Schools Alliance for Workers Comp Excess II v. FresnoCounty Office of Ed.

Filed 5/11/07 Schools Alliance for Workers Comp Excess II v. Fresno County Office of Ed. CA5

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIFTH APPELLATE DISTRICT

APPEAL from a judgment of the Superior Court of Fresno County. Donald S. Black, Judge .

Robert J. Rosati for Defendant and Appellant.

Farmer, Murphy, Smith & Alliston, Craig E. Farmer and Suzanne M. Nicholson for Plaintiff and Respondent.

Stephen D. Underwood for CSAC Excess Insurance Authority and Kronick, Moskovitz, Tiedemann & Girard and Robin Leslie Stewart for California Association of Joint Powers Authorities as Amici Curiae on behalf of Plaintiff and Respondent.

This appeal challenges the trial courts interpretation of an agreement entered into between appellant, the Fresno County Superintendent of Schools, sued as the Fresno County Office of Education, and respondent, the Schools Alliance for Workers Compensation Excess II. Respondent is a self-funded Joint Powers Authority (JPA) that was formed to provide excess workers compensation insurance to its members. These members, public education agencies, make annual contributions to a risk pool to enable respondent to pay and handle all workers compensation excess claims against members. Under the Joint Exercise of Powers Agreement and the accompanying bylaws (Agreement), respondent has the power to assess members their pro rata share of necessary additional contributions.

After appellant withdrew as a member, respondent declared deficiency assessments for certain years in which appellant was a member. The invoices sent to appellant for these assessments went unpaid. Thereafter, respondent filed the underlying breach of contract action against appellant.

The trial court concluded that respondent could properly assess appellant under the Agreement as a matter of law. A jury found in favor of respondent and awarded damages.

Appellant contends that, because respondent did not establish and exhaust a reserve account before the assessment, appellant owes no additional money to respondent. Appellant further argues that respondents action is barred by the statute of limitations.

As discussed below, although the Agreement states that a reserve account shall be established for each withdrawing member, the establishment and exhaustion of such a reserve account is not a condition precedent to the obligation of a former member to pay an assessment. Further, the statute of limitations ran separately for each assessment invoice. Thus, the action is not time barred. Accordingly, the judgment will be affirmed.

BACKGROUND

Respondent, a self-funded JPA, was established pursuant to Government Code section 6500 et seq., to provide the services and other items necessary and appropriate for the establishment, operation and maintenance of a joint group purchase program for workers compensation excess protection. As such, respondent was to perform, or contract for the performance of, the financial administration, policy formulation, claim service, legal representation, safety engineering, and other development as necessary for the payment and handling of all workers compensation excess claims against members.

Members participating in this program are public educational agencies who have signed the Agreement. Each member is obligated to make an annual contribution as calculated by the board of directors consisting of the members share of: the cost of the joint program; the general fund requirements; and all other costs.

All money received by respondent is deposited into the general fund. An operating account is maintained out of the general fund. The operating account covers insurance premiums, claims management expenses, safety engineering, data processing costs, and miscellaneous operating expenses. The Agreement also provides that a claim account and a reserve account shall be established, if necessary. The reserve account funds the general reserves, i.e., monies for claims which have been incurred by the members but remain unpaid, and the Catastrophe Reserves, i.e., monies for claims which have not been incurred.

Each fiscal year operates separately from every other fiscal year with regard to the years assets and obligations. Since the budget for each year is based on actuarial estimates, adjustments may need to be made. Thus, the Agreement provides Should the total obligations for any program year of [respondent] exceed the total assets of that year, that years members may be assessed a pro-rata share of the additional contribution as determined by the Board of Directors. Similarly, if the assets for a program year exceed the years obligations, members may receive a return of contribution.

After completing a minimum term, any member may withdraw. The Agreement provides that

Upon the withdrawal of any member, the Board of Directors shall establish a reserve account for each claim pending against the withdrawing member in an amount to be determined by the Board of Directors. The Board of Directors shall establish an additional reserve account for possible claims arising out of facts occurring while the withdrawing member was a member of [respondent] but submitted after said member has withdrawn from same. The amount of said additional reserve account shall be set by the Board of Directors.

Further, a withdrawing member continues to be responsible for the amount of any costs, liabilities, assessments, or contingencies required because of claims which exceed the amount set aside in the reserve accounts established .

Appellant joined respondent effective July 1, 1990, and withdrew effective June 30, 1996. However, when appellant withdrew respondent did not establish any reserve accounts.

In October 1998, respondents board of directors declared and authorized assessments for program years 1990/1991 and 1991/1992. On December 18, 1998, an invoice was sent to appellant for its pro rata share of these assessments. Respondents expectation was that this bill would be paid during the following fiscal year, i.e., between July 1, 1989, and June 30, 2000. Invoices for additional assessments were sent to appellant in July 2000, 2001, 2002, and 2003. Appellant never responded to or paid any of the assessment invoices.

