Could Kentucky counties be liable for KRT insurance revenue bonds, and could the insurer operate under its existing license?

Plain-English summary

In 1994, Kentucky's Attorney General examined an insurance company connected to two counties and financed through revenue bonds. The office said a statute barred issuance or continuation of a license to a county-owned insurance company, but did not itself make the company's business under an existing license unlawful. The Department of Insurance could consider revocation if it found the license should not have been issued.

The AG also considered whether Marshall and Pendleton Counties might have to repay KRT bonds after a default or large claims. The bond statement described limited obligations payable from identified payments and trust accounts. Even if a court treated the counties as the issuers, the AG concluded their exposure on those bonds would be limited to the specified funds. It saw no substantial likelihood of general county liability on the facts presented, while stressing that undisclosed documents or facts could change the result and only a court could give a definitive answer.

Currency note

This opinion was issued in 1994. 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.

Historical summary

County officials and public finance officers

The opinion treated KRT's bonds as revenue bonds rather than general obligations. It read their statement as limiting payment to company obligations under named agreements and money in trustee accounts. That distinction drove the AG's conclusion that the counties would not face general liability on the bonds even if a court viewed them as the issuers. The opinion expressly confined that conclusion to the transaction as described to the office.

Insurance regulators and KRT

The AG read KRS 304.3-080(1) as restricting the insurance commissioner's power to issue or continue a license for an insurer owned or financially controlled by a county. It said KRT could still transact insurance business within the scope of its issued license. KRS 304.3-190 provided a possible revocation route if the Department of Insurance determined that the license should never have issued.

Bondholders

The AG quoted the KRT bond statement's limited-payment language and concluded that holders could look to the sources it specified, rather than the counties' general tax resources, for payment. The opinion did not purport to resolve every possible claim arising from the wider KACo programs or unknown transaction documents.

Common questions

Did county involvement make KRT's insurance business unlawful?

The AG said no, so long as KRT operated within its issued license. It distinguished the restriction on issuing or continuing a license to a county-owned insurer from conduct under an existing license, while recognizing possible revocation.

Would Marshall and Pendleton Counties have to pay KRT revenue bonds from general funds?

The AG said the bonds were limited obligations payable from specified sources. On the information supplied, it saw no substantial likelihood of broader county liability, even if a court classified the counties as issuers.

Did the opinion guarantee the counties could never face a claim?

No. The office said additional documents or facts could affect its conclusions and that a definitive answer required court action.

Background and statutory framework

Representative Kenneth F. Harper asked about KRT Insurance Company, an interlocal arrangement between Marshall and Pendleton Counties, and bonds linked to KACo programs. The AG referred to OAG 94-1 for its conclusion that the counties could not use the interlocal cooperation act to create a trust that owned corporate stock. It then separated KRS 304.3-080(1)'s licensing restriction from KRT's ability to do business under a license already issued. On the bond question, it relied on the KRT bond statement and the distinction between revenue and general obligation bonds. Its analysis did not establish the terms of every KACo bond independently; the office said it understood them all to be revenue bonds.

Citations and references

• KRS 304.3-080(1): county ownership or control and insurer licensing.
• KRS 304.3-190: possible revocation of an improperly issued license.
• Dalton v. State Property and Buildings Commission, Ky., 304 S.W.2d 342, 352 (1957): revenue-bond description quoted by the AG.
• Rivers v. City of Owensboro, Ky., 287 S.W.2d 151 (1956): constitutional public-debt limits discussed in the opinion.
• OAG 94-1: related conclusion on the interlocal trust and stock ownership.

Source

• Landing page: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG94-002.htm

Original opinion text

OAG 94-2

January 7, 1994

Kenneth F. Harper

State Representative

Committee For Program Review And Investigations

Capitol Building

Frankfort, Kentucky 40601

Dear Representative Harper:

This letter responds to your recent questions regarding KACo and its affiliated programs.

Your first question is:

Is the KRT Insurance Company, Inc., a violation of KRS 304.3-080(1) because it was formed as a result of an interlocal agreement between Marshall County and Pendleton County, and the funding was derived from issuance of revenue bonds from these counties?

