Can a Tennessee city or county buy liability insurance from a private company without taking competitive bids?

Subject

Opinion No. 13-65, Requirement for Local Governments to Seek Competitive Bids for Liability Insurance, August 23, 2013

Plain-English summary

Sen. Jim Tracy asked whether two statutes, Tenn. Code Ann. § 29-20-407 and § 12-3-1209(a)(1), let a city or county buy liability insurance from a private company without going through competitive bidding. The AG said only one of them did so, and only on narrow terms.

§ 29-20-407 (the pool exemption). Tennessee governmental entities were authorized to buy liability insurance under Tenn. Code Ann. § 29-20-403(a). Section 29-20-407 added that they could do so "without the necessity of public bidding" if the insurance was "purchased through a plan authorized and approved by any organization of governmental entities representing cities and counties." That clause was written to cover risk pools and similar joint plans run by associations of Tennessee local governments. Outside that channel, the normal bidding rules in the entity's charter or governing statute applied.

§ 12-3-1209(a)(1) (the professional-services exemption). This 2013 statute (effective July 1, 2013) said competitive solicitations were not required for legal services, fiscal agent, financial advisor, educational consultant, or similar "professional persons or groups of high ethical standards." The AG concluded liability insurance was not such a service. Insurance is a product (a contract by which the insurer agrees to pay if a defined loss occurs), not a professional service. Buying liability insurance might include advice from the selling agent, but that advice was incidental to the sale of the product, not the thing the local government was actually buying.

The net result: a Tennessee city or county that purchased liability insurance from a private corporation through a recognized city/county risk pool could skip public bidding. A city or county that purchased the same insurance through a regular private broker had to follow whatever bidding requirement its charter, private act, or local regulations imposed.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Tennessee procurement code has been reorganized since 2013, and § 12-3-1209 has been amended. Local procurement rules in city charters and private acts also vary widely. Anyone advising a current insurance purchase should pull current statutes and the specific charter or private act for the city or county in question.

Background and statutory framework

Authority to buy liability insurance. Tenn. Code Ann. § 29-20-403(a) authorized governmental entities to purchase liability insurance.

Pool-bidding exemption. Tenn. Code Ann. § 29-20-407 stated:

Any governmental entity may purchase any of the insurance authorized by this chapter, without the necessity of public bidding, as required by any public or private act or charter restriction, if such insurance is purchased through a plan authorized and approved by any organization of governmental entities representing cities and counties.

Professional-services exemption. Tenn. Code Ann. § 12-3-1209(a)(1) (enacted by 2013 Tenn. Pub. Acts ch. 403, § 70, effective July 1, 2013) provided that contracts for "legal services, fiscal agent, financial advisor or advisory services, educational consultant services, and similar services by professional persons or groups of high ethical standards" would not be based on competitive solicitations, but on "recognized competence and integrity." Identical substance had previously appeared at Tenn. Code Ann. § 12-4-106(a) (2011).

Insurance defined. Couch on Insurance, 3rd ed., § 1.6, defined insurance as a contract by which the insurer, for consideration, promises to make a payment upon destruction of or injury to something in which the insured has an interest. Tenn. Code Ann. § 56-7-101(a) defined "contract of insurance." Tenn. Att'y Gen. Op. 10-85 (July 6, 2010) discussed what constitutes a "contract for insurance."

Statutory construction rule. Chapman v. DaVita, Inc., 380 S.W.3d 710, 714 (Tenn. 2012), quoting State v. Strode, 232 S.W.3d 1, 9 (Tenn. 2007), instructed courts to ascertain legislative intent without "unduly expanding a statute's coverage beyond its intended scope."

Common questions

What organizations qualified as "an organization of governmental entities representing cities and counties"?

The opinion did not list specific organizations by name. In practice, Tennessee risk pools historically operated under the Tennessee Municipal League and the Tennessee County Services Association, which sponsored TML Risk Management Pool and TN-RMPP, respectively. The statute used broad language, so any pool plan sponsored by a recognized city/county association would have qualified.

Did the opinion say anything about workers' compensation or property insurance?

No. The opinion addressed only liability insurance authorized by Title 29, Chapter 20 (the Governmental Tort Liability Act). Other forms of insurance had their own statutory framework and were not analyzed.

Could an insurance broker dress up its services as "advisory services" to fit the professional-services exemption?

The AG anticipated and rejected this. The opinion noted that "[a]lthough part of the purchase of insurance may include the advice of the selling agent as to which type or range of insurance would best suit the purchasing governmental entity, that advice is not what the governmental entity ultimately buys." The exemption was for fees paid for advice itself, not for insurance products that include advice as part of the sales process.

What was the consequence of buying insurance in violation of the bidding rules?

The opinion did not address remedies. Generally, Tennessee local governments faced with improper procurement could have the contract challenged as ultra vires, lose audit findings from the Comptroller of the Treasury, and in some cases face personal liability for the officials who approved the purchase.

Citations

Tenn. Code Ann. §§ 29-20-403(a), 29-20-407, 12-3-1209(a)(1), 12-4-106(a) (2011), 56-7-101(a). 2013 Tenn. Pub. Acts ch. 403, § 70. Couch on Insurance, 3rd ed., § 1.6. Tenn. Att'y Gen. Op. 10-85 (July 6, 2010). Cases: Chapman v. DaVita, Inc., 380 S.W.3d 710, 714 (Tenn. 2012); State v. Strode, 232 S.W.3d 1, 9 (Tenn. 2007).

