Lead Opinion
Opinion
Dоes the 1977 amendment to Labor Code section 5500.5, which limits the employers and compensation insurers among whom liability for cumulative injury and occupational disease claims may be apportioned, violate the contract clause of the United States and California Constitutions?
I.
Kenneth Atkinson was employed as a fireman by the City of Torrance (City) from July 20, 1956, to April 30, 1977. For fifteen of the twenty-one years that Atkinson worked for the City, the State Compensation Insurance Fund (State Fund) was the workers’ compensation insurer for the City. Since July 1, 1971, the City has not carried insurance.
On March 12, 1978, Atkinson died of lung cancer. Subsequently, his fifteen-year-old daughtеr Christine filed an application for workers’ compensation death benefits against the City and the State Fund. Christine claimed that her father’s death was proximately caused by a cumulative injury which developed during the course of his employment with the City.
After lengthy negotiations, the City settled the Atkinson claim for $28,165.49. Thereafter, contribution was sought from the State Fund for 72 percent (15/21sts) of the settlement amount. The City based its claim on section 5500.5 of the Labor Code.
Section 5500.5 was enacted in 1951 to codify the rule announced by this court in Colonial Ins. Co. v. Industrial Acc. Com. (1946)
In 1973, section 5500.5 was amended to limit liability for occupational disease or cumulative injury to the five years of employment immediately preceding either the date of injury or the last dаte on which the employee worked in an occupation which exposed him to the hazards which caused the occupational disease or cumulative injury. (Stats. 1973, ch. 1024, § 4, p. 2032.) Apportionment of liability to earlier years was forbidden except where “the employment exposing the employee to the hazards of the claimed occupational disease or cumulative injury was for more than five years with the same employer .... ” (Id. at p. 2034.) In such circumstances, liability' could be extended to “all insurers who insure[d] the . . . compensation liability of such employer, during the entire period of the employeе’s exposure with such employer .. .. ” (Ibid.)
In 1977, the section was again revised. The 1977 amendment provided for the stepped reduction of the five-year limitation of liability to one year by 1981 and repealed the “single employer exception.” (Stats. 1977, ch. 360, § 1, p. 1334.) By its terms, the amendment was applic
In the contribution proceedings held by the Workers’ Compensation Apрeals Board (Board), it was undisputed that the State Fund was liable for 72 percent of the Atkinson settlement under the provisions of section 5500.5 which were in effect prior to the 1977 amendment. It was also undisputed that if the 1977 amendment were applied, the City, as a legally uninsured employer, was solely liable for the settlement.
Relying on the 1977 amendment, the State Fund moved for dismissal of the case. The City opposed this motion and argued that the 1977 amendment violated the state and federal prohibitions against impairment of contracts since it abrogated the State Fund’s alleged preexisting contractual obligation to contribute tо the settlement. (U.S. Const., art. I, § 10; Cal. Const., art. I, § 9.) The Board granted State Fund’s motion and denied the City’s subsequent petition for reconsideration. The City now seeks review of the Board’s decision.
II.
This court must decide whether the 1977 repeal of the “single-employer exception” to section 5500.5 violates the contract clauses of the United States and California Constitutions.
The language of these clauses “appears unambiguously absolute ... . ” (Allied Structural Steel Co. v. Spannaus (1978)
As the United States Supreme Court recently stated, “it is to be accepted as a commonplace that the Contract Clause does not operate to obliterate the police power of the States. ‘It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the State from exercising such powers as are vested in it for the prоmotion of the common weal, or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected.. ..’ [Citation.] As Mr. Justice Holmes succinctly [stated] ... ‘One whose rights, such as they are, are subject to state restriction, cannot remove them from the power of the State by making a contract about them. The contract will carry with it the infirmity of the subject matter.’” (Allied Structural Steel, supra, 438 U.S. at pp. 241-242 [
Thus, a finding that the state in the exercise of its police power has abridged an existing contractual relationship does not in and of itself establish a violation of the contract clause. It is the beginning, not the end of the analysis. A finding of impairment merely moves the inquiry to the next and more difficult question—whether that impairment exceeds constitutional bounds. Obviously, if the contract clause is to have any substance, it must place some limits upon the state’s exercise of the police power. (Allied Structural Steel, supra,
In applying these principles to the present case, this court’s first inquiry must be whether the repeal of the “single employer exception” impaired the obligations of the City’s insurance contracts with State Fund. “The obligations of a contract are impaired by a law which renders them invalid, or releases or еxtinguishes them .... ” (Home Bldg. & L. Assn. v. Blaisdell, supra,
On closer examination, it is apparent that the City’s characterization of the State Fund’s obligation is not accurate. Pursuant to its insurance contracts with the City, the State Fund agreed “to pay promptly and directly to any person entitled thereto under the Workers’] Compensation Laws ..., and as therein provided, any sums due for compensation .. .; to be directly and primarily liable ... to pay the compensation, if any, for which the [City] is liable .. .; and [to] be bound by and subject to the orders, findings, decisions or awards rendered against the [City] under the Workers’] Compensation Laws .. .. ” (See Ins. Code, §§ 11651, 11654.)
