CITY OF TORRANCE, Pеtitioner, v. WORKERS’ COMPENSATION APPEALS BOARD and STATE COMPENSATION INSURANCE FUND, Respondents.
L.A. No. 31517
Supreme Court of California
Sept. 13, 1982.
Rehearing Denied October 13, 1982.
32 Cal.3d 371
Kegel, Tobin & Hamrick, Kegel & Tobin, David E. Lister and Stephan G. Thompson for Petitioner.
John H. Larson, County Counsel (Los Angeles), Milton J. Litvin, Daniel E. McCoy, Deputy County Counsel, Kendig, Stockwell & Gleason, Eugene L. Stockwell, Jr., Owens O‘Keefe Miller, John C. Shaffer, Jr., Herrick, Lundgren, Hays, Shaffer & Lancefield, James P. Jackson, City Attorney (Sacramento), and William P. Carnazzo, Deputy City Attorney, as Amici Curiae on behalf of Petitioner.
C. Gordon Taylor, Evans, Dalbey & Cumming, Barry F. Evans and Stafford Leland as Amici Curiae on behalf of Respondent State Compensation Insurance Fund.
OPINION
BIRD, C. J.—Does the 1977 amendment to
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 daughter Christine filed an application for workers’ cоmpensation 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
In 1973,
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The 1977 amendment provided for the stepped reduction of the five-year limitation of liability to one year by 1981 and repealed the “single employer exception.”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 Appeals Board (Board), it was undisputed that the State Fund was liable for 72 percent of the Atkinson settlemеnt under the provisions of
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 to the settlement. (
II.
This court must decide whether the 1977 repeal of the “single employer exception” to
The language of these clauses “appears unambiguously absolute . . . .” (Allied Structural Steel Co. v. Spannaus (1978) 438 U.S. 234,
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 promotion 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 [57 L.Ed.2d at p. 734].)
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 constitutionаl 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, 438 U.S. at p. 242 [57 L.Ed.2d at pp. 734-735].)
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 extinguishes them . . . .” (Home Bldg. & L. Assn. v. Blaisdell, supra, 290 U.S. at p. 431 [78 L.Ed. at p. 425], citing Sturges v. Crowninshield (1819) 17 U.S. (4 Wheat.) 122, 197-198 [4 L.Ed. 529, 549].)
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 Work[ers‘] 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 Work[ers‘] Compensation Laws . . . .” (Seе
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, necessarily 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) 45 Cal.2d 764, 771 [291 P.2d 433]; accord Swenson v. File (1970) 3 Cal.3d 389, 393 [90 Cal.Rptr. 580, 475 P.2d 852]; see also Home Bldg. & L. Assn. v. Blaisdell, supra, 290 U.S. at
In Swenson v. File, supra, this court spoke to this issue. The case involved a covenant in a partnership agreement which was made in 1960. The covenant provided that a retired partner would not “‘render service to a client which has its principal office within a radius of twenty miles from any partnership office which existed on the date of his retirement.‘” (Id., at p. 392.) When the agreement wаs made, this provision was invalid under
Here, however, there is such evidence. First, the language of the agreements between the City and the State Fund clearly 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 рarticular 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) 203 Cal. 359, 362-363 [264 P. 482].) Moreover, at oral argument in this case, the City agreed that it was the parties’ intention to incorporate subsequent changes in the law in their insurance agreements.
Since the City originally agreed to incorporate subsequent changes in the 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.
MOSK, J.—I dissent.
The issue in this case is whether an amendment to
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
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 emрloyee had suffered cumulative injury while a policy was in effect but who later became 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
The legislative revision of
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 сontribution under existing law, it would be 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.”3 Since City was liable for “cumulative trauma” suffered by its employees, it follows that State Fund also incurred such liability.
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 (
But the rule that liability for cumulative injuries must be apportioned among succеssive employers and their insurers has long prevailed in this state (e.g., Royal Globe Ins. Co. v. Industrial Acc. Com. (1965) 63 Cal.2d 60, 64 [45 Cal.Rptr. 1, 403 P.2d 129]), and the parties are pre-
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) 104 Cal.App.2d 27 [230 P.2d 637], between the time the decedent had incurred a cumulative injury and the date of his death in 1948, the Legislature had increased the benefits payable to an employee. The employer claimed that the award of compensation on the basis of rates in effect in 1948 impaired the obligation of its contract with the deceased employee because at the time of hire the parties “dealt in contemplation” of the statutes in existence when the injury was incurred and those statutes had become an integral part of the employment contract. It was held that the right to workers’ comрensation was not founded upon contract, but upon statutory rights and duties arising from the employer-employee relationship, and that such rights are imposed by the law as incidents of that status. (See also McAllister v. Bd. of Education (1963) 79 N.J. Super. 249 [191 A.2d 212, 218]; Schmidt v. Wolf Contracting Co. (1945) 269 App.Div. 201 [55 N.Y.S.2d 162, 167-168].)
