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Acquiring Insurance for the City

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Reviewed Date: July 12, 2021


Original Author: 
Hemsley, Sid
Date of Material: 
May 3, 2011

Purchasing--Laws and regulations
Purchasing--Professional services

Acquiring Insurance for the City

MTAS was asked whether the city is required to competitively bid the purchase of insurance for its employees and officers and whether the city can hire the services of a financial advisor or insurance broker to acquire the insurance.

May 3, 2011

Dear City Attorney:

You have essentially the following questions that I have attempted to answer for other cities earlier. However, I have done as much additional research on those questions as I can find that appears pertinent to those questions. On the basis of that research, I have changed my mind on the first question:

1. Is the city required to competitively bid the purchase of its employees’ and officers’ insurance?

In my opinion, the answer is yes. The Municipal Purchasing Law of 1983 requires that answer.

2. Can the city hire the services of a financial advisor or insurance broker to acquire insurance for the city?

In my opinion, the answer is yes, but not in the form of professional services within the meaning of Tennessee Code Annotated, § 12-4-106, which governs the hiring by municipalities of professional services.

Analysis of Questions 1 and 2

The Municipal Purchasing Law of 1983, codified at Tennessee Code Annotated, § 6-56-301 et seq., with few exceptions applies to “all municipalities using or encumbering municipal funds....” [§ 6-56-302] It also provides that, with some exceptions that will generally not apply to insurance purchases, “all purchases and leases and lease purchases shall be made or entered into only after public advertisement and competitive bid.” [§ 6-56-304]

Tennessee Code Annotated, § 12-4-106 prohibits competitive bidding by municipalities for professional services. However, it appears clear to me that the purchase of insurance does not qualify as a professional service. That conclusion is supported by 121 A.L.R.5th 365, entitled Insurance Agents or Brokers as Professionals or Nonprofessionals for Purpose of Malpractice Statutes of Limitations. Although as its title indicates, that legal treatise applies to malpractice statutes of limitations, it considers the general question of what is, and what is not, a “professional.” The heavy weight of authority cited in that treatise, concludes that insurance brokers do not meet the criterion for being professionals:

.... there are relatively few decisions in which the courts have focused on the specific issue of whether insurance agents or brokers are to be regarded as professional for purposes of malpractice statutes of limitations. The courts in these decisions have regarded certain criteria as significant in the determination of who should be considered a professional covered by such a statute of limitations.... One such criterion has been the level of education, training or special knowledge required for participation in the calling at issue, a criterion which has been evoked to deny professional statutes to an insurance agent or broker without having attained the higher education expected of a traditional or acknowledged professional. Likewise, governance of persons engaging in a vocation by a code of conduct, for the violation of which discipline can be imposed.... and this criterion has been invoked to deny professional status to insurance agents and brokers, due to the absence of a code of conduct or like stand of ethical or moral behavior controlling them. However, although the courts have not disputed that licensure and regulation by state authorities represents elements of the type of professionalism envisioned by state legislatures in enacting professional malpractice statutes of limitation....they have concluded that this alone is not sufficient to bring agents and brokers within the purview of such statutes, sometimes pointing out that to hold otherwise would elevate to professional statutes persons clearly not meant to be covered by these statutes, such as embalmers and beauticians, simply because they are required to be licensed and regulated. The courts have also found no basis for regarding insurance agents and brokers as professionals.... in the mere circumstances that they may disseminate advice on which clients rely, reasoning ....that the giving of such advice does not qualify one as a professional if he or she does not have the requisite level of education, or that a professional relationship is one of trust and confidence, carrying with it a continuing duty to counsel and advise clients, a duty not imposed on insurance agents and brokers....[§ 1]

That treatise does go on to note that the courts attempting to determine whether an insurance broker is a “professional” for the purposes of statutes of limitation have not found the definition of “professional” or “professional service” in any other contexts helpful. But that appears to me gross overstatement, at least for the purpose of determining whether an insurance broker is a professional for the purpose of Tennessee Code Annotated, § 12-4-106. The criteria contained in the above treatise appears to be generally consistent with what is required to determine who is a professional and what is a professional service, and that insurance brokers and their services do not fit into those categories. Although I am not an expert in insurance, my review of Tennessee Code Annotated, Title 56, which regulates insurance, and insurance agents and brokers in Tennessee does not change that view.

At first glance, a municipality could retain a financial advisor to determine what is the best insurance bargain, because “financial advisor or advisory services” is expressly made a professional service under that statute. But under subsection (d) of that statute, “financial advisory or advisory services” are related to the issue of municipal securities. The purchase of insurance for municipal employees does not fit into that category. The Municipal Purchasing Law requires that the actual purchase of insurance by a municipality be competitively bid; insurance, not financial advice is primarily what the city is buying, and the use of a financial advisor or insurance broker for such advice would not boost the city over the Municipal Purchasing Law. Indeed, “competitive bidding” has a specific meaning under Tennessee law, and the solicitation of “bids” by a financial advisor or broker would not qualify as competitive bidding.

