City of Torrance v. Workers' Compensation Appeals Board , 32 Cal. 3d 371 ( 1982 )

MOSK, J.

I dissent.

The issue in this case is whether an amendment to section 5500.5 of the Labor Code in 1977¹ results in the impairment of a workers’ compensation insurance contract, in violation of the United States and California Constitutions.²

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 proportion 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 In 1977 subdivision (d) was repealed, with the result that an employer whose employee had suffered cumulative injury while a policy was in effect but who later became self-insured was required to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.

Kenneth Atkinson died on March 12, 1978, from lung cancer. His only surviving dependent, his 15-year-old daughter Christine, filed an application for workers’ compensation death benefits against the City of Torrance (City) and the State Compensation Insurance Fund (State Fund). She alleged that his death resulted from cumulative trauma and exposure to carcinogens during his employment by City as a fireman from July 20, 1956, through April 30, 1977. State Fund had insured City for workers’ compensation liability from a time prior to 1956 through June 30, 1971. Since that date City has been self-insured. If section 5500.5, subdivision (d), had not been repealed in 1977, State Fund would have been liable for the payment of benefits for 15 of the 21 years of Atkinson’s employment.

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 impact 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 be unfair for the Legislature to absolve those workers’ compensation insurers of liability and shift that loss to the self-insured employer.”

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 (§§ 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 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 presumed to have recognized its existence at the time they entered into the insurance contract. Thus, the premiums paid by City to State Fund during the period the policy was in effect were based on the assumption that State Fund would be liable for any portion of a cumulative injury incurred by City’s employees during the period of policy coverage even though the employee’s disability may not have occurred until a later time. It is clear, therefore, that the parties had bound themselves to a contract which, at the time it was made, and until the amendment of section 5500.5 in 1977, obligated State Fund to reimburse City for its apportioned share of cumulative trauma claims.

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’ compensation 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 had paid premiums.⁴ Obviously, the relationship of an employer to its workers’ compensation carrier is fundamentally contractual in nature. Efforts by the Legislature to affect that relationship are subject to constitutional limitations.

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 obligations 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 impairment 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 and necessity is not appropriate in that circumstance “because the State’s self-interest is at stake.” (United States Trust Co. v. New Jersey (1977) 431 U.S. 1, 26 [52 L.Ed.2d 92, 112, 97 S.Ct. 1505]; Sonoma County Organization of Public Employees v. County of Sonoma (1979) 23 Cal.3d 296, 310 [152 Cal.Rptr. 903, 591 P.2d 1] [hereinafter Sonoma County]; see Fletcher v. Peck (1810) 10 U.S. (6 Cranch) 87 [3 L.Ed. 162].)

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 extensive 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 (id., § 11770), and its employees are civil servants. Furthermore, the State Fund is authorized to receive specific appropriations from the Legislature. (Id., § 11773.) This relationship between the state and State Fund makes the state a direct beneficiary of the 1977 legislative changes, and heightens the level of scrutiny that we must apply.

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 Structural Steel Co. v. Spannaus, supra, 438 U.S. at pp. 246-247 [57 L.Ed.2d at p. 738], quoting from Los Angeles Dept. of Water & Power v. Manhart (1978) 435 U.S. 702, 721 [55 L.Ed.2d 657, 673, 98 S.Ct. 1370].)

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 reasonably 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 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, 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 with a broad, generalized economic or social problem. (See Allied Structural Steel, supra, 438 U.S. at p. 245 [57 L.Ed.2d at pp. 736-737].) Moreover, the cost shift effected by the legislation was total and irrevocable rather than merely temporary in nature.

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 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.

1 Al references are to the Labor Code, unless otherwise noted.

2 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.”

3 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.

4 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.