AGO 1967 No. 37 - Oct 31 1967
DISTRICTS - SCHOOLS - CONTRACT - INSURANCE - FIRE AND EXTENDED COVERAGE.
When a school district purchases fire and extended coverage insurance protection for the property of the district under a three year contract which it may cancel at any time, and consequently recover any unearned portion of the premium, it may pay the full premium due in accordance with the contract at the time of purchase.
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October 31, 1967
Honorable Elmer W. Stanley
Washington State School Directors Association
201 Capitol Park Building
Olympia, Washington 98501
Cite as: AGO 1967 No. 37
By letter previously acknowledged you have requested an opinion of this office on a question which we paraphrase as follows:
When a school district purchases fire and extended coverage insurance protection for the property of the district under a three year contract which it may cancel at any time, and consequently recover any unearned portion of the premium, may the district pay the full premium due in accordance with the contract at the time of purchase?
We answer your question in the affirmative for the reasons set forth in our analysis.
The basic question of whether a school district can legally contract for fire and extended coverage insurance by means of a contract covering a period of years was affirmatively answered by this office in AGO 65-66 No. 17, copy inclosed. In that opinion we took note of the fact that an insurance contract is in the nature of a unilateral contract with the insurer making the promises, the performance of which is dependent solely upon the doing of certain acts; namely, the payment [[Orig. Op. Page 2]] of the premiums by the insured. We said:
". . . the insured is not bound to pay the premiums, except in so far as he wishes to assure the payment of benefits. . . .
"Stating these principles in terms of breach of contract, the insured has no obligation to pay premiums, and if he fails to do so, he has not breached the contract, but merely failed to perform the act upon which the performance (as unilaterally promised) of the insurer depends. . . ."
Because of these characteristics of an insurance contract, we then concluded that such a contract does not constitute an indebtedness within the meaning of RCW 28.58.130, which provides in material part as follows:
"It shall be unlawful for any board of directors to contract indebtedness against its district in any one year in any sum in excess of the aggregate amount set forth and approved in its final budget. . . ." (Emphasis supplied.)
However, in AGO 65-66 No. 17, the stipulated method of payment of the insurance premiums was on an installment basis; here, on the other hand, the stipulated method of payment of the premiums is by means of full payment for the entire term of the policy at the time of purchase.1/ The district would, however, have a right to cancel the policy at any time during its term and, thereby, to receive any unearned portion of the premium. Accord, RCW 48.18.300; WAC 284-20-010 (2) (b).
This latter feature, it is to be seen, places any future school board coming into office during the term of the contract in essentially the same position, in so far as cancellation is concerned, as in the type of contract considered in AGO 65-66 No. [[Orig. Op. Page 3]] 17, supra. Thus, the only issue to be here determined relates to the legality of payment of the full premium "in advance," i.e., at the time of purchase of the insurance policy. Resolution of this issue, in our opinion, is dependent upon whether such payments are prohibited by RCW 42.24.080, which provides in pertinent part as follows:
"All claims presented against any county, city, district or other municipal corporation or political subdivision by persons furnishing materials, rendering services or performing labor, or for any other contractual purpose, shall be audited, before payment, by an auditing officer elected or appointed pursuant to statute or, in the absence of statute, an appropriate charter provision, ordinance or resolution of the municipal corporation or political subdivision. Such claims shall be prepared for audit and payment on a form and in the manner prescribed by the division of municipal corporations in the state auditor's office. The form shall provide for the authentication and certification by such auditing officer that the materials have been furnished, the services rendered or the labor performed as described, and that the claim is a just, due and unpaid obligation against the municipal corporation or political subdivision; and no claim shall be paid without such authentication and certification: . . ." (Emphasis supplied.)2/
This statute first requires that "All claims . . . by persons furnishing materials, rendering services or performing labor,or for any other contractual purpose. . ." be audited before they are paid. Then, as to contracts for the furnishing of materials or services, the statute prohibits the payment of any claim without the authentication and certification of the auditing officer that ". . . the materials have been furnished, the services rendered or the labor performed as described, and [[Orig. Op. Page 4]] that the claim is a just, due and unpaid obligation against the municipal corporation . . ."
However, this limitation upon payment of claims against a municipal corporation cannot be applied to contractual obligations which do not involve the furnishing of materials, rendering of services, or performing labor. Thus, contractual claims not involving materials, services or labor may be paid by a municipal corporation upon the authentication and certification by the auditing officer that the claim is a just, due and an unpaid obligation against the municipal corporation.
An insurance contract, in our opinion, gives rise to such a claim. The contract itself is simply a contract under which the insurer obligates itself to indemnify the insured, in an amount not in excess of the face amount of the policy, for losses occasioned by the insured in consequence of occurrences of the various risks against which the policy is issued. See, Couch on Insurance (2d ed. 1959) § 1:2. This being the case, it follows that an insurance contract is not a contract for the purchase of services or labor within the meaning of RCW 42.24.080,supra.3/ Accordingly, under this statute a school district may pay for the premium of such a contract in advance, so long as the claim for payment, at that time, is ". . . a just, due, and unpaid obligation" of the district.
We trust the foregoing will be of some assistance to you.
Very truly yours,
JOHN J. O'CONNELL
ROBERT P. TJOSSEM
Assistant Attorney General
*** FOOTNOTES ***
1/You have indicated that a school district's motivation for taking this latter approach would, likely, be to obtain a savings in the total amount of the premiums (in consequence of an insurer's willingness to accept a lesser total premium in exchange for advance payment).
2/Section 1, chapter 116, Laws of 1963 (RCW 42.24.035) provides for an express exemption from this requirement in the case of subscriptions to magazines or other periodical publications.
3/Such insurance contract should be distinguished from a contract entered into by a school district or other municipal corporation for the services of an insurance broker or agent. Clearly, a contract for the services of a broker or agent is a contract for personal services or labor, within the meaning of RCW 42.24.080. See,London & Lancashire Indemnity Co. v. Upper Darby Township, 28 Del. Co. 223 (Penn.) [[Pa.]], cited in AGO 61-62 No. 103. Therefore, a broker or agent who is hired by a school district or other municipal corporation in order to procure insurance for the municipality can only be compensated for those services as they are rendered.