American Liberty Financial Services, Inc. v. Cooper

WILNER, Judge. We deal here with the construction of those parts of former Maryland Code, Art. 48A, § 486G, currently codified as Insurance Article, §§ 23-402 and 23-403, 1 which require a premium finance company to give to its customer at least 10 days written notice of its intention to cancel the insurance policy it has financed. The question is whether the statute precludes the company from setting as the effective date of the cancellation a date prior to the end of the notice period. The Circuit Court for Wicomico County answered that question in the affirmative.

We agree and shall therefore affirm. ⁹⁵ BACKGROUND Premium finance companies play an important role in the implementation of Maryland’s compulsory motor vehicle insurance law. In order to provide a fund for the payment of legitimate claims made by persons injured through the operation of motor vehicles, Maryland Code, § 17-104 of the Transportation Article, requires the owner of every motor vehicle to maintain in effect certain financial security. With an exception not relevant here, that security must be in the form of a motor vehicle liability insurance policy containing at least the minimum coverages specified in § 17-103 of that Article. If that required security lapses or is terminated, the registration of the vehicle is automatically suspended as of the date of lapse or termination (§ 17-106), and, upon notice by the Motor Vehicle Administration, the owner must, within 48 hours, surrender all evidence of the registration.

If the owner fails to do so, the Administration may suspend his or her driver’s license. Lapse or termination may also result in a civil penalty of $150 for the first 30 days of non-coverage and $7 per day thereafter, up to a maximum of $2,500. See § 17-106. Any person who drives a vehicle, knowing or having reason to know that the registration of the vehicle has been suspended pursuant to § 17-106, is guilty of a misdemeanor and, for a first offense, is subject to imprisonment for one year and a fine of $1,000.

See §§ 17-107(a) and 27 — 101(h). To the extent that insurance companies have insisted on receiving in advance the full amount of the premiums due on the policy, a problem is created for both fleet and individual owners who cannot afford such an outlay. It is a special problem for persons insured by the Maryland Automobile Insurance Fund (MAIF), which is precluded by law from accepting installment payments or otherwise financing premiums. See Insurance Article, § 20 — 507(f).

To meet that need, premium finance companies were formed. Their business is to lend money to persons for the purpose of purchasing liability insurance; they pay the premium to the insurance company and are then reimbursed through a down payment and monthly installments made by the insured. They make ⁹⁶ their profit from the higher-than-average interest charged on the loan, 2 but their real protection in the event of a default lies in their ability to cancel the policy if the insured fails to make the installment payments when due and to receive back from the insurance company, as an assignee or on behalf of the insured, the unearned premiums as of the date of cancellation. To that extent, the loan is fully secured.

Until 1964, premium finance companies were largely unregulated in Maryland, and, as we pointed out in Gov’t Employees Ins. v. Taylor, 270 Md. 11, 17 , 310 A.2d 49, 52 (1973), the result was not only the exaction of usurious interest and excessive service charges but the danger that flowed from the premium finance company’s right, under its contract, to cancel the insurance policy without notice to the insured when a repayment installment was not made. The effect of that, we observed, was to leave the insured unaware that he or she was without coverage and also to jeopardize the protection that the required security law afforded to innocent victims of the formerly-insured’s negligence. In 1964, the General Assembly added §§ 486A through 486G to Article 48A of the Code, through which, among other things, it (1) required that premium finance companies register with the Insurance Commissioner, (2) limited the fees, interest, and late charges that those companies could charge, (3) required that not less than 10 days written notice be mailed to the insured of the company’s intent to cancel the policy unless the defaulted installment payment is received within that period, and (4) provided a procedure for the company to cancel the policy after expiration of the 10-day period and receive from the insurer the gross unearned premiums. See 1964 Md. Laws, ch. 141.

With certain modifications, that is the law now codified in title 23 of the Insurance Article. ⁹⁷ This case arose from a premium finance agreement entered into on January 30, 1997, between Melvin Cooper and American Liberty Financial Services, Inc. (ALFS) to finance the $2,565 premium that Cooper owed to MAIF for the policy year January 30, 1997 through January 30, 1998. Under that agreement, ALFS paid the $2,565 to MAIF, Cooper made a down payment of $285 to ALFS, and he agreed to make 10 monthly payments of $256.22 each, commencing February 20, 1997. The amount payable by Cooper included a $20 service fee and $262.20 in interest, the maximum amounts allowable under the statute. See Insurance Article, §§ 23-303 through 23-305.

