Board of Trustees of the Kentucky School Boards Insurance Trust v. Joseph N. Pope Jr Deputy Rehabilitator of the Kentucky School Boards Insurance Trust Workers' Compensation Self-Insurance Fund

RENDERED: SEPTEMBER 28, 2017 . . TO BE PUBLISHED ~UJJttttt:e draurf af 1ft:eitfurku 20 l 5-SC:.000664-TG BOARD OF TRUSTEES OF THE KENTUCKY APPELLANT . SCHOOL BOARDS INSURANCE TRUST ON REVIEW FROM COURT OF APPEALS v. CASE NO. 2015-CA-001682-TG . FRANKLIN ' CIRCUIT COURT NO. 14-CI-01080 . JOSEPH N. POPE, JR. DEPUTY APPELLEES REHABILITATOR OF THE KENTUCKY SCHOOL BOARDS· INSURANCE TRUST WORKERS' . .COMPENSATION SELF-INSURANCE FUND; JOSEPH N. POPE, JR., DEPUTY REHABILITATOR OF THE KENTUCKY SCHOOL BOARDS INSURANCE TRUST PROPERTY AND. LIABILITY SELF-INSURANCE FUND; AND KENTUCKY ASSOCIATION OF COUNTIES, INC. OPINION OF THE COURT BY. JUSTICE VENTERS AFFIRMING Appellant, Board of Trustees of the Kentucky School Boards Insurance .Trust (KSBIT), appeals from a decision of the Franklin Circuit Court rejecting its claim of governmental immunity and thus denying its motion for summary judgment. Appellee, Joseph N. Pope, Jr., is the Deputy Rehabilitator of the Kentucky School Boards Insurance Trust Worke:i;::s' Compensation Self- Insurance Fund and _the Deputy Rehabilitator of Kentucky School Boards Insurance Trust Property and Liability Self Insurance Fund. The circuit court concluded that the KSBIT Board is not entitled to I . governmental immunity because its "parent" entity is not an agency of state. government that enjoys governmental iinmunity and it does not perform. a . . function that is integral to state. government. The KSBIT Board appealed the circuit court's decision to the Court of Appeals. We granted Appellee's . uncontested CR 74.02(2) motion to tra:nsfer this case directly to this Court. \. · ·. Upon review, we agree that the KSBIT Board does not qualify for governmentai immunity and so we affirm the Franklin Circuit Court's order denying· summary judgment.. I. FACTUAL AND PROCEDURAL BACKGROUND The Boatd of Trustees of the Kentucky School Boards Insurance Trust manages.the self-insurance funds established to_provide workers' compensation insurance .and property and liability insurance to local public school districts that are members of the Kentucky School Board Association (KSBA)~ Prior to the involvement of the: Deputy Rehabilitator, KSBIT's . responsibilities included the collection and management of the Trust's funds, which are comprised of member contributions, policy dividends, and rate refunds; investments and income thereon; and other .mon.ey and property in the hands of the Trust in connection with.its administration/KSBIT also . pex:formed other duties required in the administration of the Trust. KSBA ·2 served as the administrator of KSBIT providing the day-to-day management of the KSBIT .funds until 2010. Two of KSBIT'~ self-insurance funds, the Workers' Compensation Fund and the Property and Liability Fund, operated at a deficit for many years. Eventually, the Kentucky Department of Insurance stepped in and directed KSBIT to cure the deficits or assess its member school boards additional fees to balance its accounts. In response, KSBIT entered into agreements with the Ken~ucky League of Cities (KLC) and the Kentucky League of Cities Insurance Services Association (KLCIS) to borrow money and to transfer the administration of the KSBIT fundsto those entities.. Despite these ~fforts, the financial condition of KSBIT's ipsurance funds continued to deteriorate. KSBIT -wrote its last insurance policy during the 2012-2013 fiscal y~ar. In the latter part of 2013, KLC/KLCIS and.KSBIT filed a declaratory judgment action asking · the Franklin Circuit Court to force the Department of Insurance to assess . KSBIT's members for the additional money needed to overcome the deficits and repay the KLC/KLCIS loan. Ultimately, the Franklin Circuit Court placed the KSBIT Funds into rehabilitation. I . . .