Bd. of Trs. of the Ky. Sch. Boards Ins. Trust v. Pope

528 S.W.3d 901

BOARD OF TRUSTEES OF the KENTUCKY SCHOOL BOARDS INSURANCE TRUST, Appellant

v.Joseph N. POPE, Jr. Deputy 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., Appellees

2015-SC-000664-TG.

Supreme Court of Kentucky.

SEPTEMBER 28, 2017

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 40507-1746.

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, Stoll, Keenon & Ogden, PLLC, 300 West Vine Street, Suite 2100, Lexington, KY 40507-1801, Justin Drew Clark, Stoll, Keenon & Ogden, PLLC, 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, Barry Lee Dunn, Public Protection 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, Kentucky Association of Counties, Inc., General Counsel, 400 Englewood Dr., Frankfort, KY 40601.

OPINION OF THE COURT BY JUSTICE VENTERS

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 Workers' 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 governmental immunity because its "parent" entity is not an agency of state government that enjoys governmental immunity 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 transfer 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 Board 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 money and property in the hands of the Trust in connection with its administration. KSBIT also performed other duties required in the administration of the Trust. KSBA 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 Kentucky 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 funds to those entities. Despite these efforts, the financial condition of KSBIT's insurance funds continued to deteriorate. KSBIT wrote its last insurance policy during the 2012-2013 fiscal year. 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.¹

The Deputy Rehabilitator filed suit against the KSBIT Board for negligence, negligence per se, breach of fiduciary duty of diligence and due 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-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 that 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 governmental immunity; and 2) because KSBIT's function of providing local public school districts with statutorily-mandated workers' compensation insurance and property insurance advances the governmental function of public education and is, therefore, a function integral to state government.

For reasons set forth below, we affirm the 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 agency 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, 105 Ky. 840, 49 S.W. 458, 459 (1899) ; Kentucky Center for the Arts v. Berns, 801 S.W.2d 327, 332 (Ky. 1990) ).

Comair's 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 S.W.3d 855 (Ky. 2015). Our review accordingly proceeds with an examination of the two elements as they relate to KSBIT.

A. The KSBIT Board 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 local 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 not created by local public school boards, it fails the first prong of the Comair test.

The Deputy Rehabilitator claims that the parental entity of the KSBIT Board is not the local public school districts who self-insured through the KSBIT trust, but is instead the Kentucky School Board Association (KSBA). KSBA is a private 501(c)(4) non-profit corporation. According to its articles of incorporation, membership 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 meeting "legal requirements for the efficient delivery of educational services to the public." Obtaining workers' compensation coverage for school employees and property insurance for school property are among the 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 districts that comprise the KSBA membership or participate in KSBIT's...