Clearly, the only obligation the State Fund assumed was the obligation to pay what the workers’ compensation law required. Did this promise encompass the text of that law as it existed when the insurance contracts were made, or did the parties recognize and intend that subsequent changes in the law be applied?
Ordinarily, “‘all applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have had in mind, nеcessarily enter into the contract and form a part of it, without any stipulation to that effect, as if they were expressly referred to and incorporated.’ [Citation.]” (Alpha Beta Food Markets v. Retail Clerks Union (1955)
In Swenson v. File, supra,
Here, however, there is such evidence. First, the language of the agreements between the City and the State Fund cleаrly indicates that it was the intention of all the parties to incorporate subsequent changes in the law. “[W]hen an instrument provides that it shall be enforced according either to the law generally or to the terms of a particular .. . statute, the provision must be interpreted as meaning the law or the statute in the form in which it exists at the time of such enforcement.” (14 Cal.Jur.3d, Contracts, § 173, p. 433, citing United Bank & Trust Co. v. Brown (1928)
Since the City originally agreed to incorporate subsequent changes in thе law of workers’ compensation in its insurance agreements with the
The decision of the Workers’ Compensation Appeals Board is affirmed.
Richardson, J., Newman, J., Kaus, J., Broussard, J., and Reynoso, J., concurred.
Notes
All statutory references are to the Labor Code unless otherwise indicated.
Although not codified in section 5500.5 until 1973, this rule was applied to cumulative injury сlaims as well. (See, e.g., Fireman’s Fund Indem. Co. v. Ind. Acc. Com. (1952)
The full text of this exception read as follows: “If the employment exposing the employee to the hazards of the claimed occupational disease or cumulative injury was for more than five years with the same employer, or its predecessors in interest, the limitation of liability to the last five years of employment as set forth in subdivision (a) shall be inapplicable. Liability in such circumstances shall extend to all insurers who insure the workmen’s compensation liability of such employer, during the entire period of the employee’s exposure with such employer, or its predecessors in interest. The respective contributions of such insurers shall be in proportion to employment during their respective periods of coverage. As used in this subdivision, ‘insurer’ includes an employer who during any period of the employee’s exposure was self-insured or legally uninsured.
“The provisions of this subdivision shall expire on July 1, 1986, unless otherwise extended by the Legislature prior to that date.”
As amended by Statutes 1977, chapter 360, section 1, page 1334, Labor Code section 5500.5, subdivision (a) provides: “(a) Except as otherwise provided in Section 5500.6 [which applies to household employees], liability for occupational disease or сumulative injury claims filed or asserted on or after January 1, 1978, shall be limited to those employers who employed the employee during a period of four years immediately preceding either the date of injury, as determined pursuant to section 5412, or the last date on which the employee was employed in an occupation exposing him to the hazards of such occupational disease or cumulative injury, whichever occurs first. Commencing January 1, 1979, and thereafter on the first day of January for each of the next two years, the liability period for occupational disease or cumulative injury shall be decreased by one year so that liability is limited in the following manner:
“For claims filed or
asserted on or after: The period shall be:
January 1, 1979 ...............................................three years
January 1, 1980 .................................................two years
January 1, 1981 and thereafter ....................................one year
“If, based upon all the evidence presented, the appeals board or referee finds the existence of cumulative injury or occupational disease, liability for such cumulative injury or occupational disease shall not be apportioned to prior or subsequent years .... ”
For example, if a worker’s last injurious exposure were found to have taken place during the period that State Fund insured the City, State Fund would remain obligated to pay all or part of any compensation award under the 1977 amendment to section 5500.5. (See ante, fn. 4.)
Dissenting Opinion
I dissent.