- . The Deputy Rehabilitator filed suit against the KSBIT Board for negligence, negligence per se, breach of fiduciary duty of diligence and due 1 The Deputy Rehabilitator assessed KSBIT ~oup members an amount in excess of $45 million to fill the KSBIT Funds' financial deficit. The assessment did not include the approximately $8 million worth of notes from KLC/KLCIS. The Franklin Circuit Court has since ruled that the notes were not subject to repa~ent. ' 3 care, and breach o(fiduciary duty of loyalty.2. The KSBIT Board asserted a defense of governmental immunity and moved for summary ju.dgment. After applying the two-prong test expounded upon in Comair, Inc. v; Lexington- ,) Fayette Urban CountyAirporfCorp;, 295 S.W.3d 91(Ky.2009), the circuit court concluded that KSBIT did not qualify for governmental immunity. Specifically, the circuit court determined that KSBIT was created by KSBA, a non- governmental entity. Since KSBA had no governmental immunity, its progeny KSBIT could not have immunity under the Comair test. The circuit court held under the second prong of the Comair analysis tha:t KSBIT's purpose of maintaining a self-insurance trust fund to provide its member organizations (local school boards) with workers' compensation and other insurance was not a function integral to state government. This appeal followed. On appeal, KSBIT asserts that the circuit court's Comair analysis was flawed for these reasons: 1) because the language of the Agreement and Declaration of Trust that established KSBIT reveals that its true "parent" organization is not KSBA, as the Circuit court found, but is instead the several local school districts that comprise KSBA and opted to participate in KSBIT's. insurance programs, and those member school districts do have govern.mental immunity; and 2) because KSBIT's function of providing local public school . districts with statutm:jly-mandated workers' compensation insurance and 2 .KSBA and Kentucky.League of Cities are co-defendants in the still-pending circuit court action but are not parties to this interlocutory appeal. 4 \ property.ins1:1rance advances the governmental function of public education and is, therefore, a function integral to state government. For reasons set forth below, we affirm t4e decision ·Of the Franklin Circuit· Court. II. ANALYSIS In Comair, this Court sifted through and digested decades of decisions · illustrating Kentucky cqurts' struggle to apply the concept of governmental immunity to public and quasi-public agencies outside the fundamental · departments of state government. We concluded that two elei:nents are decisive. The fi!st element is whether the entity in question was created by a governmental agericy that enjoyed the cloak of governmental immunity .. "This inquiry can be as simple as looking at the 'parent' of the·entity in question; i.e., was it created by the state or a county, or a city?" 295 S.W.3d at 99. The second element is whether the entity in question exercises a function that is "integral to state government." Id. (citing Gross v. Kentucky Board of Managers ' of World's Columbian Exposition, 49 S.W. 458, 459 .(Ky. 1899); Kentucky Center for the Arts v. Bems,.801S_.W'.2d327, 332 (Ky. 1990)). Comairs adaptation of a two-pronged test is consistent with our historical application of governmental immunity and it has proven to be a workable 'solution to a complex and often confusing issue. as seen, for. example,· . in Kentucky River Foothills Development Council, Inc. v. Phirman, 504 S. W. 3d 11 · ' ' (Ky. 2016), and in Coppage Construction. Co. v. Sanitation District No. 1; 459 5 S.W._3d.855 (Ky. 2015). Our review accordingly proceeds with an examination of the two ele!Ilents as they relate to KSBIT. A. The KSBIT Bo11;rd was not created by local public school boarc:is . . The KSBIT Board argues on appeal that it is imrriune from the claims of the Deputy Rehabilitator because it was created by locar public school boards which have traditionally and undisputedly enjoyed governmental immunity. The . KSBIT Board claims to. have inherited the governmental . immunity of its "parent" agencies. The irony is inescapable: KSBIT claims to have inherited the governmental immunity of the local public school boards whose insurance trust funds the rehabilitator claims KSBIT negligently mismanaged. KSBIT ·posits no other entity as its progenitor, and so if it was ~ot created by iocal. · public school boards, :it fails the first prong of the Comaif' test. The' Deputy Rehabilitator clairz:i.s that th~ parental entity of the KSBIT Board is not the local public school districts who seif-insured through-the . . KSBIT trust, but is instead the Kentucky School Boa:rd Association (KSBA). KSBA is a private 501(c)(4) non-profit c9rporation. According to its articles of . incorporation, membership· in KSBA is open to public school districts in . Ken·tucky as· well as privately funded schools and colleges in the state with interests and views consistent with KSBA's objectives and ·purposes. One of KSBA's stated purposes is to assist its members in meeting ''legal requfrements for