Cooper also agreed to pay a delinquency charge, for any installment in default for more than five days, in an amount equal to 5% of the installment payment, and a cancellation charge in the maximum amount allowed by law. 3 The relevant statute in effect at the time, § 486G of Article 48A (current §§ 23-402 and 23-403 of the Insurance Article) provided, in relevant part, that: (a) The insurance contract may not be canceled by a premium finance company unless the cancellation “is effectuated in accordance with this section.” (b) “Not less than ten (10) days’ written notice shall be mailed to the insured of the intent of the premium finance company to cancel the insurance contract ... unless the defaulted installment payment is received within said ten (10) day period.” (c) “After expiration of such ten (10) day period, the premium finance company may thereafter cancel by submitting to the insurer a notice of cancellation, specifying the effective date of such cancellation, and the premium finance company shall mail a copy of the cancellation notice to the insured at his last known address” (emphasis added); and ⁹⁸ (d) “If the insurer receives a copy of the cancellation notice issued under subsection (c) ... within 30 days after the effective date of cancellation specified in the notice, the insurance contract shall be cancelled effective on the date the notice is received by the insurer.”' In conformance with those provisions, the premium finance agreement contained a power of attorney authorizing ALPS to cancel the policy in the event of “a default in payment of more than 5 days of any installment in full” but further provided, in relevant part, that: “In exercising its power of cancellation, the Company shall observe the following: (A) Not less than ten (10) days written notice of intent to cancel policyfies) unless the default is cured within such ten (10) day period. (B) If the default is not cured within the ten (10) day period A.L.F.S. in the name of the insured(s) may request the cancellation of insurance policy(ies) by mailing a notice of cancellation to the insurer. A copy of cancellation notice to be mailed to the insured at his last known address.” Cooper was almost in constant default under the agreement. He made his first installment, due February 20, 1997, on time, but' was late with respect to each payment thereafter.

ALFS developed two different forms of notice in the event of a default — a late notice, captioned “Notice of Intent to Cancel,” that informed the insured that an installment payment was past due, and a “Notice of Cancellation.” The late notice had a place for two dates — the date the notice was mailed and the due date of the installment. It stated prominently that, in order to avoid cancellation, payment must be received within 15 days from the date the notice was mailed. It stated further that the payment, including late charges, must be received in the ALFS office “prior to cancellation” and that “this is notice of intent to cancel the above policy(ies).” The “Notice of Cancellation” was routinely sent four or five days after the late notice — before the expiration of the 15-day period. It contained, at the top, one box for “Date Mailed” ⁹⁹ and another for “Effective Date of Cancellation.” This notice stated that, to avoid cancellation, payment had to be received 11 days from the date mailed.

It gave notice that the policy(ies) “is/are cancelled for non-payment of an installment, in accordance with the conditions and terms of the Premium Service Agreement” and that the cancellation “is effective on the above captioned date.” When the payment due March 20 was not made, ALFS, on March 26, sent a Notice of Intent to Cancel, giving Cooper 15 days within which to make the payment. Cooper made the payment by April 3. When he failed to make the April 20 payment, ALFS, on April 25, sent another 15-day Notice of Intent to Cancel, which would have allowed Cooper to make the payment by May 10. On May 1, ALFS sent a Notice of Cancellation, advising that, if the payment was not made within 11 days, the policy would be canceled effective April 23.

Cooper made the April payment on May 9. He failed, however, to make the payment due May 20, resulting in a 15-day Notice of Intent to Cancel mailed on May 28 and an 11 day Notice of Cancellation mailed on June 2. The June 2 notice warned that, if payment was not received within the 11 days, the policy would be canceled as of May 23. Cooper cured that default on June 5 but, consistent with his practice, failed to make the June 20 payment.

The default in the June payment is what triggered this case. On June 26, ALFS mailed a 15-day Notice of Intent to Cancel. On its face, that gave Cooper until July 11 to make the payment and avoid cancellation. On June 30, ALFS sent a Notice of Cancellation, confirming that, unless the payment due June 20 was received by July 11, the policy would be canceled effective June 23, 1997, a date prior to both the June 26 and the June 30 notices.

On June 27, while he still was insured and had the ability to cure his default, Cooper was driving his car along Route 50 in Salisbury when he was shot in the neck by the occupant of another vehicle, causing him to lose control of his car, crash, and sustain serious injuries. He was transported to the University of Maryland Shock Trauma Center, where he remained under intensive care for several ¹⁰⁰ weeks. Cooper was discharged from the Shock Trauma Center on July 16 and admitted, as an in-patient, to a rehabilitation facility. On June 30, 1997, a claim on Cooper’s behalf was reported to MAIF.

On July 23, 1997 — 30 days after the cancellation date specified in the Notice of Cancellation — ALFS electronically issued a Notice of Cancellation to MAIF. The notice specified June 23 as the effective date of cancellation. The next day, MAIF sent a written notice to Cooper, advising that the policy had been canceled effective June 23, 1997, and remitted the unearned premium of $1,493 to ALFS. ALFS retained that premium to cover the remaining balance owed by Cooper under the Premium Finance Agreement.

In October, 1997, Cooper filed an action in the Circuit Court for Wicomico County against both ALFS and MAIF, seeking a declaratory judgment that, apart from any contractual provisions, the policy could not be lawfully canceled prior to the expiration of the 10-day period prescribed by § 486G, which would have been July 6, 1997, and that the policy was therefore improperly canceled. He asked that the policy be reinstated and that the parties responsible for improperly causing the policy to be canceled be held accountable to him in damages. MAIF cross-claimed against ALFS, asserting that it acted properly in canceling the policy and that, if there was any impropriety in