CITY OF TORRANCE, Petitioner, v. WORKERS' COMPENSATION APPEALS BOARD and STATE COMPENSATION INSURANCE FUND, Respondents, 32 Cal. 3d 371

Opinion BIRD, C. J. Does the 1977 amendment to Labor Code

section 5500.5, which limits the employers and compensation insurers among whom liability for cumulative injury and occupational disease claims may be apportioned, violate the contract clause of the United States and California Constitutions? I. Kenneth Atkinson was employed as a fireman by the City of Torrance (City) from July 20, 1956, to April 30, 1977. For fifteen of the twenty-one years that Atkinson worked for the City, the State Compensation Insurance Fund (State Fund) was the workers’ compensation insurer for the City. Since July 1, 1971, the City has not carried insurance.

On March 12, 1978, Atkinson died of lung cancer. Subsequently, his fifteen-year-old daughter Christine filed an application for workers’ compensation death benefits against the City and the State Fund. Christine claimed that her father’s death was proximately caused by a cumulative injury which developed during the course of his employment with the City. After lengthy negotiations, the City settled the Atkinson claim for $28,165.49. Thereafter, contribution was sought from the State Fund for 72 percent (15/21sts) of the settlement amount. The City based its claim on

section 5500.5 of the Labor Code.

Section 5500.5 was enacted in 1951 to codify the rule announced by this court in Colonial Ins. Co. v. Industrial Acc. Com. (1946) 29 Cal.2d 79 [172 P.2d 884]. (Flesher v. Workers’ Comp. Appeals Bd. (1979) 23 Cal.3d 322, 327 [152 Cal.Rptr. 459, 590 P.2d 35].) As originally enacted, the

section provided that an employee claiming benefits for an occupational disease could recover against any one of the successive employers whose employment contributed to the disease. Also, any of the successive insurance carriers that provided coverage during such employments were liable. The employer or insurer held liable had the burden of seeking the apportionment of this liability among the many other responsible employers and insurers. (Stats. 1951, ch. 1741, § 1, p. 4154; see Flesher v. Workers’ Comp. Appeals Bd., supra.) In 1973,

section 5500.5 was amended to limit liability for occupational disease or cumulative injury to the five years of employment immediately preceding either the date of injury or the last date on which the employee worked in an occupation which exposed him to the hazards which caused the occupational disease or cumulative injury. (Stats. 1973, ch. 1024, § 4, p. 2032.) Apportionment of liability to earlier years was forbidden except where “the employment exposing the employee to the hazards of the claimed occupational disease or cumulative injury was for more than five years with the same employer .... ” (Id. at p. 2034.) In such circumstances, liability' could be extended to “all insurers who insure[d] the . . . compensation liability of such employer, during the entire period of the employee’s exposure with such employer .. .. ” (Ibid.) This provision, which came to be known as the “single employer exception,” continued the rules which had previously been in effect for certain employers.

In 1977, the

section was again revised. The 1977 amendment provided for the stepped reduction of the five-year limitation of liability to one year by 1981 and repealed the “single employer exception.” (Stats. 1977, ch. 360, § 1, p. 1334.) By its terms, the amendment was applicable to all cumulative injury and occupational disease claims filed on or after January 1, 1978. (Ibid.) In the contribution proceedings held by the Workers’ Compensation Appeals Board (Board), it was undisputed that the State Fund was liable for 72 percent of the Atkinson settlement under the provisions of

section 5500.5 which were in effect prior to the 1977 amendment. It was also undisputed that if the 1977 amendment were applied, the City, as a legally uninsured employer, was solely liable for the settlement. Relying on the 1977 amendment, the State Fund moved for dismissal of the case. The City opposed this motion and argued that the 1977 amendment violated the state and federal prohibitions against impairment of contracts since it abrogated the State Fund’s alleged preexisting contractual obligation to contribute to the settlement. (U.S. Const., art. I, § 10; Cal. Const., art.

I, § 9.) The Board granted State Fund’s motion and denied the City’s subsequent petition for reconsideration. The City now seeks review of the Board’s decision. II. This court must decide whether the 1977 repeal of the “single-employer exception” to

section 5500.5 violates the contract clauses of the United States and California Constitutions. The language of these clauses “appears unambiguously absolute ... . ” (Allied Structural Steel Co. v. Spannaus (1978) 438 U.S. 234, 240 [57 L.Ed.2d 727, 733, 98 S.Ct. 2716].) “No State shall ... pass any ... law impairing the obligation of contracts.... ” (U.S. Const., art. I, § 10.) “A ... law impairing the obligation of contracts may not be passed.” (Cal. Const., art. I, § 9.) Read literally, these provisions appear to proscribe any impairment.

