A school district, through its board of directors, may legally contract for fire, theft and liability insurance covering a period of years, the premiums of which are payable in annual installments over the life of the contract.
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April 15, 1965
Honorable Louis Bruno Superintendent of Public Instruction Old Capitol Building Olympia, Washington
Cite as: AGO 65-66 No. 17
By letter previously acknowledged you have requested the advice of this office upon a question which we paraphrase as follows:
May a school district legally contract for fire, theft and liability insurance covering a period of years, the premiums of which are payable in annual installments extending beyond the district's fiscal year?
We answer your question in the affirmative.
It is settled in this jurisdiction that a contract may extend beyond the term of office of any or all board members. Splaine v. School Dist. No. 122, 20 Wash. 74, 54 Pac. 766 (1898); and Taylor v. School District, 16 Wash. 365, 47 Pac. 758 (1897). Generally, as to the duration of a normal business contract, the test is whether the term of the contract is reasonable in view of the nature of the subject matter. "Upon this principle contracts covering periods of ten, twenty, thirty and even fifty years have been sustained as valid." Washington Fruit & Produce Co. v. Yakima, 3 Wn. (2d) 152, 163, 103 P. (2d) 1106 [[Orig. Op. Page 2]] (1940).1/
In AGO dated June 13, 1941, this office considered the exact question which you have posed. Therein it was said that although a district may enter an insurance contract for a period of years, it must budget and pay the cost of said insurance contract within a single fiscal year.
The reason given for this result was said to be the rule expressed in RCW 28.58.130, which provides in part:
"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.)
After quoting the above statute, the opinion concluded:
"From the foregoing the board is prevented from obligating future budgets. . . ."
It is our opinion that such a view fails to recognize the essential nature of an insurance contract. 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 of the premiums. Thus, the insured is not bound to pay the premiums, except in so far as he wishes to assure the payment of benefits. See, Appleman, Insurance Law and Practice, Vol. 14, § 7831, and cases cited therein.
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 [[Orig. Op. Page 3]] promised) of the insurer depends. See, Appleman,supra.
Thus, it is clear that by entering a contract like the one in question, the board has not obligated future budgets or, stated in terms of the statute, has not contracted anindebtedness beyond its budgetary year. Therefore, it is our conclusion that a school district, through its board of directors, may legally contract for fire, theft and liability insurance covering a period of years, the premiums of which are payable in annual installments over the life of the contract. AGO dated June 13, 1941, to the Division of Municipal Corporations, in so far as it is inconsistent, is hereby overruled.
We trust the foregoing will be of assistance to you.
Very truly yours,
JOHN J. O'CONNELL Attorney General
BRUCE W. COHOE Assistant Attorney General
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1/See, also, AGO 63-64 No. 111 [[to Prosecuting Attorney, King County on June 30, 1964]], AGO 61-62 No. 160 [[to Prosecuting Attorney, Klickitat County on September 5, 1962]], AGO dated February 24, 1959, to the Honorable Lloyd J. Andrews, Superintendent of Public Instruction; AGO 47-48-88C; and AGO dated June 13, 1941, to the Division of Municipal Corporations, State Auditor's Office, all of which have sustained contracts covering a period of years.