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2013/op13-065.pdf

Original opinion text

August 23, 2013

Opinion No. 13-65

Requirement for Local Governments to Seek Competitive Bids for Liability Insurance

QUESTION

Do the provisions of Tenn. Code Ann. §§ 29-20-407 or 12-3-1209(a)(1) allow a local governmental entity to purchase liability insurance from a private corporation without requiring competitive bids?

OPINION

Under these statutes a local governmental entity in Tennessee may only purchase liability insurance without the necessity of any legally required public bidding if the liability insurance is purchased through a plan authorized and approved by any organization of governmental entities representing cities and counties.

ANALYSIS

Governmental entities are specifically authorized to purchase liability insurance by Tenn. Code Ann. § 29-20-403(a). Tenn. Code Ann. § 29-20-407 authorizes the purchase of such liability insurance by governmental entities without public bidding under certain circumstances, stating:

Any governmental entity may purchase any of the insurance authorized by this chapter, without the necessity of public bidding, as required by any public or private act or charter restriction, if such insurance is purchased through a plan authorized and approved by any organization of governmental entities representing cities and counties.

Accordingly, notwithstanding any requirements for competitive bidding contained in a governmental entity's governing statute or in the entity's charter or local regulations, a governmental entity may purchase liability insurance through a plan authorized by any organization of governmental entities representing cities and counties without public bidding. However, unless the liability insurance offered by a private corporation is purchased through a plan authorized by the type of organization described in Tenn. Code Ann. § 29-20-407, then the governmental entity must abide by any legal requirement that contracts for liability insurance be publicly bid. See, e.g., Chapman v. DaVita, Inc., 380 S.W.3d 710, 714 (Tenn. 2012) (quoting State v. Strode, 232 S.W.3d 1, 9 (Tenn. 2007)) (recognizing that a court is required to "ascertain and give effect to the legislative intent [of a statute] without unduly . . . expanding a statute's coverage beyond its intended scope").

Nor do the provisions of Tenn. Code Ann. § 12-3-1209(a)(1) relieve a local governmental entity from any legal requirement to publicly bid the purchase of liability insurance. This statute, enacted by Chapter 403 of the 2013 Tennessee Public Acts and effective as of July 1, 2013, states:

Contracts by counties, cities, metropolitan governments, towns, utility districts and other municipal and public corporations of the state, for legal services, fiscal agent, financial advisor or advisory services, educational consultant services, and similar services by professional persons or groups of high ethical standards, shall not be based upon competitive solicitations, but shall be awarded on the basis of recognized competence and integrity. The prohibition against competitive soliciting in this section shall not prohibit any entity enumerated from interviewing eligible persons or entities to determine the capabilities of such persons or entities.

Tenn. Code Ann. § 12-3-1209(a)(1); 2013 Tenn. Pub. Acts ch. 403, § 70. (Prior to the effective date of Tenn. Code Ann. § 12-3-1209(a)(1), language identical in substance to this statute was found at Tenn. Code Ann. § 12-4-106(a) (2011).)

This statute exempts governmental entities from the requirement to hire certain types of professionals on the basis of competitive bidding, specifically listing legal services, fiscal agent, financial advisors and educational consultants but also including similar services offered by professionals of "high ethical standards." Id.

Liability insurance does not fit within this classification of services exempted from any controlling competitive bidding requirements. Liability insurance is not a service. Rather it is an insurance product offered by a private insurance company for purchase by potential customers like Tennessee local governmental entities. See Couch on Insurance, 3rd ed., § 1.6 Insurance defined (Dec. 2012) (stating that insurance is essentially "a contract by which one party (the insurer), for a consideration that usually is paid in money, either in a lump sum or at different times during the continuance of the risk, promises to make a certain payment, usually of money, upon the destruction or injury of 'something' in which the other party (the insured) has an interest") (footnotes omitted). See also Tenn. Code Ann. § 56-7-101(a) (defining "contract of insurance"); Tenn. Att'y Gen. Op. 10-85 (July 6, 2010) (discussing what constitutes a "contract for insurance"). The exception to competitive bidding found in Tenn. Code Ann. § 12-3-1209(a)(1) is limited to professional services and makes no mention of the purchase of any product such as insurance. Although part of the purchase of insurance may include the advice of the selling agent as to which type or range of insurance would best suit the purchasing governmental entity, that advice is not what the governmental entity ultimately buys. That advice is only part of the sales process that the insurance agent hopes will end with the purchase of one of his or her offered insurance policies. As such, the fact that the purchase of liability insurance may include any such advice does not cause that transaction to be the purchase of "professional services" as contemplated by Tenn. Code Ann. § 12-3-1209(a)(1).

In sum, the purchase of liability insurance by a Tennessee governmental entity is not exempted from any applicable competitive bidding requirement by the exemption from competitive bidding for professional services found in Tenn. Code Ann. § 12-3-1209(a)(1). Further, Tenn. Code Ann. § 29-20-407 only exempts such a purchase from public bidding if the liability insurance is purchased "through a plan authorized and approved by any organization of governmental entities representing cities and counties." Thus, unless liability insurance for local Tennessee governments offered by a private corporation is purchased through such a plan, its purchase is not exempted from any applicable competitive bidding requirements.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

C. SCOTT JACKSON
Deputy Attorney General

Requested by:

The Honorable Jim Tracy
State Senator
2 Legislative Plaza
Nashville, TN 37243