the. efficient delivery of educational services to the public;" Obtaining ·workers' compensation coverage for school employees and property insurance 6 for school property are among lli:e legal requirements.of local public school boards. See KRS 342.340, KRS 160.105. . . The KSBIT Board was established in 1978 upon the ·execution of the Agreement and Declaration_ of Trust (Trust Agreement). The founding parties identified in clause 1 of the Trust Agreement3 are: KSBA, seven. named individuals to serve as Trustees, and the Trust itself. None of the individual public school boards or school distri~ts that comprise the· KSBA_ membership or participate in KSBIT's insurance programs are mentioned in the Trust Agreement. The Trust Agreement notes, in clauses 2 and 3 of the preamble, that "boards of educationin Kentucky are authorized to join together in a group or groups for th~ purpose of providing self-insurance of various kinds" and that some members of KSBA "may deem it expedient to join together in purchasing ·and procurin.g insurance coverage_ of various kinds or providing self-insurance." Clauses 4 and 5 of the Trust Agreement preamble declare that KSBA is "undertaking to furnish the leadership and guidance necessary to estaI?lish such [insurance] programs" and that "the most practical manner in which to establish and administer these [insu~~ce] programs is through a Trust created for. that purpose." 3 Clause 1 of the Trust Agreement states: "This AGREEMENT AND DECLARATION OF TRUST :tnade ... by and between the Kentucky School Boards. Association (hereinafter referred to as 'KSBA' or 'Association 1 and [seven named individuals] as duly appointed Trustees (hereinafter referred to collectively as 'Trustees1 and the Kentucky School Boards Insurance Trust (hereinafter referred to as 'Trust"), WITNESSETH:" 7 Article III of the Trust Agreement states the purpose of KSBIT · . . shall he: (1) to enable. school districts and other tax supported educational agencies of Kentucky who are members of the Association, to avail themselves of the benefits which will accrue to them in tl:le forming of a group or groups to provide .self-insurance · of various kinds or procure permitted insurance coverages of all · kinds; and (2) to provide risk management services. The trial court provided two reasons for deterqiining that KSBA, rather than the local public school board's members, is KSBIT's parent organization. First, the Trust Agreement language creating KSBIT directly idep.tifies KSBA, rather than the individu~ member school districts, as the entity undertaking ··the task of creating KSBIT. Second, pursuant to the agreement, it is KSBA that appoints the_KSBIT trustees, three.of\Yhorri must be the pr~sident,immediate ·past president. and vi.ce-president of KSBA. The KSBIT Board ackriowledges that individual pubfic school boards are not . actual . . parties . to the Trust Agreement. . The Board cl:iallenges the trial court's reasoning by pointing Out, based upon the language of the Trust · Agreement, that in creating KSBIT, KSBA was acting on behalf of, and through the authority of, its member s~hool boards. KSBIT also notes that Article X of · the Trust Agreement explicitly provides that "the Trust is operated ... as agent and representative of the participating members only:" We examine the genesis of_KSBIT to ascertain .its "parental." entity beginning upon the same path followed by the trial court: the Trust Agreement which created KSBIT'. The Trust Agreement is a contract, and is therefore subject to the rules of contract construction. In interpreting a contract, we 8 first determine as a matter of law whether the contract is ambiguous. A contract written in clear and unambiguous language is not subject to ' interpretation or construction and must be enforced according to its terms. New York Life Ins. Co. v. Conrad, 107 S.W.2d 248, 250-251(Ky.1937). In the absence of ambiguity, ... a court will interpret the contract's terms by assigning language its ord!nary meaning and without resort to extrinsic evidence. A contract is ambiguous if a ·reasonable person would find it susceptible to different ·or· inconsistent interpretations. Kentucky Shakespeare Festival, Inc. v. Dunaway, 490 S.W.3d 691, 694-695 (Ky. 2016) (citations and quo~ations omitted). The terms of the Trust Agreement cited to show whether KSBA or the public school boards being insured through KSBIT are the true progenitors of KSBIT are not ambiguous. The plain language of the Trust Agreement that · created KSBIT identifies