However, it has long been settled that the proscription is “not an absolute one and is not to be read with literal exactness like a mathematical formula.” (Home Bldg. & L. Assn. v.

Blaisdell (1934) 290 U.S. 398, 428 [78 L.Ed. 413, 423, 54 S.Ct. 231, 88 A.L.R. 1481].) As the United States Supreme Court recently stated, “it is to be accepted as a commonplace that the Contract Clause does not operate to obliterate the police power of the States. ‘It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the State from exercising such powers as are vested in it for the promotion of the common weal, or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected.. ..’ [Citation.] As Mr.

Justice Holmes succinctly [stated] ... ‘One whose rights, such as they are, are subject to state restriction, cannot remove them from the power of the State by making a contract about them. The contract will carry with it the infirmity of the subject matter.’” (Allied Structural Steel, supra, 438 U.S. at pp. 241-242 [57 L.Ed.2d at p. 734].) Thus, a finding that the state in the exercise of its police power has abridged an existing contractual relationship does not in and of itself establish a violation of the contract clause. It is the beginning, not the end of the analysis.

A finding of impairment merely moves the inquiry to the next and more difficult question—whether that impairment exceeds constitutional bounds.

Obviously, if the contract clause is to have any substance, it must place some limits upon the state’s exercise of the police power. (Allied Structural Steel, supra, 438 U.S. at p. 242 [57 L.Ed.2d at pp. 734-735].) In applying these principles to the present case, this court’s first inquiry must be whether the repeal of the “single employer exception” impaired the obligations of the City’s insurance contracts with State Fund. “The obligations of a contract are impaired by a law which renders them invalid, or releases or extinguishes them .... ” (Home Bldg. & L. Assn. v.

Blaisdell, supra, 290 U.S. at p. 431 [78 L.Ed. at p. 425], citing Sturges v. Crowninshield (1819) 17 U.S. (4 Wheat.) 122, 197-198 [4 L.Ed. 529, 549].) The City contends that it paid the State Fund valuable consideration in the form of insurance premiums. In return, the State Fund allegedly promised to pay benefits for that portion of any cumulative injury attributable to the period during which coverage was provided to the City. It is undisputed that the repeal of the “single employer exception” to

section 5500.5 operated to release to a substantial degree the State Fund from this obligation. As a result of the repeal, the State Fund was no longer obligated in every case to pay for that portion of a cumulative injury which was incurred during the time its policies were in effect. Therefore, if the City’s characterization of the obligation assumed by the State Fund pursuant to its insurance contracts is correct, the repeal must be found to have impaired the obligations of the City’s contracts.

On closer examination, it is apparent that the City’s characterization of the State Fund’s obligation is not accurate.

Pursuant to its insurance contracts with the City, the State Fund agreed “to pay promptly and directly to any person entitled thereto under the Workers’] Compensation Laws ..., and as therein provided, any sums due for compensation .. .; to be directly and primarily liable ... to pay the compensation, if any, for which the [City] is liable .. .; and [to] be bound by and subject to the orders, findings, decisions or awards rendered against the [City] under the Workers’] Compensation Laws .. .. ” (See Ins.

Code, §§ 11651, 11654.) Clearly, the only obligation the State Fund assumed was the obligation to pay what the workers’ compensation law required. Did this promise encompass the text of that law as it existed when the insurance contracts were made, or did the parties recognize and intend that subsequent changes in the law be applied?

Ordinarily, “‘all applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have had in mind, necessarily enter into the contract and form a part of it, without any stipulation to that effect, as if they were expressly referred to and incorporated.’ [Citation.]” (Alpha Beta Food Markets v. Retail Clerks Union (1955) 45 Cal.2d 764, 771 [291 P.2d 433]; accord Swenson v. File (1970) 3 Cal.3d 389, 393 [90 Cal.Rptr. 580, 475 P.2d 852]; see also Home Bldg. & L. Assn. v.

Blaisdell, supra, 290 U.S. at pp. 429-430 [78 L.Ed. at pp. 423-424].) “[L]aws enacted subsequent to the execution of an agreement,” however, “are not ordinarily deemed to become part of the agreement unless its language clearly indicates this to have been the intention of the parties. [Citations.]” (Swenson v. File, supra, at p. 393, italics added.) In Swenson v. File, supra, 3 Cal.3d 389, this court spoke to this issue. The case involved a covenant in a partnership agreement which was made in 1960.

The covenant provided that a retired partner would not “‘render service to a client which has its principal office within a radius of twenty miles from any partnership office which existed on the date of his retirement.’” (Id., at p. 392.) When the agreement was made, this provision was invalid under

section 16602 of the Business and Professions Code to the extent that it restricted a former partner from competing for clients located in areas beyond the boundaries of the cities or towns where the partnership had its offices. (Ibid.) A year later, that statute was revised to permit countywide restrictions.