The Tennessee Supreme Court in State ex rel. Wright v. Leech, 622 S.W.2d 807 (Tenn. 1981), answered defined competitive bidding as follows:

1. “The request for bids must not unduly restrict competition. All persons or corporations having the ability to furnish the supplies or materials needed, to perform the work to be done, should be allowed to compete freely without any unreasonable restrictions.”

2. “It is essential that bidders, so far as possible, be put on terms of perfect equality so that they may bid on substantially the same proposition and on the same terms.”

3. “In order to attain competitive bidding in its true sense, proposals for bids must be invited under fair circumstances which afford a fair and reasonable opportunity for competition.” [Emphasis is mine.]

4. Among other things, the advertisement for bids should include “[s]pecifications of the supplies or equipment to be purchased and the quantity thereof.”

Those standards are not optional, continued the Court, they must be followed. [At 815]

The obvious fundamental principles of Leech are that all bidders must be put on a level playing field, and that the bidding process actually be competitive. In fact, it is further said in Metropolitan Air Research Testing Authority, Inc. v. Metro. Government of Nashville & Davidson County, 842 S.W.2d 611 (Tenn. Ct. App. 1992), that:

One of the purposes of competitive bidding is to provide bidders with a fair opportunity to compete for public contracts. State ex rel. Leech v. Wright [citation omitted]. Thus, the courts have recognized that the statutes and ordinances requiring competitive bidding impose upon the government an implied obligation to consider all bids honestly and fairly. [Citations omitted.] [At 616] [Emphasis is mine.]

It is difficult to see how simply obtaining insurance quotes would satisfy any of those requirements. That is the same process Mr. Wright used to secure bids for the Lincoln County Highway Department. What precipitated the court’s outline of what constitutes competitive bidding is the testimony of Wright in an ouster suit against him about, among other things, what, to him, constituted competitive bidding. Said Wright:

He (defendant) testified that competitive bidding in his mind meant buying something at the cheapest price. He testified that sometimes he solicited bids by letter, sometimes by telephone, and sometimes in person and that in most cases he asked the bidder to write him a letter that he put in a bid file....

[W]hy advertise in local newspapers for a bid for something...if there is no place around here that sells that. Why do you want to keep a newspaper up? Most of the time Mr. Wright telephones places where he feels that the needs of the Lincoln County Highway Department can be filled. If they can’t, he asks them to mail him a letter to that effect; otherwise, he invites their bids.

Many times the bookkeeper, Mr. Frank Locker will invite bids in person by visiting various businesses, establishments or by telephone. There is no particular form for bids. Mr. Wright knows of no such law which requires written invitation for bids. Under cross examination the question was put to Mr. Wright, ‘Mr Wright, to the best of your judgment and to the best of your belief, have you taken bids according to what you conceive to be the law? Have you done it according to the law as you understand it’ Answer, “yes, sir.” [At 812]

Similar testimony goes on and on in that case. What constitutes a “bid” in Mr. Wright’s view (or so he said) was a price list or the quoted price.

I am certainly not trying to equate the function of insurance brokers finding insurance for clients with Mr. Wright’s method of obtaining quotes, but it appears to me that the insurance broker’s function is some distance from competitive bidding. It is said in the unreported case of Ebbtide Corporation v. Traveler’s Insurance Company, 2002 WL 856578, (Tenn. Ct. App.), that:

“An insurance broker is one who acts as a middleman between the assured and the insurer, and who solicits insurance from the public under no employment from any special company, but having secured an order he either places the insurance with a company selected by the assured, or in the absence of any selection by him, then with a company selected by such broker. A broker is the agent for the insured, according to all authorities on the subject, though at the same time for some purpose he may be the agent for the insurer, and his acts and representations within the scope of his authority as such agent are binding on the insured.”

“Every broker is within a sense an agent, but every agent is not a broker. The chief feature which distinguishes a broker from other classes of agents is that he is an intermediary, or middleman, and in accepting applications for insurance, acts in a certain sense as the agent of both parties to the transaction. Another distinction is that the idea of exclusiveness enters into an employment of agency, while in respect to a broker there is a holding out of oneself, generally for employment in securing insurance.” [Citation omitted by me.] [At 6]

Presumably, it would be desirable for the city to have help determining what kind of insurance the city should buy and other issues related to it, including which bid is the lowest and best bid. I know of no reason why the city could not hire a financial advisor or insurance broker as an independent contractor to provide those services, at an amount that comes under the maximum amount allowed by the Municipal Purchasing Law without competitive bidding, but I cannot fathom how an insurance broker could perform a “middleman” function in a competitive bidding system contemplated by the Municipal Purchasing Law.