KRS 304.3-080(1) states:

No certificate of authority or license to transact any kind of insurance business in this state shall be issued, renewed or continued in effect to any domestic, foreign, or alien insurance company or other insurance entity which is owned, or financially controlled in whole or in part by any state of the United States, or by a foreign government or by any political subdivision of either, or which is an agency of such state, government or political subdivision, unless such company or entity was so owned, controlled or constituted prior to January 1, 1957, and was authorized to do business in this state on or prior to January 1, 1957.

As we stated in OAG 94-1, the invocation of the interlocal cooperation act does not permit Pendleton and Marshall Counties to create a trust which in turn owns stock in a corporation. The statute that you have cited provides the converse of that proposition: an insurance company cannot be owned by a county. However, the statute merely prohibits the insurance commissioner from issuing a certificate of authority to such a company; it does not prohibit the conduct of business by the company if it has been licensed by the Department of Insurance. Therefore it is not a violation for the company to conduct insurance business within the scope of its license. That license could be subject to revocation, however, under KRS 304.3-190 if the Department of Insurance determines that the license should not have been issued in the first place.

Your second question is:

The Management Review conducted by the Auditor of Public Accounts on KACo and related programs, the counties that issued the bonds to finance KALF and KRT may be liable for their repayment. If there is a bond default or large claims, is there any possibility that Marshall and Pendleton Counties could be liable to the bondholders, the letter of credit bank or for any claims. If all the legally available funds for the project are exhausted, what would be the liabilities of the two counties?

The bonds in question, at least regarding KRT, were revenue bonds rather than general obligation bonds. "The term 'revenue bonds' is a descriptive qualification indicating that the instruments are payable solely from a revenue producing public project." Dalton v. State Property and Buildings Commission, Ky., 304 S.W.2d 342, 352 (1957). A more descriptive definition is provided in 64 AmJur2d, Public Securities and Obligations 420:

Generally speaking, revenue bonds are bonds issued by a state or a political subdivision in connection with the construction, maintenance, or operation of some enterprise or project, such as a publicly owned or operated utility, a bridge, or a dormitory for a state university, etc. The statutes under which the bonds are issued, and the terms and conditions in the bonds themselves, state clearly that they are payable solely from the income, revenue, or proceeds of the enterprise or project to acquire, build, or operate which they were issued. Hence, they are bonds payable from a special fund, are not the general obligations of the issuing public body, and are not payable from its general resources raised by taxation.

Revenue bonds are not subject to constitutional limitations on public indebtedness. Rivers v. City of Owensboro, Ky., 287 S.W.2d 151 (1956).

The bond statement for the KRT bonds clearly denominates the bonds as "Revenue Bonds, Series 1990." On page 1 of the attachment to the statement this provision appears:

The Bonds are not general obligations of KRT but are limited obligations, payable from (i) payments to be made to KRT by the Company under the Surplus Note and Stock Repurchase Agreement described below, . . . and (ii) amounts deposited to the credit of the funds and accounts held by the Trustee . . . .

It is our understanding that all the KACo bonds were issued as revenue bonds.

The classification of these bonds as revenue bonds is significant because the issuing agency is protected from general liability on the bonds. Thus, even if a court were to construe the KRT bonds as having been issued by Pendleton and Marshall Counties rather than by the trust, the counties still would not be liable on the bonds except to the limited extent of the funds available from sources specified in the bond statement. Therefore, based on what we know of the transactions in question, we do not foresee any substantial likelihood that the counties will be held liable on the bonds.

We appreciate the assistance of the Legislative Research Commission in furnishing us with written materials that provide the factual background for this opinion. Because the KRT bond issue was a complex undertaking, we have no way of ascertaining whether there are additional documents or facts that could affect the conclusions we have reached. Our opinion is, of course, based on the situation as it has been presented to us; a definitive answer to the questions can be provided only through court action.

Sincerely,

Chris Gorman

Attorney General

Ross T. Carter

Assistant Attorney General