Opinion ID: 2545362
Heading Depth: 1
Heading Rank: 4

Heading: The State Insurance Fund Is A State Agency For The Purpose Of Evaluating Whether Kelso And Irwin Created A Conflict Of Interest By Filing A Claim Against The SIF While Representing The ISIF.

Text: Kelso and Irwin argue that the SIF is not a state agency but rather merely a mutual insurance carrier. They assert that since it is not a state agency, they did not breach their contract with the Attorney General by creating a conflict of interest. Interestingly, both sides and the district court agree that the Idaho case of State v. Musgrave, 84 Idaho 77, 370 P.2d 778 (1962), is controlling and dispositive. In Musgrave, the issues presented were whether the manager of the SIF could make payments for legal services out of SIF funds without legislative appropriation, and whether anyone other than the Attorney General could represent the SIF in front of the Industrial Accident Board. Id. at 80-81, 370 P.2d at 779. As manager of the SIF, Musgrave had made payments from the SIF account to one of the attorneys who had represented the SIF (Coughlan). Id. at 81, 370 P.2d at 780. At the time, the State Insurance Fund manager would sign sight drafts, which were then paid out by the State Treasurer from the rotary fund, which was in turn repaid from the SIF. Id. at 83, 370 P.2d at 781. The State Auditor brought suit against Musgrave for making the payments of state funds without an appropriation by the Legislature. Id. In its holding, the Court first determined that Coughlan was an independent contractor of the SIF, rather than an employee. This was because the agreement between Coughlan and Musgrave provided that Coughlan would represent the SIF on matters that were referred to him by Musgrave, and then bill the SIF for the fees generated on each individual case. Id. at 81, 370 P.2d at 780. The Court then went on to define the nature of the SIF as an agency of the state created for the purpose of carrying on and effectuating a proprietary function as distinguished from a governmental function. Id. at 85, 370 P.2d at 782. Furthermore, It serves a `public purpose' but not a 'governmental purpose.' Id. The Court then quoted from decisions by several other states with similar funds to show that the money in the SIF is not state money and could be disbursed without legislative appropriation. Id. One of the decisions quoted by the Court was the Minnesota Supreme Court case of Senske v. Fairmont & Waseca Canning Co., 232 Minn. 350, 45 N.W.2d 640 (1951). This Court quoted Senske that it is erroneous to assume that an employee's [sic] claim for total disability benefits from the special fund is in the nature of a claim against the state. Id. at 645-46. Kelso and Irwin draw upon this quote to show that their claim against the SIF was not a claim against a state agency nor in the nature of a claim in which the attorney general had any lawful voice or influence, hence no possible conflict of interest. Appellants' Brief at 20. Kelso and Irwin fail to consider the rationale for the statement of the Minnesota court or the correct reason for which this Court used the quote. In both of these cases, the SIF was being attacked as though the money in the fund were state money. Both courts wanted to clarify that the money in the funds was not state money, and thus, not subject to the constitutional requirements of making legislative appropriations to disburse funds. This Court explained that [t]he state insurance fund, not being state money, and claims against it not being claims against the state, the state board of examiners has no power or jurisdiction over the expenditure or disbursement thereof, except such as is given to it by the legislature. Musgrave, 84 Idaho at 90, 370 P.2d at 786. It is clear from Musgrave that the SIF is not considered a state agency for the purpose of determining the ownership of the money it holds. This limited exception from state agency status has been further defined in other cases from this Court. In Board of County Commissioners v. Idaho Health Facilities Authority, 96 Idaho 498, 531 P.2d 588 (1974), this Court was asked to review whether the Health Authority had exceeded constitutional limits. Id. at 501, 531 P.2d at 591. It was argued that the Health Authority had been created as a corporation, in contravention of Article 3 § 19 of the Idaho Constitution, which prohibits the legislature from creating corporations. Id. at 505, 531 P.2d at 595. In establishing a means of differentiating between state agencies and corporations, the Court discussed several examples of both. One of the examples was the SIF as discussed in Musgrave Id. at 507, 