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 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., DEPl.JTY 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 Appell~t, Board of Trustees of the KentU:cky 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. Appeliee,. Joseph N. Pope, Jr., is the Deputy . Rehabilitator of the . . Kentucky School Boards Insurance Trust Workers' Compensation Self- Insurance Fund and _the Deputy Reh_abiHtator of Kentucky School Boards Insurance Trust Property and Liability Self I:nsurance Fund. · The circuit court concluded that the KSBIT Board is not entitled to governmentai immunity because its "parent" eritity is not an agency of state. goverriinent that enjoys governmental immunity and it does. not perforrn a . function that is integral to state. government. The KSBIT Bo~rd 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 governmental 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 man~gement of the Trust's funds, which are comprised of member contributions, policy dividends, and rate refunds; i~vestments and income thereon; and other .money and property- in the hands of the Trust in connection with its administration/KSBIT also. performed other duties required i~ the administratiqn 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's 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 insurance 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 1The Deputy Rehabilitator assessed.KSBIT gtoup 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 repayi;n~nt. ' 3 care, and breach of fiduciary duty of loyalty.2 The KSBIT Board asserted a defense of governmental immunity and moved for summary judgment. After applying the two-prong test expounded upon in Comair, Inc. v; Lexington- .J Fayette Urban County Airport' Corp~, 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 provid_e its member organizations . (local sc_hool 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 fourid, but is instead the several local school districts that comprise KSBA and opted to participate in KSBIT's insurance programs, and tho.se member school districts do have governmental immunity; and 2) because KSBIT's function of providing local public school . districts with statuto:r:ily-mandated workers' compensation insurance and 2 _!(SBA 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 tqe decision ·Of the Franklin Circuit · Court. II. ANALYSIS In Comair, this Court sifted through and digested decades of decisions · illustrating Kentucky courts' 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 elements are decisive. The first 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. Berns, 801 S.W'.2d 327, 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, 4S9 5 S.W._3d85S (Ky. 2015). {)ur reviewaccordingly proceeds with an examination · of the two elem.ents as they relate to KSBIT. A. The KSBiT Bo~rd was not created by local public school boards. . The KSBIT Board argues on appeal that it is immune 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 tq 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 fun_ds the rehabilitator claims KSBIT negligently mismanaged·. KSBIT . . ·posits no other entity as its progenitor, and so if it was not created by iocal. · P1:1blic school boards, it fails the first prong o_f the Comair test. · . . . The. Deputy Rehabilitator claims that th~ par~ntal entity of the KSBIT Board is not the local p:ublic school districts who seif-insured through the KSBIT trust, but is instead the Kentucky School Board Association (KSBA). . . . . KSBA is a private 50l(c)(4) non-profit c9rporation. According to its ·articles of ·. incorporation, mernbersl?-ip· in KSBA is open to public school districts in .. · . Kentucky 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 me~ting "legal requirements 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 the legal requirements of focal 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 districts that comprise the· KSBA membership or participate in KSBIT's insurance programs are mentioned in the Trust Agreement. The Trust Agreement notes, in clauses ~ and 3 of the preamble, that "boards of education. in 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 fogether in purchasing ·and procuring 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 estal?Iish such [insurance] programs" and that "the :i:nost practical manner in which to establish and· administer these [insu~ance] 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') and [seven named individuals] as duly appqinted Trustees (hereinafter referred to collectively as 'Trustees') 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 be: (1) to enable school districts and other tax supported educational agencies of Kentuckj ·who are members of the Association, to avail themselves of the benefits which will accrue to them . in the 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 determining that KSBA, rather than the. local public school board's members, is KSBIT's parent organization. · First, the Trust Agreement language creating KSBIT directly ide!ltifies KSBA, rather than the individu~l member school districts, as the entity undertaking . the task of creating KSBIT. SecondJ pursuant to the agreement, it is KSBA that . . . appoints the KSBIT trustees, three of whoni must be the president, immediate past president. and vi.ce-president of KSBA. The KSBIT Board acknowledges that individual public school boards are not actual parties to the Trust Agreement .. The Board challenges the trial court's reasoning by pointing out, based upon th~ language of the Trust . Agreement, that in creating KSBIT, KSBA was acting on behalf of, and through the authority . of, its member school .' boards. . KSBIT also notes.that Article X of· the Trust Agreement explicitly provid_es 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 ' iriterpretation 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 ordinary 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, 49~ 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 scJ!ool 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 Agreement 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 serv~ce 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, antj. so KSBA's action upon the Trust Agreement, "undertaking to furnish the leadership and guidance ne-cessary 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 everi more significance is the fact that the member school boards have no inherent right to participate in KSBIT':;; insurance programs. The Trust Agreement requires local public school bofil.