An argument can be made that the purchase and provision of insurance by a municipality for its officers and employees under Tennessee Code Annotated, § 8-27-601 is not required to be competitively bid. However, on reflection, that argument is not a strong one. The purchase by a municipality of insurance from the Risk Management Pool is expressly exempt from competitive bidding under Tennessee Code Annotated, § 29-20-407. The main point for mentioning that exemption is this: There was concern on the part of the General Assembly that without that exemption, the purchase of governmental tort liability insurance would be subject to the Municipal Purchasing Law, and other laws that govern the purchase by counties of such insurance.

The insurance purchasing scheme contemplated in Tennessee Code Annotated, § 27-6-601et seq. does not expressly exempt municipal insurance purchases from the competitive bidding requirements of the Municipal Purchasing Law or any competitive bidding requirements contained in a private acts, but Tennessee Code Annotated, § 27-6-601 et seq. appears to reflect a complete statutory scheme for municipal purchases of insurance, including the appointment by the governing body of the municipality of an insurance committee consisting of “aldermen or other governmental body of the municipal corporation....” The function of that committee is to “prepare and present for approval a contract or contracts with one or more insurance companies, or other corporations....” The approval of particular contract or contracts is made by the governing body of the city. Nowhere in that statutory scheme is competitive bidding required on the part of the committee or of the governing body, although presumably the governing body of the city could appoint the entire governing body of the city as the “committee” and agree to use competitive bidding to make the insurance purchase.

However, I have gone back and looked at the entire statutory scheme in Tennessee Code Annotated, Title 8, Chapter 27 for the purpose of determining whether any chapter envisions competitive bidding of insurance. I have determined that the answer is no, except that the state insurance committee is required to make such purchases on a “competitive basis.” Tennessee Code Annotated, Title 8, Chapter 27, Part 1, provides for a state insurance committee, and Part 2 provides for the purchase of insurance for state officials and employees. It also creates a local government insurance committee that has authority to purchase insurance for local government employees. [Tennessee Code Annotated, § 8-27-207] In addition, Part 3 creates a local education insurance committee and authorizes it to purchase insurance for local education employees.

When the state insurance committee was established by Public Acts 1976, Chapter 804, it gave that committee “authority to obtain competitive bids it deems appropriate from insurance companies.” That provision was subsequently eliminated, although the statute presently provides that, “The procurement of such contracts shall be governed by the provisions of § 12-4-109 and the rules promulgated thereunder.” There is similar language in Parts 2 and 3 for the other two insurance committees. The text of those statutes regulate the purchase by those committees of personal, professional and consultants services, but does not require such purchases by competitive bidding. But “the rules promulgated thereunder,” do. Tenn. Comp. R.& Regs. 0620-03-03-.03(1)(a) provides that “Personal, professional and consultant services shall be procured by a method that is determined in the state’s discretion to be efficient and reasonable. Except as otherwise provided in these rules, contracts representing the procurement of services shall be made on a competitive basis.”

Subsection (1)(b) declares that, “To be competitive, a procurement method must include a consideration and comparison of potential contractors, based upon both cost and quality (i.e., service provider qualifications, experience, and technical approach. The terms “proposal,” “bid,” “quote,” and “offer” shall all denote that which a service provider provides for competitive consideration and comparison under any competitive methodology.” Generally, it appears that those rules prescribe a Request For Proposals (RFP) process, and other alternative processes. As far as I can determine, there is no requirement in those rules for competitive bidding as that term is probably understood in the Municipal Purchasing Law.

Both Tennessee Code Annotated, Title 8, Chapter 27, Part 4, and Tennessee Code Annotated, Title 8, Chapter 27, Part 5, authorizes counties to provide group insurance to county employees. Under the first short statutory schemes, “the county executive or a delegated committee of the governing body” can prepare and present to the county governing body a contract for insurance. That is all that is said about how the insurance process works. The second short statutory scheme, authorizes the “county legislative body or other governing body of the county,” to appoint a committee of the same entities, which is to prepare and present a contract for insurance to the governing body of the county, for the benefit of county employees and officials. Nothing else is said in those statutes about the methods of procurement of insurance.

Finally, Tennessee Code Annotated, Title 8, Chapter 27, Part 6 provides for the purchase of insurance by municipal corporations and school districts. This statutory scheme also provides for the creation by the governing body of the city of a “committee of aldermen or other governing body of the municipality or special school district,” which is to present a contract or contracts of insurance, the approval of which is to be by a majority of the aldermen or other governing body of the municipality or special school district. Nothing is said in that statutory scheme about the methods by which the committee is to procure insurance.