only KSBA, KSBIT, and the Trustees. If the Trust Agreeme:pt can be regarded as KSBIT's birth certificate, then those parties are the parents. The language of the Trust Agreement also clearly expresses KSBA's leadership in undertaking to create KSBIT. The fact that it did so as a servjce to its members does not equate its actions to the actions of individual · · public school boards. KSBA is not the alter ego or the surrogate of its . members, and so KSBA's action upon the Trust Agreement, "undertaking to furnish the leadership and guidance necessary to establish such [insurance] programs," cannot be attributed as the action of the many' local school boards that comprise its membership. 9 The Trust Agreement significantly fails to mention any public school . board as a creator of the Trust. The document is not executed by any focal public school board. Of even more significance is the fact that· the member school boards_ have no inherent right to participate in KSBIT's insurance programs. The Tr{ist Agreement requires local public school bo~ds to apply for and gain acceptance to participate in KSBIT's insurance programs. It is difficult to conceive_ that local school boards having no right to participate in KSBIT ate the entities that created KSBIT. The Trust Agreement's plain and unambiguous language reveals that KSBA, an incorporate_d legal entity, created KSBIT for the benefit of its members. The fact that KSBIT was created for local public school .boards .does not go so far as to establish that KSBIT was created by local public school boards. No plausible reading of Trust Agreement supports the assertion that KSBA's school board members created KSBIT . .Regardless .of the terms of th_e Trust Agreement, the. KSBIT Board asserts· that because the res of the insurance trusts was funded by payments of participating school boards using state-appropriated moriie~, thos~ participating school boards mustbe regarded as KSBIT's "parents" for purposes of immunity analysis. KSBIT cites Franklin County v. Malone, 957 S.W.2d 195 (Ky~ 1997),4 as support for this argument. 4 Overruled on other grounds by Yanero v. Davis, 65 S.W.3d 510 (Ky. 2001). . 10 In Malone,_ an in:giate at the Franklin County Jail committed suicide. The ini:nate's estate filed suit against several government~ entities including Franklin County, the members of the Franklin County Fiscal Court, various · other Franklin County officials, the Commonwealth of Kentucky, and a state trooper. ·Against the backdrop of negligence .claims, the estate claimed that Franklin County's participation in a self-insurance fund to 'cover liabilitY claims5 against the county constituted a waiver of its claim to governmental immunity. Rejecting the plaintiffs arguments, this Court held that "participation in a self-in~urance _fund is not an implied waiver of immunity" and that "[p]articipation in a self-insuranc~ fund pursuant to an inter~local cooperation act does not give rise to an implied waiver of sovereign_immunity." · Id. at 203-204. With respect to a waiver of immunity, in Malone this Court distinguished the expenditure of county money to pay_ the premium for a commercial liability insurance policy frotri the contribution of county money into a self-insurance trust fund. Jc/,. at 204. The KSBIT Board relies upon that distinction to support its claim of jmmunity. The·K~BIT Board's reliance upon Malone is 'misplaced .. We are mindful that the instant case does not involVe any claim of negligence or wrongdoing by •. a local public school board; the clain:i here is directly·against the KSBIT Board s The specific self-insurance trust involved was the Kentucky All Lines Fund operated by the Kentucky Association of Coun·ties authorized pursuant to KRS 65 .150(3) under the authority of KRS 65 .210 et seq., the Inter...:Iocal Cooperation Act. 11 for its alleged mismanagement of th~ Trust. W~ see n_othing in Malone that . remotely suggests that, as the repository of the self-insurance funds, th~ KSBIT . . . . . ' ' .. Board cannot ·be sued for· mismanaging the. funds because it has the same . . governmental immunity as the public entities contributing funds it oversees .. Moreover; Malone addressed the is.sue of whether governmental entities, such as Franklin County and the members of its. Fiscal Court, which unquestionably have governmental immunity, waived their immunity at least to the extent of the funds they placed .in a self_;insurarice program·. The question before us in this case is not whether t~e public school boards