Insurance Company of North America

and Waite Hill Services, Inc., Petitioners

John W. Morris, et al., Respondents

Justice Hecht, joined by Justice Owen, dissenting.

The Insurance Code requires that "policies of insurance" be issued solely through licensed agents. The persons who provided the Investors in this case with INA's surety bonds to secure their promissory notes were not licensed agents. Thus, if INA's surety bonds were "policies of insurance", the issuance of the bonds violated the Code, the violation tainted the Investors' agreements to indemnify INA for any obligations it incurred based on the surety bonds, and those agreements were therefore unenforceable, as the Court holds. But if INA's surety bonds are not insurance policies, then the Investors are obliged to indemnify INA for payments made on those bonds.

The United States Supreme Court has observed that "the usual view, grounded in commercial practice, [is] that suretyship is not insurance." This Court held in Great American Insurance Co. v. North Austin Municipal Utility District No. 1 that there are "fundamental differences between a liability insurance contract and a surety bond." Unlike classic insurance, where the risk is controlled only by chance, the risk attendant to surety arrangements is entirely within the control of one of the three parties. Here, the Investors' default was voluntary: after paying one installment on their notes, all of the Investors simultaneously defaulted. Moreover, a surety's potential liability differs from that of an insurer. As we explained in Great American :

Unlike a liability insurance contract, in which the obligation of the insurer to the insured is the primary obligation of indemnity to the insured for loss, the obligation of a surety to a bond obligee is secondary to the obligation owed by its principal. A party sustaining a loss covered under a liability insurance contract can look only to its insurer for recourse. A bond obligee has a remedy against its principal.

Other aspects of the parties' relationships in this case indicate that INA was not dealing in insurance. The surety bond premiums were paid by the Investors in advance and were not subject to adjustment. Further, the surety bonds, unlike policies of insurance, were not subject to cancellation or renewal and had no fixed terms of duration. Finally, the instruments contain no element of risk-shifting or pooling of risks, both of which are quintessential elements of insurance contracts.

In Great American , the Court concluded that surety companies issuing surety bonds are not engaged in the business of insurance for all purposes under the Insurance Code. Specifically, the Court held that surety companies are not subject to the regulations of Article 21.21. I fail to see how a surety company is not, by issuing surety bonds, engaged in the business of insurance, if surety bonds can be insurance policies. It is true, as the Court says, that the issuance of surety bonds is included in the business of insurance as defined by Article 1.14-1, Section 2(a)(2) of the Insurance Code. But as the Court explained in Great American :

Nowhere in the "purpose" clause of article 1.14-1 did the Legislature indicate that the list of acts contained therein which constitute "doing an insurance business" was to apply throughout the Code. Rather, the purpose clause of article 1.14-1 points out that in defining "what constitutes doing an insurance business," the Legislature was exercising its power to address its explicitly listed concerns. The expressed concerns do not evidence an intention to promulgate a uniform definition of the acts which constitute doing an insurance business; rather, they indicate concern that particular parties may escape the jurisdiction of the State Board of Insurance and evade suit by contractual beneficiaries.

Just as there is no indication in the Insurance Code that the issuance of surety bonds was to be subject to the regulations of Article 21.21, there is likewise no indication that the licensing requirement of the Code was intended to apply to persons issuing surety bonds.

The Court infers from the express exclusion of bid bonds from regulation in former Article 21.09 that other types of surety bonds were not intended to be excluded. But the inference is just as likely that the Legislature intended, by excluding bid bonds, to exclude similar surety bonds. In any event, Article 21.09 has been repealed.

I do not, of course, venture an opinion regarding whether issuers of surety bonds should be licensed. That issue is properly one for the Legislature or perhaps the Department of Insurance. The only question here is whether a surety bond is an insurance policy within the meaning of the licensing provisions of the Insurance Code. In my view, this Court's decision in Great American compels a negative answer. For this reason, I would enforce the indemnification agreements. Accordingly, I respectfully dissent.

Nathan L. Hecht

Justice

Opinion delivered: July 14, 1998.

See Act of Sept. 19, 1969, 61 ^st Leg., 2d C.S., ch. 25, § 1, 1969 Tex. Gen. Laws 168, 170, amended by Act of June 9, 1997, 75 ^th Leg., R.S., ch. 596, § 1, 1997 Tex. Gen. Laws 2083 (current version at Tex. Ins. Code art. 21.07(1)(a)); Act of June 28, 1951, 52 ^nd Leg., R.S., ch. 491, 1951 Tex. Gen. Laws 868, 1065-1066, repealed by Act of June 9, 1997, 75 ^th Leg., R.S., ch. 596, § 24, 1997 Tex. Gen. Laws 2083, 2102 (formerly Tex. Ins. Code art. 21.09). See also Act of May 9, 1985, 69 ^th Leg., R.S., ch. 203, § 1, 1985 Tex. Gen. Laws 790 (current version at Tex. Ins. Code art. 21.02).

Pearlman v. Reliance Ins. Co. , 371 U.S. 132, 140 n. 19 (1962) (citing  Cushman, Surety Bonds on Public and Private Construction Projects , 46 A.B.A.J. 649, 652-653 (1960)).

908 S.W.2d 415, 418 (Tex. 1995); see Associated Indem. Corp. v. Cat Contracting, Inc. , 964 S.W.2d 276, 282 (Tex. 1998).

Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3D, § 1:18, at 1-31 (1997).

908 S.W.2d at 418-419.

Steere Tank Lines, Inc. v. United States , 577 F.2d 279, 280 (5 ^th Cir. 1978) ("Risk shifting or risk distribution is one of the requisites of a true insurance contract.").

Great American , 908 S.W.2d at 423.