‘selection of an insurance broker’
means” in section 252.024. In your brief, you conclude that under section 252.022,
“the City may ‘select’ . . . an insurance broker without going through the competitive
bidding process.” However, for reasons similar to those we have given above, we do
5We understand that a frequently encountered problem in this area has been that no bids are
received in response to local governments’ notices.
6The last sentence of section 252.024 provides that the “broker may be retained only on a fee
basis and may not receive any other remuneration from any other source.* The legislature apparently
added this provision to offset the anti-competitive potential in the broker’s contacts with providers.
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Honorable Joe Lucas - Page 6 (DM-70)
not believe that section 252.024 in itself exempts the selection of such broker from
competitive bidding. The exception created by section 252.024 must be construed
narrowly. See discussion, supm,. at 3. Had the legislature intended generally to
exempt such selection of a “sole broker of record,” it would have done so
specifically.
Please note, however, that we do not mean to imply that “selection” of an
insurance broker under section 252.024 could not, depending on the facts of the
particular case, fall within other exemptions from competitive bidding requirements.
For example, the exemption provided for in section 252.022 for “personal or
professional services” may be applicable in some circumstances. See generally
Attorney General Opinions JM-1136 (1990) (whether services fall within personal
or professional services exemption from competitive bidding involves fact
questions); JM-1038 (1989) (nature of particular services determine whether the
services of a third party administrator are “professional”); MW-494 (1982)
(specifically not addressing whether employment of an “insurance consultant” would
be within the exception for personal or professional services). We conclude here
only that section 252.024 does not in itself create such an exemption.
SUMMARY
Section 252.024 of the Local Government Code does not in
itself exempt municipal purchases of “excess” or “surplus”
insurance from the requirement that such purchases be made
through competitive bidding. Nor does that section in itself
exempt a municipality’s selection of a “sole broker of record”
from competitive bidding requirements.
DAN MORALES
Attorney General of Texas
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WILL PRYOR
First Assistant Attorney General
MARY KELLER
Deputy Assistant Attorney General
JUDGE ZOLLIE STEAKLBY (Ret.)
Special Assistant Attorney General
RENEA HICKS
Special Assistant Attorney General
MADELEINE B. JOHNSON
Chair, Opinion Committee
Prepared by William Walker
Assistant Attorney General
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