The issue in this case is whether an amendment to section 5500.5 of the Labor Code in 1977
The workers’ compensation law requires an employer to pay benefits to an employee injured as the result of continuous trauma or occupational disease incurred in the employment; Prior to the amendment of section 5500.5 in 1977, the liability for such benefits was divided among various employers (with certain limitations) in propоrtion to the period of time the employee was exposed to the risk in each employment. The workers’ compensation insurer was liable for these pro rata benefits.
Subdivision (d) of the section provided before 1977 that if the employment was for a period longer than five years, each successive insurer of the employer during the period of cumulative injury was liable for the payment of benefits for the period during which the policy was in force. In 1977 subdivision (d) was repealed, with the result that an employer whose employee had suffered cumulative injury while a policy was in effect but who later becаme self-insured was required to pay compensation attributable to a period during which it had paid premiums for a policy to cover the risk of such injury.
City settled the Atkinson claim for $28,165.49, reserving the right to seek contribution from State Fund, which agreed to pay 72 percent of the settlement if the 1977 amendment to section 5500.5 were held to be unconstitutional. I believe that it is unconstitutional as applied in this case.
The legislative revision of section 5500.5 in 1977 was no mere minor alteration. It accelerated reduction (through 1981) of the five-year period of employer (and insurer) liability to one year, and eliminated the “single employer exception” by repealing subdivision (d). According to the report of a legislative committee which considered the proposed amendment, the purpose of reducing the period of exposure for individual risks to one year was to permit “loss experiences to be more closely reflected in current dollars.” The report went on to point out that a major consequence of the bill would be a dramatic shift of liability for cumulative injuries: “To the extent that the shift is from one insurer to another, and assuming that each has a fairly representative spectrum of risks, the net fiscal imрact of enactment of [the bill] would appear relatively insignificant. To the extent that an insurer is absolved of liability in one case, he may be presented with a larger liability on another. The net effect may be a ‘wash.’”
On the other hand, “if an employer has recently become self-insured, he may be held fully liable for the payment of benefits for cumulative injury without being able to turn to a prior insurer for contribution in cases where the single employer exception applies. Opponents argue that since they paid their premium on an ‘occurrence’ basis and are entitled to contribution under existing law, it would bе unfair for the
As to the financial amounts involved in this shift, the report stated: “The exact amount ... is not known but it has been estimated by the insurance industry to be approximately $52.7 million for the period of 1978 through 1981. Of this amount, it is estimated that $15.3 million will be shifted to private self-insurers and $37.4 million shifted to public agencies.” The analysis concluded that “the greatest fiscal impact appears to be on those public agencies who were formerly covered by the State [Fund].” (Assem. Com. on Finance, Insurance and Commerce, Interim Hgs. on Assem. Bill No. 155 (Apr. 27, 1977) p. 4.) That, of course, is the predicament of the City of Torrance.
The first step in determining the merit of City’s assertion that the deletion of the “single employer exception” results in an unconstitutional impairment of its contract with State Fund is to decide whether the policy covered the injury sustained by Atkinson. The policy, in accordance with provisions of law, required State Fund to be “liable to employees ... or in the event of death, to their dependents, .to pay the compensation ... for which the insured is liable.”
State Fund contends, however, that the repeal of the “single employer exception” in 1977 did not affect its obligation to provide benefits for injuries which occurred during the time its policy was in force. That is, it argues, since a cumulative injury occurs when the employee first suffers disability and knows that the disability is caused by his employment (§§ 3208.1, 5412), Atkinson was not injured while State Fund insured City, but thereafter, while City was self-insured. Thus, the 1977 amendment only deprived City of its right to seek contribution for the portion of the injury sustained by Atkinson during the time the State Fund policy was in effect.
But the rule that liability for cumulative injuries must be apportioned among successive employers and thеir insurers has long prevailed in this state (e.g., Royal Globe Ins. Co. v. Industrial Acc. Com. (1965)
State Fund argues that a workers’ compensation contract is subject to policy considerations and that the Legislature may, by statute, affect the rights of the parties under such a contract. In support of this assertion, it cites cases from California and other jurisdictions, and points to the fact that the policy of insurance provided that it was to be governed by the workers’ compensation laws. The majority opinion leans heavily on that proposition.
But the cases relied upon for this proposition are inapposite. In Argonaut Mining Co. v. Ind. Acc. Com. (1951)
In the present case, however, the issue is not the liability of an employer for compensation to his employee, but whether the state may by statute relieve an insurer of its obligation to indemnify the employer for a risk which the insurer had agreed to bear and for which the employer
Since the 1977 legislation relieved State Fund of obligations it would have had prior to the amendment, the elimination of the “single employer exception” amounted to an impairment of contract. Admittedly not every contractual impairment violates the constitutional mandate; under some circumstances impairment has been held to be justified.