Respondent filed the underlying complaint on October 14, 2003. Following appellants demurrer, one cause of action for breach of contract remained. Appellants affirmative defenses included the failure of a condition precedent and the four-year statute of limitations on causes of action for breach of written contract.

Trial of the case was bifurcated. In phase 1 the trial court ruled that the contract on its face did not create a condition precedent that reserve accounts had to be established and exhausted before respondent could levy assessments. The trial court based this ruling on the contract itself. In the second phase, a jury determined that none of respondents invoices were barred by the statute of limitations and awarded respondent approximately $62,000 in damages.

DISCUSSION

1. The Agreement does not establish a condition precedent.

As noted above, the Agreement provides that upon a members withdrawal, the board of directors shall establish reserve accounts for each claim pending against the member and an additional reserve account for possible claims against that member. Appellant contends that such reserve accounts must be established and depleted before a withdrawn member will be obligated to pay its pro rata share of additional contributions for a particular program year. Since no reserve accounts were established, appellant argues it does not owe any additional money to respondent. In other words, the condition precedent to its obligation to perform was not met.

The fundamental goal of contract interpretation is to give effect to the parties mutual intent. (Morey v. Vannucci (1998) 64 Cal.App.4th 904, 912.) When a contract is reduced to writing, this intent is determined from the writing alone, if possible. (Cedars-SinaiMedicalCenter v. Shewry (2006) 137 Cal.App.4th 964, 979.) In so interpreting the contract, the court focuses on the usual and ordinary meaning of the language used. (Founding Members of the Newport BeachCountyClub v. Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 955.) The contract must be construed as a whole, with the various individual provisions interpreted together so as to give effect to all, if reasonably possible or practicable. (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 473.) Where, as here, the trial court did not rely on extrinsic evidence, the appellate court independently construes the contract. (Cedars-Sinai Medical Center v. Shewry, supra, 137 Cal.App.4th at p. 980.)

Appellant contends the alleged condition precedent is created by the section requiring that reserve accounts be established for withdrawing members in conjunction with the following provision: The withdrawing member shall continue to be responsible for the amount of any costs, liabilities, assessments, or contingencies required because of claims which exceed the amount set aside in the reserve accounts established . According to appellant, the plain meaning of this language is that before an additional assessment can be imposed against a withdrawn member , the reserve accounts must be exhausted. To reach this conclusion, the phrase required because of claims which exceed the amount set aside in the reserve accounts must be read to qualify costs, liabilities, assessments, and contingencies, not just contingencies.

However, this interpretation is contrary to a longstanding rule of statutory construction known as the last antecedent rule. (White v. County of Sacramento (1982) 31 Cal.3d 676, 680.) This rule provides that qualifying words, phrases and clauses are to be applied to the words or phrases immediately preceding and are not to be construed as extending to or including others more remote. (Ibid.) Applied here, the rule requires that the phrase required because of claims which exceed the amount set aside in the reserve accounts be read to qualify only the word contingencies. Under this construction, a withdrawn member is still responsible for the amount of any costs, liabilities, or assessments without regard to that members reserve accounts.

The punctuation used in the subject phrase further supports this interpretation. Evidence that a qualifying phrase is intended to apply to all antecedents, not only the immediately preceding one, may be found when the phrase is separated from the antecedents by a comma. (White v. County of Sacramento, supra, 31 Cal.3d at p. 680.)

Here, however, the entire phrase contingencies required because of claims which exceed the amount set aside in the reserve accounts is set off from the preceding terms by a comma followed by the word or. Such use of the word or indicates the intent to designate alternative or separate categories. (White v. County of Sacramento, supra, 31 Cal.3d at p. 680.) Thus, the ordinary rules of construction strongly suggest that the phrase required because of claims which exceed the amount set aside in the reserve accounts was intended to modify only the term contingencies. (Ibid.)

There are two exceptions to the last antecedent rule. (White v. County of Sacramento, supra, 31 Cal.3d at p. 680.) The first provides that when several words are followed by a clause that applies as much to the first and other words as to the last, the natural construction of the language demands that the clause be read as applicable to all. (Renee J. v. Superior Court (2001) 26 Cal.4th 735, 743.) The second provides that when the sense of the entire act requires that a qualifying word or phrase apply to several preceding words, its application will not be restricted to the last. (Ibid.)

Here, neither exception applies. Under the Agreement, reserve accounts are established for the purpose of funding claims which have been incurred by the members but remain unpaid and claims which have not been incurred. However, members are also responsible for their share of insurance premiums, claims management expenses, safety engineering, data processing costs, miscellaneous operating expenses, and expenses related to investigation and defense of workers compensation excess claims. Thus, certain costs, liabilities and assessments that a withdrawn member may be responsible for would not be paid out of a reserve account. Accordingly, neither the natural construction of the language nor the sense of the entire contract excepts the Agreement from the last antecedent rule. In fact, the sense of the entire contract supports the trial courts interpretation. The purpose of the Agreement is to share risk among members on a pro rata basis. It would be antithetical to this purpose to permit a withdrawn member to escape responsibility for deficits that might occur years in the future simply because the board of directors did not require that member to fund a reserve account for possible claims at the time of withdrawal.