waived their . immunity by participating in KSBIT. Malone holds thf;lt public entities with . governmental immunity do not lose that imm1:1nity when they participate in a self-insurance fund. Malone does not hold that the administrators of the self- .insurance fl,J.nd acquire the governmental immunity of their patro:ns. · We are satisfied that fr~m the language of the Trust· Agreement, the seminal instrument_ creating KSBIT, that the KSBIT Board was not .created by the local public school boards that partidpate in.. KSBIT's insurance programs . .From our conclusion tha..t the KSBIT Board is not the offspring of local public ·school.boards, ·. it follows that the KSBIT Board does not have . the governmental . . . . ' . immunity accorded to those governmental bodies .. We next consider the second prong of the Comair analysis: whether the KSBIT Board serves a function integral to state government. 12 B. The KSBIT Board. does not serve a function integral to state governmeJ;lt. KSBIT describes its role in providing insurance for public school boards as a gove~mental fu:r;iction because Kentucky school boards ate mandated to carry workers' compensation insurance and property insurance, and they can satisfy that obligation by participating in KSBIT. We do not agree with that analysis. As we held in Yanero v, Davis, "[l]ocal school boards fulfill a governmental function of state government by providing public education ·within a particular geographical area." 65 S.W.3d 510, 526 (Ky. 2001) (quoting Cullinan v. Jefferson County, 418 S.W.2d 4~7, 408 (Ky. 1967)). To.be more precise in light of Comairs two-prong test, we would say that local public . school boards perform an integral state .function by providing ~ducation for children and others situated within their respective geographic areas .. · However, the fact that local school boards, like private employers, must have workers' compensation coverage and other kinds of insurance does not transform the acquisition of that insurance into a governmental function. Providing or obtaining insurance, even though a self-insurance progr8;m, is not providing education: Innumerable things necessarily contribute to the a~ility of the school _boards to fulfill their governmental function, but the entities that supply those things do not themselves perform an integral state function. To determine whether an entity such as KSBIT performs ari integra) state function, we examine two elements: 1) "whether its function is 'governmental' 13 ~s opposed to. proprietary," and 2) "whether it is a matter of 'statewide' r concern." Coppage, 459 S.W.3d at 862. . . Providing employers with workers' compensation coverage or managing a self-insurance fund that enables employers to meet their workers' compensation requirement is not a function integral . to .state government;. it is . . not a governmental function at all. Workers' compensation coverage through insurance and self-Insurance pools is conducted almost exclusively by the private sector anc;l is clearly a proprietary function .. Even if KSBIT could be said to serve the public purpose of serving public· sch.ool boards, as we forewarned in Coppage, "not every 'public purpose' qualifies as an 'integral state function.' If that we·re the case, sovereign immunity would extend far beyond its current constraints, reaching virtually every local government agency fulfilling a perceived 'public purpose."' Id. Th~ KSBIT Board is no~ ari integral part of state ·government; it. does not fit "within regular. patterns.of administrative organization and. structure".~f state government. Berns, 801. S.W.2d at 332 ("[I]mmunity should extend only . to 'departments, boards or agencies that are such integral parts of 'state . . . . . . . government as;to come with~n regular patterns o(admin,istrative organization . . anp structure.'") (quoting Kentucky Region Eight v. Commonwealth, 507 S.W.2d: 489, 491 (Ky. 1974)). . . ·Performing the same business activity that is ordinarily accomplished by private individuals or .business corporations is not engaging in a governmental ·function. Yaner~, 65 S.W.