The seminal case in contract clause analysis is Home Building and Loan Assn. v. Blaisdell (1934)
In later cases, the high court has discussed additional factors to be considered in determining whether an impairment violates thе Constitution. Governmental acts are subject to a stricter level of scrutiny when a “substantial impairment” is found. In such a situation, a “careful examination of the nature and purpose of the state legislation” must be conducted, keeping in mind that “[t]he severity of the impairment measures the height of the hurdle the state legislation must clear.” (Allied Structural Steel Co. v. Spannaus (1978)
Another circumstance which calls for stringent review is if the legislation modifies the government’s own financial obligations. The deference traditionally given to a legislative assessment of reasonableness
In applying these standards to the contract in question, we must first decide whether the state was attempting to modify its own obligations. While the state itself is not a party to this proceeding, the State Fund, an autonomous state agency, is involved. Organized and established by the Legislature in 1914, pursuant to the provisions of article XX, section 21, of the California Constitution, the State Fund has been regulated and supervised directly since that time by the state Insurance Commissioner. (See Gilmore v. State Comp. Ins. Fund (1937)
The case for stricter scrutiny is buttressed if the contractual impairment is determined to be severe. In Allied Structural Steel the high court invalidated Minnesota’s Private Pension Benefits Protection Act when it found its effect on contractual obligations severe. There a basic term of the pension contract was retroactively modified. The court stressed the element of reliance as a key ingredient in measuring severity, particularly in the context of pension and insurance funds. “‘These plans, like other forms of insurance, depend on the accumulation of large sums to cover contingencies. The amounts set aside are determined by a painstaking assessment of the insurer’s likely liability. Risks that the insurer foresees will be included in the calculation of liability, and the rates or contributions charged will reflect that calculation. The occurrence of major unforeseen contingencies, however, jeopardizes the insurer’s solvency and, ultimately, the insureds’ benefits. Drastic changes in the legal rules governing pension and insurance funds, like other unforeseen events, can have this effect.’’” (Italics added.) {Allied
As was the case in Allied Structural Steel, the statutory changes which removed the single employer exception in 1977 “nullifie[d] express terms” of the State Fund’s contractual obligations with the City and “impose[d] a completely unexpected liability in potentially disabling amounts.” {Id., at p. 247 [
Accordingly, in applying the Blaisdell factors to this case we should observe stricter scrutiny because the contractual impairment is severe and the state is attempting to modify its own obligations.
The first part of the Blaisdell test—a legislative declaration of emergency—is a “threshold” hurdle that the state must overcome. {Sonoma County, supra,
The remaining factors of the analysis require a showing that the legislation was enacted to protect basic interests of society, were based on reasonable conditions, and were temporаry in duration. The legislative acts here, as those in Allied Structural Steel, were not enacted to deal
State Fund and amicus curiae urge that the 1977 revisions were necessary to “streamline procedures” and “reduce litigation costs and delay.” As to the effect on litigation, however, there is no showing that the “single employer exception” had any negative impact on an applicant’s ability to obtain benefits in a just and expeditious fashion. And the need to “streamline procedures” is obviously insufficient to justify the severe impairment which occurred here. The streamlining for State Fund is at the expense of a substantial burden upon the City.
The board and State Fund claim that the 1977 legislation was justified as an exercise of the police power; they suggest that when the state acts under this plenary power, contractual obligations can be impaired at will. It is of course true that the contract clause does not obliterate the police power of the state. (Allied Structural Steel, supra,
I would hold that section 5500.5 is unconstitutional insofar as it relieves State Fund of its obligation to pay death benefits attributable to Atkinson’s employment during the time it provided workers’ compensation insurance to City. I would annul the board’s decision.
Petitioner’s application for a rehearing was denied October 13, 1982.
Al references are to the Labor Code, unless otherwise noted.
Article I, section 10, of the United States Constitution provides, “No State shall ... pass any .law impairing the obligation of contracts .... ”
Article I, section 9, of the California Constitution similarly mandates that “A law impairing the obligation of contracts may not be passed.”
Section 11651 of the Insurance Code provides that every contract of workers’ compensation insurance shall provide that the insurer will be liable for payment of compensation for which the employer is liable, subject to the provisions of the policy.
Nor does State of California v. Industrial Accident Commission (1959)