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 langliage reveals that KSBA, an incorporate_d legal entity, created KSBIT for the benefit of its . members. The fact that K~BIT 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 the Trust Agreement, the. KSBIT Board ass~rts · ' ' ' that because the res of the insurance trusts was funded by payments of participating school boards using state-appropriated moriies, thos~ participating school boards must be 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 inmate's estate filed suit against several governmental 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 claimss 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-insurancb fund pursuant to an inter~local cooperation act does not give rise to an implied waiver of sovereign)mmunity." · 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 from· the contribution of county money into a self-insurance trust fund. Id. 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 Kentucey Association of Counties authorized pursuant to KRS 65.150(3) under the authority of KRS 65.210 et seq., the Inter_;local Cooperation Act. 11 for its alleged mismanagement of th~ Trust. We see n_othing in Mafone that . . remotely suggests that, as the repository of the self-insurance funds, the KSBIT Board cannot ·be sued for mismanaging the. funds because it has the same governmental immunity as the public entities contributingfunds it oversees .. Moreover, Malone addressed the i~sue of whether governmental entities, such as Franklin County and the members of its. Fiscal Court, which unquestionably ha~e governmental im~unity, waived their immunity at least to . . the extent of the funds they placed in a self...:insuraiice program. The question before us in this _case is not whether the public school boards waived their . immunity by pa,rticipating in KSBIT. Malone holds that pu·blic entities with governmental immunity do not lose that im·m';lnity when they participate in· a self-insurance fund. Malone does not hold that the administrators of the self- · insurance f-µnd acquire the governmental immunity of their patrons. · 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 th~t the KSBIT Board is not the offspring of local public scl;lool.boards, it follows that the KSBIT Bo.ard does not }?.ave the gove~mental immu11ity accorded. to those gov~rnmental bodi~s. We next consider the s~cond 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 government. KSBIT describes its role in providing insurance for public school boards as a governmental fu:µction bec;;i.use Kentucky school boards are 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 .,I 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 407, 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 education 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 necess.arily 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 . . . as 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 conduc.ted 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_o9l boards, as we forewarned in CQppage, "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 aperceived 'public purpose."' Id. . Th~ KSBIT Board is not.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(admi~istrative organiZation a~d' 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. YanerQ, 65 S.W.~d at 51:9-520 {citing 83 L.Ed. 794, 804-05). KSBIT 14 "performs substantially the. same functions as any private business engaged in the [insurance] business." Berns, BOl S.W.2d at 331. KSBIT cites Breathitt County Board of Education v. Prater, 292 S.W.3d 883 (Ky. 2009), as an example where a service in ai~ of the educational mission of a local school board was deemed to be the performance of a governmental , function. The local school board iri 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 aspeCt of state government and that activities in ditect furtherance of education will be deemed governmental rather th.an 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~th housing, not in the proprietary 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 hou·sed 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 differen.ce between Prater and the present .case is clear·. A private landlord could not serve the school board's need to have a riight watchman housed on the school grounds; obvio.usly only the school board, as the owner of the property, could do that. . . Requiring (~r allowing) the watchman to live on school property did not put the school boc:i.rd in the proprietary role of a landlord. In contrast to that, KSBIT was eff~ctively 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 a function integral to state government. Unlike the airport board in Comair which provides essential air transport infrastructure. which cannot be provided by private entities to meet Kentucky's commercial, industrfal, and public transportation needs, KSBIT provides · insurance protection readily available frorri a number of private. sources. KSBIT compares more closely to the substance abuse programs provided by the area development district in K~ntucky River Foothills Development Council, Inc. . v. Phinnan, 504 S.W.3d 11 (Ky. 2016), which operates for the benefit of a discrete group. 16 KIS~IT does not satisfy the elements required for concluding.it serves 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 sitting. All concur. COUl'lSEL FOR APPELLANT: Douglas L. Mcswain William Craig Robertson Ill Sharon Leslie Gold Courtney Ross Samford Wyatt, Tarrant & Combs, LLP 250 West Main Street, Suite 1600 Lexington, KY 40507 -1746 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: Perry Mack Bentley Todd Smith Page Sfoll, Keenon & Ogden, PLLC 300 West Vine Street, Suite 21-00 Lexington, KY 40507-lBOl Justin Drew Clark Stoll, Keenon & Ogden, PLLC 17 2000 PNC. :Pl8Za 500 West Jefferson Street . Louisville, KY 40202 Paul C. Harnice Sarah Jackson Bishop Stoll, Keenon & Ogden, PLLC 20 l West Main Street, Suite A · . P.O~Box 5130 Frankfort, KY 40601 Barry Lee Dunn ·· Public Protection Cabinet · Office of Legal Services Emily Warf . Fultz Madtjox 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 Coµnties, ·Inc. · General -Counsel 400 -Englewood Dr. Frankfort, KY 40601 18 19