As can be seen, none of the above statutory schemes for providing insurance for county or municipal employees specify competitive bidding for such insurance, or any other methods for procuring such insurance, except for the more complex prescriptions that govern the state insurance commission’s procurement of insurance. It does not appear that “competitive bidding” is required on the part of the state insurance committee, only that they be made on a “competitive basis,” which appears to include RFPs.

But as far as I can determine, neither the rules governing the procuring of insurance by the state insurance committee, nor the “rules” contained in the above statutory schemes for counties and municipalities to purchase insurance for their officers and employees offer any guidance for how they are to accomplish that task, specifically whether the purchase falls under the Municipal Purchasing Law of 1983. That statute was initially adopted by the General Assembly in Public Acts 1961, Chapter 328, long before the Municipal Purchasing Law was adopted in 1983. For that reason, and for the additional one that there was no competitive bidding requirement in that statute, an argument can be made that it was not the intent of the General Assembly that insurance contracts under Tennessee Code Annotated, § 8-27-601 et seq. be competitively bid.

I have previously said that Tennessee Code Annotated, § 8-27-601 is ambiguous on that question and that the answer would require the application of the rules of statutory construction, which I did not attempt to apply. But on reflection that omission was probably a mistake. The Municipal Purchasing Law changed the legal landscape. Tennessee Code Annotated, §6-56-302 says, “This part shall apply to all purchases by authorized officials in all municipalities using or encumbering municipal funds, except as follows....” Those exceptions include:

(1) Municipalities “having charter provisions or private act requirements governing competitive bidding or purchasing.”

(2) Purchases made under Tennessee Code Annotated, § 12-3-1001 {purchases by the State Department of General Services for local governments.

(3) “[I]nvestments in or purchases from the pooled investment fund established pursuant to title 9, chapter 4, part 7.”

(4) “[P]urchases from instrumentalities created by two or more cooperating governments....”

(5) Purchases from certain nonprofit corporations whose “purpose....is to provide goods and services specifically to municipalities.”

None of those exceptions apply to the purchase by municipalities of insurance.

That law changed the legal landscape of municipal purchasing because it is a remedial statute, and under the rules of statutory construction, remedial statutes are retroactive. It is said in Anderson v. Memphis Housing Authority, 534 S.W.2d 125 (Tenn. Ct. App. 1976), that:

The fact that a statute is retrospective in application does not automatically render it unconstitutional and void. It is when a statute creates as new right or takes away a vested right or impairs contractual obligations that its retrospective application is constitutionally forbidden. [Citations omitted by me.] If the statute does none of the foregoing, but is only procedurally remedial in nature, retrospective application is constitutionally permissible. [Citations omitted by me.] In point of fact, the retrospective application of remedial statutes is not only constitutionally permissible, but such statutes are generally to be construed in favor of retrospective application when possible. [Citation omitted by me and emphasis is mine.] [At 127]

It is also said in Ebbtide Corporation, above, that, “.... remedial statutes should be construed liberally to accomplish the objects, correct the evil, and suppress the mischief at which they are aimed.” [Citing Holland v. Celebrezze, 223 F. Supp. 347 (E.D. Tenn. 1963)]. [At 4]. It takes little imagination to see what objects were to be accomplished, evils corrected, and mischief suppressed by the Municipal Purchasing Law of 1983.

The Municipal Purchasing Law is clearly a remedial statute, made by the General Assembly to apply to all municipal purchases using city money, except for a narrow class of exceptions, none of which apply to insurance purchases by municipalities, except for municipalities that have charter provisions governing competitive bidding and purchasing. Because the statute was remedial the question of it creating new rights and taking away vested rights or impairing contracts is not an issue. But even if it were, that statute did none of those. The General Assembly has extremely broad powers over its municipalities and can, by general law, require them to conform to state mandates.

I have been told that many cities do not feel that competitive bidding produces any difference among insurance companies in the cost of insurance for city officers and employees. If that is the case, perhaps some legislation is in order to address that problem. As pointed out above, the State Insurance Committee has the authority to procure such insurance on a “competitive basis,” which includes RFPs, and other options. Some exploration on how well those options work may be in order as a possible direction in which municipalities can go.


Sidney D. Hemsley
Senior Law Consultant


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Information written by MTAS staff was based on the law at the time and/or a specific sets of facts. The laws referenced may have changed and/or the technical advice provided may not be applicable to your city or circumstances. Always consult with your city attorney or an MTAS consultant before taking any action based on information posted to this website.