Shortly thereafter, the defendant withdrew from the partnership and went into business in the same county. (Id., at pp. 391-392.) The Swenson court held that the covenant could not be interpreted as incorporating the revised statute. “[T]o hold that subsequent changes in the law which impose greater burdens or responsibilities upon the parties become part of that agreement would result in modifying it without their consent, and would promote uncertainty in commercial transactions. [Citation.] We recognize that the parties could have originally agreed to incorporate subsequent changes in the law .. ., but there is no evidence that they did so in this case.” (Id., at pp. 394-395.) Here, however, there is such evidence.

First, the language of the agreements between the City and the State Fund clearly indicates that it was the intention of all the parties to incorporate subsequent changes in the law. “[W]hen an instrument provides that it shall be enforced according either to the law generally or to the terms of a particular .. . statute, the provision must be interpreted as meaning the law or the statute in the form in which it exists at the time of such enforcement.” (14 Cal.Jur.3d, Contracts, § 173, p. 433, citing United Bank & Trust Co. v.

Brown (1928) 203 Cal. 359, 362-363 [264 P. 482].) Moreover, at oral argument in this case, the City agreed that it was the parties’ intention to incorporate subsequent changes in the law in their insurance agreements. Since the City originally agreed to incorporate subsequent changes in the law of workers’ compensation in its insurance agreements with the State Fund, it cannot complain that those changes impaired the State Fund’s obligations. The City had every reason to anticipate that its rights under those agreements would change over time.

It had no other legitimate contractual expectation. (Compare Allied Structural Steel, supra, 438 U.S. at pp. 245-246 [57 L.Ed.2d at p. 737]; see also Veix v. Sixth Ward Assn. (1940) 310 U.S. 32, 38 [84 L.Ed. 1061, 1065, 60 S.Ct. 792].) The decision of the Workers’ Compensation Appeals Board is affirmed. Richardson, J., Newman, J., Kaus, J., Broussard, J., and Reynoso, J., concurred. All statutory references are to the Labor Code unless otherwise indicated. Although not codified in

section 5500.5 until 1973, this rule was applied to cumulative injury claims as well. (See, e.g., Fireman’s Fund Indem. Co. v. Ind. Acc. Com. (1952) 39 Cal.2d 831, 835 [250 P.2d 148]; Royal Globe Ins. Co. v. Industrial Acc. Com. (1965) 63 Cal.2d 60, 63 [45 Cal.Rptr. 1, 403 P.2d 129]; see also Stats. 1973, ch. 1024, § 4, p. 2032.) The full text of this exception read as follows: “If the employment exposing the employee to the hazards of the claimed occupational disease or cumulative injury was for more than five years with the same employer, or its predecessors in interest, the limitation of liability to the last five years of employment as set forth in subdivision (

a) shall be inapplicable. Liability in such circumstances shall extend to all insurers who insure the workmen’s compensation liability of such employer, during the entire period of the employee’s exposure with such employer, or its predecessors in interest. The respective contributions of such insurers shall be in proportion to employment during their respective periods of coverage. As used in this subdivision, ‘insurer’ includes an employer who during any period of the employee’s exposure was self-insured or legally uninsured. “The provisions of this subdivision shall expire on July 1, 1986, unless otherwise extended by the Legislature prior to that date.” As amended by Statutes 1977,

chapter 360,

section 1, page 1334, Labor Code

section 5500.5, subdivision (

a) provides: “(

a) Except as otherwise provided in

Section 5500.6 [which applies to household employees], liability for occupational disease or cumulative injury claims filed or asserted on or after January 1, 1978, shall be limited to those employers who employed the employee during a period of four years immediately preceding either the date of injury, as determined pursuant to

section 5412, or the last date on which the employee was employed in an occupation exposing him to the hazards of such occupational disease or cumulative injury, whichever occurs first.

Commencing January 1, 1979, and thereafter on the first day of January for each of the next two years, the liability period for occupational disease or cumulative injury shall be decreased by one year so that liability is limited in the following manner: “For claims filed or asserted on or after: The period shall be: January 1, 1979 ...............................................three years January 1, 1980 .................................................two years January 1, 1981 and thereafter ....................................one year “If, based upon all the evidence presented, the appeals board or referee finds the existence of cumulative injury or occupational disease, liability for such cumulative injury or occupational disease shall not be apportioned to prior or subsequent years .... ” For example, if a worker’s last injurious exposure were found to have taken place during the period that State Fund insured the City, State Fund would remain obligated to pay all or part of any compensation award under the 1977 amendment to

section 5500.5. (See ante, fn. 4.)