2. The breach of contract cause of action is not time barred.

The statute of limitations for breach of a written contract is four years. (Code Civ. Proc.,  337.) In general, the cause of action accrues, and this statute begins to run, when all of the elements of the cause of action have occurred. (Howard Jarvis Taxpayers Assn. v. City of La Habra(2001) 25 Cal.4th 809, 815.) Thus, a cause of action for breach of contract does not accrue before the time of breach. Moreover, There can be no actual breach of a contract until the time specified therein for performance has arrived. (Romano v. Rockwell Internat., Inc. (1996) 14 Cal.4th 479, 488.)

Where performance of contractual obligations is severed into intervals, the courts have found that an action attacking the performance for any particular interval must be brought within the period of limitations after the particular performance was due. (Armstrong Petroleum Corp. v. Tri-Valley Oil & Gas Co. (2004) 116 Cal.App.4th 1375, 1368.) This is an application of the doctrine of contractual severability. Where a contract is divisible and, thus, breaches of its severable parts give rise to separate causes of action, the statute of limitations will generally begin to run at the time of each breach; in other words, each cause of action for breach of a divisible part may accrue at a different time for purposes of determining whether an action is timely under the applicable statute of limitations. (Id. at pp. 1388-1389.)

Here, the complaint was filed on October 14, 2003. Therefore, respondents cause of action is time barred unless the breach occurred on or after October 14, 1999.

Appellant contends the breach occurred when its obligation to fund reserve accounts arose, i.e., June 30, 1996, the effective date of its withdrawal. However, as discussed above, the establishment of reserve accounts was not a condition precedent to appellants obligation to pay assessments. Thus, the breach did not occur upon appellants withdrawal.

Alternatively, appellant argues that its obligation arose in 1996 when respondent first was aware of deficits for the particular program years. However, the Agreement does not require the board of directors to make an assessment as soon as a deficit is indicated. Rather, if the obligations for any program year exceed the total assets of that year, that years members may be assessed a pro-rata share of the additional contribution as determined by the Board of Directors. (Italics added.) Potential deficits are identified by actuarial predictions and may or may not materialize. Thus, the Agreement gives the board of directors discretion to determine when, and if, the members are assessed. Accordingly, a members obligation to perform does not arise until it is notified that an individual assessment is due. In other words, the Agreement is a divisible contract. Therefore, the failure to pay each invoice when due gives rise to a separate cause of action and the statute of limitations begins to run at the time of each breach.

The first invoice at issue was mailed to appellant on December 18, 1998. The cover letter with that invoice stated: Please review the attached additional documentation for payment of the assessment and assistance in setting budgets for your upcoming fiscal year. The expectation was that the invoice would be paid some time during the next fiscal year, i.e., between July 1, 1999, and June 30, 2000. Invoices for additional assessments were dated July 1, 2000, July 1, 2001, July 1, 2002, and July 1, 2003. The jury found that the statute of limitations did not bar recovery on any of these invoices. Appellant contends this finding must be reversed because the trial court gave an erroneous and prejudicial instruction. The jury was instructed:

This is a divisible contract [and] the statute of limitations accrues separately for each invoice.

[Appellant] claims as a defense that [respondent] filed this suit too late. To establish this defense, [appellant] must prove that this action was not commenced within four years of the date on which the claims sued on accrued. You must decide when the claims accrued. If one or more claims accrued more than four years before October 14, 2003, when the suit was filed, then the plaintiffs suit was filed too late as to any such invoice and is time barred as to any such invoice.

A reasonable time is allowed for [respondent] to send an invoice and a reasonable time is allowed for [appellant] to pay an invoice.

The claims accrue and the statute of limitations begins to run at the expiration of what you determine to be a reasonable time for invoicing plus a reasonable time for payment.

Appellant bases its assertion of error on the ground that the Agreement was not a divisible contract. However, as discussed above, the trial court correctly concluded that the Agreement was divisible and that the statute of limitations accrued separately for each invoice. Accordingly, this instruction was proper. In light of this conclusion, the trial court correctly refused to instruct the jury with appellants alternative instruction based on Woollomes v. Gomes (1938) 26 Cal.App.2d 461, 465 [Where a right has fully accrued except for some demand to be made as a condition precedent to legal relief, which the claimant can at any time make, if he so chooses, the cause of action has accrued for the purpose of setting the statute of limitations running].

DISPOSITION

The judgment is affirmed. Costs on appeal are awarded to respondent.

_________________________

Levy, J.

WE CONCUR:

_______________________________

Wiseman, Acting P.J.

_______________________________

Gomes, J.

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