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) 290 U.S. 398 [78 L.Ed. 413, 54 S.Ct. 231, 88 A.L.R. 1481], in which the United States Supreme Court upheld a state act that placed a moratorium on foreclosures during the Great Depression. To justify the impairment of contractual obligatiоns in that case, the court found four factors to be significant: (1) an emergency existed, as declared by the Legislature; (2) the legislation was addressed to a legitimate end—the protection of basic interests of society—and was not enacted for the advantage of particular individuals; (3) the legislative changes were appropriate to the emergency and were based on reasonable conditions; and (4) the legislation was temporary in operation and limited to the emergency. (Id. at pp. 444-447 [78 L.Ed. at pp. 432-433].)
In later cases, the high court has discussed additional factors to be considered in determining whether an impairmеnt violates the 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) 438 U.S. 234, 244-245 [57 L.Ed.2d 727, 736-737].)
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) 23 Cal.App.2d 325, 329 [73 P.2d 640].) Sections 11770 through 11881 of the Insurance Code provide extеnsive rules regulating the organization, powers, rates, policies, reports and other rights and duties of the State Fund. The board of directors of the State Fund is appointed by the Governor (
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 thе 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 [57 L.Ed.2d at p. 738].) When the City became self-insured in 1971, it reasоnably and justifiably relied on State Fund‘s honoring its contractual commitments, including the incurred but not reported loss reserve to cover anticipated cumulative trauma claims. The law in effect at that time mandated that State Fund be responsible for such future claims, and that law was part of the contract by which to measure the obligations of the parties. This has been made clear in every California case on the subject. (See, e.g., Interinsurance Exchange v. Ohio Cas. Ins. Co. (1962) 58 Cal.2d 142 [23 Cal.Rptr. 592, 373 P.2d 640]; Alpha Beta Food Markets v. Retail Clerks (1955) 45 Cal.2d 764, 771 [291 P.2d 433] (cert. den. 350 U.S. 996 [100 L.Ed. 861, 76 S.Ct. 547]); Bell v. Minor (1948) 88 Cal.App.2d 879, 881 [199 P.2d 718].) Thus, the 1977 changes attempted to shift unforeseen and formidable liabilities to the City, the severity of which in terms of millions of dollars cannot be doubted.
Accordingly, in applying the Blaisdell factors to this case we shоuld 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, 23 Cal.3d at p. 312.) In Sonoma County the Legislature had specifically included a declaration of fiscal emergency, but we found insufficient factual evidence to support such a conclusion. In the case before us, there is nothing in the record to indicate that an emergency justified the repeal. Analysis of the other Blaisdell criteria adds no more support to State Fund‘s position.
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 temporary 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, 438 U.S. at p. 241 [57 L.Ed.2d at p. 734].) We have pointed out that “The state‘s police power remains paramount, for a legislative body ‘cannot “bargain away the public health or the public morals.“‘” (Sonoma County, supra, 23 Cal.3d at p. 305, quoting from Blaisdell, supra, 290 U.S. at p. 436 [78 L.Ed. at p. 428].) However, it is equally true that “if the contract clause is to have any effect, it must limit the exercise of the police power to some degree.” (Sonoma County, supra, 23 Cal.3d at p. 305.) In my view the Legislature exceeded the limits of its power here.
I would hold that
Petitioner‘s application for a rehearing was denied October 13, 1982.
Notes
“The provisions of this subdivision shall expire on July 1, 1986, unless otherwise extended by the Legislature prior to that date.”
“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 . . . .” Nor does State of California v. Industrial Accident Commission (1959) 175 Cal.App.2d 674 [346 P.2d 861], support State Fund‘s position. There, the Legislature repealed a statute giving insurers a right of contribution from the Subsequent Injuries Fund under some circumstances—a right which was purely statutory rather than contractual in nature.