~d at 51.9.:...520 (citii:ig 83 L.Ed. 794, 804-05). KSBIT 14 "performs substantially the same functions as any private business engaged in ·the [insurance] business." Berns, 801 S.W.2d at 331. KSBIT cites Breathitt County Board of Education v. Prater, 292 S.W.3d 88;3 (Ky. 2009), as an example where a service in aid of the educational mission of a local school board was deemed to be the performance of a governmental, function. The local school board in Prater provided on-site housing to the person serving as night watchman and groundskeeper. A social visitor to the property was injured and sued the school board. ·The v_isitor argued that the school board was not immune from suit because providing on-campus housing was proprietary in nature. We analyzed the facts under the theory that "education is an integral aspeet of state government and that activities in difect furtherance of education will be deemed governmental rather than proprietary." · Id." at 887' (citing Yanero, 65 S.W.3d 510; Withers v. University of Kentucky, 939 S.W.2d 340 (Ky.1997); Autry v. Western Kentucky University, 2_19 S.W.3d 713 (Ky. 2007)). We ·resolved the issue in favor of immunity, reasoning that the school board provided the groundskeeper w_ith _housing, not in the propriet~ry role of commercial landlord, "but to further its educational mission by protecting the facilities where that mission is carried out." Id. at 888. In other words, the watchman/ groundskeeper was not housed on campus so that the school board could rent out the house as a proprietary landlord; the watchman/ groundskeeper was housed on campus so that he was always available to protect school property. 15 The Board argues that, like the housing provided in Prater, KSBIT was not created for the purpose of participating in the commercial insurance market, but was instead created to provide local school boards with cheaper . . insurance coverage than was otherwise available. ·The difference between · Prater and the present .case is clear·. A private landlord could not serve the scho.ol board's need to have a night watchman housed on the school grounds; obvio.usly only the school board_, as the pwner of the property, could do that. . . Requiring (c;>r allowing) the watchman to live on school property did not put the school board in the proprietary role of a landlord. In contrast to that, KSBIT was effectively \ . a participant in the insurance market,· providing its members . the same "product" available from and ordinarily provided by non- governmental entities. Finally, we note that KSBIT's function is not a matter of statewide ., . concern. We do not imply that KSBIT's service is not important. But, the analysis is to determine if it performs afunction integral to state government. Unlike the airp.ort board in Comair which provides essential air transport infrastn.icture. which cannot be provided by private entities to meet Kentucky's commercial, industrial,, and public transportation needs, KSBIT provides · insurance protection readily available frorri a number of private sources. KSBIT compares more closely to the substance abuse pro~ams provided by the area development district in Kentucky River Foothills Development Council, Inc. v. Phirman, 504 S.W.3d 11 (Ky. 2016), which operates for the benefit of a discrete group. 16 KISBIT does not satisfy the elements required for concluding it ser\res an integral state function. III. CONCLUSION · For reasons stated above, we affirm the order of the Franklin Circuit. Court's denying summary judgment to the KSBIT Board. based upon the . . grounds of governmental immunity. This case· is remanded to Franklin Circuit Court for further proceedings consistent with this decision. All sittirig. All concur. COUNSEL FOR APPELLANT: Douglas L. Mcswain William Craig Robertson III Sharon Leslie Gold Courtney Ross Samford Wyatt, Tarrant & Combs, LLP 250 West Main Street, Suite 1600 Lexington, KY 40507 -17 46 COUNSEL FOR APPELLEE JOSEPH N. POPE JR, DEPUTY REHABILITATOR OF THE KENTUCKY SCHOOL BOARDS INSURANCE TRUST PROPERTY AND LIABILITY SELF-INSURANCE FUND, AND JOSEPH N. POPE, JR. DEPUTY. REHABILITATOR OF THE KENTUCKY SCHOOL BOARDS INSURANCE TRUST WORKERS' COMPENSATION SELF-INSURANCE FUND: I Perry Mack Bentley Todd Smith Page Sfoll, Keenan & I Ogden, PLLC 300 West Vine Street, Suite 2100 Lexington, KY 40507 - l 801 Justin Drew Clark Stoll, Keenan & Ogden, PLLC 17 2000 PNC· Plaza 500 West Jefferson Street Louisville, KY 40202 Paul C. Harnice· · Sarah Jackson Bishop Stoll, Keenon & Ogden, PLLC ·201 West Main Street, Suite A · · P.o~· Box 5130 Frankfort, KY 40601 Bany Lee Dunn ·Public Protectfon Cabinet · Office of Legal Services Emily Warf Fultz Maddox Dickens, PLC 101 S. 5th Street, Suite 2700 · Louisville, KY 40202 . COUNSEL FOR AMICUS CURIAE, KENTUCKY ASSOCIATION OF COUNTIES, INC.: Timothy A. Sturgill K~ntucky Association of Counties,· Inc. · General Counsel · 400 Englewood Dr. _ Frankfort, KY 40601 18