531 P.2d at 597. In creating a formula for establishing state entities which are not forbidden corporations, the Court stated that under the doctrine of the Musgrave case there are state-created entities which are neither corporations nor state agencies subject to all the restrictions of the state constitution. Id. Kelso and Irwin also rely upon the case of Idaho Water Resource Board v. Kramer, 97 Idaho 535, 571, 548 P.2d 35, 71 (1976), wherein this Court relied upon Musgrave for the proposition that disbursement of payments from a state insurance fund... did not require submission of each claim to the board of examiners. Id. However, this again merely points out that the money in the SIF is not state money, subject to review by the Board of Examiners. The decision in this case is not in conflict with this Court's previous holdings that money in the SIF is not state money. Thus, these cases recognize an entity which is not entirely a corporation, nor a full-fledged state agency. However, of importance is the qualification given to the SIF by the Idaho Health Authority case. As noted above, the Court conspicuously identified the SIF as not being a state agency subject to all the restrictions of the state constitution. Id. Thus, we have the interesting result that the SIF is treated as a state agency for some purposes but not for others. Under the facts presented here, we conclude that the SIF is a state agency, thus creating a conflict of interest for Kelso and Irwin. This conclusion is buttressed by the fact that at the time the conflict arose, the Attorney General's office was responsible for representing both the SIF and the ISIF. In 1995, Senate Bill 1217 was passed, amending Idaho Code § 67-1401. 1995 Idaho Sess. Laws ch. 141 § 1. This legislation brought the responsibility of legal representation for all state agencies under the control of the Attorney General. I.C. § 67-1401. The Attorney General's office, however, is not required to provide all of these legal services alone. The legislature provided that the Attorney General may contract for legal representation of state agencies. I.C. § 67-1409. When these contracts for legal services are made, the attorney is appointed as a special deputy attorney general. I.C. § 67-1409. The underlying consequence is that it is still the Attorney General's office which is ultimately responsible for the legal representation of these state agencies. Therefore, since the office of the Attorney General was responsible for representing both the SIF and the ISIF, we hold that when determining the status of the SIF for a potential conflict of interest pursuant to legal representation, the SIF is a state agency. Kelso and Irwin created a conflict of interest by putting the Attorney General's office on both sides of the litigationthe very thing the disclaimer in Kelso and Irwin's applications was designed to prevent. Kelso and Irwin next argue that the SIF is not a state agency because of statements made by some of its administrative personnel. While these statements cannot change the legal nature of the SIF, they are, nevertheless, all in line with the cases from this Court defining the SIF. None of these comments claim that the SIF is not a state agency; they simply reiterate the holding of Musgrave that money in the SIF is not state money. In fact, many of these statements specifically refer to the SIF as a state agency. For example, one stated that the legislature also established the State Insurance Fund (SIF) as a state agency. It should also be noted that Kelso and Irwin conceded that the SIF was a state agency when they filed their notice of tort claim under Title 6, Chapter 9 of the Idaho Code. The Idaho Tort Claims Act mandates, in pertinent part, that state agencies cannot be sued without first filing a notice of tort claim. I.C. § 6-905. The Act defines state as the state of Idaho or any office, department, agency, authority, commission, board, institution, hospital, college, university or other instrumentality thereof. Kelso and Irwin have not argued that the SIF fits within this definition as anything other than a state agency. It is, therefore, inconsistent for them to file a notice of tort claim against the SIF and then to argue that the SIF is not a state agency for the purpose of a claim against the state. For these reasons, the decision of the district court, finding that the SIF is a state agency for the purpose of conflicts of interest, is affirmed. Since we have determined that the SIF is a state agency for the purpose of determining that Kelso and Irwin created a conflict of interest, we need not consider Kelso and Irwin's additional claims.