Ben Lewis Plumbing, Heating & Air Conditioning, Inc. v. Liberty Mutual Ins. Co.

RODOWSKY, Judge. In this creditor’s action on a running account to which the debtor pled, inter alia, a general denial we hold that a defense based on negligent misrepresentation is not precluded by want of a special plea asserting that defense. We also hold, however, that there is no negligent misrepresentation as a matter of law. The petitioners, defendants in the trial court, are Ben Lewis Plumbing, Heating & Air Conditioning, Inc. and related companies and their principal (collectively Lewis).

The respondents are Liberty Mutual Insurance Co. and other companies of the Liberty Mutual Group (collectively Liberty). Liberty’s action against Lewis was filed in February 1993 seeking the balance due for premiums on policies issued by Liberty to Lewis that provided a variety of coverages, including workers’ compensation. The latter covered Lewis’s activities in Maryland and in other nearby jurisdictions where Lewis also did business. The net balance on all lines claimed at trial by Liberty from Lewis was $63,725.70.

Only workers’ compensation coverage for the policy period July 1, 1986, through June 30, 1987, under Policy WC-7-581-962477-046 (the Policy) is involved in the dispute between the parties. The premium on the Policy was determined by ⁴⁵⁴ retrospective rating. 1 Liberty is a mutual insurance company, and its board of directors historically had declared dividends payable to policyholders, and, on retrospectively rated policies, dividends are credited against premium, or, if no additional premium is payable, dividends are paid in cash. The relationship between dividends for a workers’ compensation policy period and losses incurred in years subsequent to the policy period based on compensable accidents that occurred during the policy period was governed by the type of plan offered by Liberty and selected by the policyholder. All of the issues in the instant matter revolve around whether Liberty, having credited Lewis with a dividend in the first adjustment of the Policy premium, could, in later adjustments and because of increased losses chargeable to the Policy period, recover back an amount equal to dividends previously paid.

I The dispute arises out of the following facts. Lewis annually requested proposals on its insurance requirements, and ⁴⁵⁵ Liberty had provided Lewis’s insurance for the two years preceding July 1, 1986. The workers’ compensation policy for the year ending June 30, 1986, was written on a plan under which dividends paid on the first readjustment were not subject to repayment based on losses determined at later readjustments. The workers’ compensation policy for that period ending June 30, 1986, is not in evidence.

Part of the record, however, is a form letter prepared by Liberty and accepted by Lewis by its corporate secretary’s signature that presents the dividend plan for that policy period. In relevant part it reads: “WORKERS’ COMPENSATION RETENTION DIVIDEND PLAN CONFIRMATION LETTER “RE: POLICY(IES) # Eff. Date 7/1/85 “An initial computation of dividends is made in conformity with the Directors’ vote approximately ten months after expiration of the policy subject to all applicable legal requirements. The first computation will be considered final, if all claims under the policy are closed.

If at the time of the first computation of dividends, there are any open cases such cases will be increased by 25% to determine the indicated dividend. “If the first computation of dividends is not final, a second computation will be done approximately twelve months after the first. “The second computation will be considered final if all claims under the policies are closed. If open cases exist at the time of the second adjustment, such cases will be increased by 10% to determine the applicable dividend. “If the second computation of dividends is not final, a third computation will be done approximately twelve months after the second. If open cases exist at the time of the third adjustment, such cases will not be increased to determine ⁴⁵⁶ the applicable dividend. The third computation of dividends will be final. “In addition, adverse loss development on the second or third adjustment will not reduce any dividend previously paid to you.” (Emphasis added).

For the year beginning July 1, 1986, Liberty submitted a proposal to Lewis that included workers’ compensation insurance based on Lewis’s estimated payroll of $1.82 million. Liberty estimated that the minimum net premium on the Policy would be approximately $82,000 if there were no losses and the maximum net premium would be approximately $140,-000 if losses' reached or exceeded $89,600. This proposal contemplated that the coverage would be written on the “Regular Variable Dividend Plan,” but that plan’s treatment of any dividend to policyholders was not described in the proposal. As in the two prior years, Liberty’s proposal for all lines was submitted to Lewis’s corporate secretary, Sally Fink, by an employee representative of Liberty.

The employee who submitted the proposal in 1986 was not a witness at trial. Ms. Fink testified that when the Liberty representative delivered the proposal, Ms. Fink asked if “it was the same coverage as we’d gotten. We were with them two years before that, so we could be very brief. She said, Tes.’ ” On or about August 27, 1986, all of the policies, including the thirty-seven page Policy, were delivered to Lewis in a large binder.

Also transmitted at that time was a one-page, Liberty-form, confirmation letter referencing the Policy and dated July 1, 1986. Ms. Fink testified that “[o]n receipt of the binder of policies” she telephoned the Liberty representative and “asked her if there was anything I needed to know about them. She said, ‘No,’ and she requested that I ... sign this form [the confirmation letter], and get it back to her for her files.” Ms. Fink signed on behalf of Lewis next to the printed words “Accepted by” and returned the confirmation. That letter in relevant part reads as follows: ⁴⁵⁷ “ALL STATES WORKERS’ COMPENSATION RETENTION DIVIDEND PLAN CONFIRMATION LETTER WITH REDETERMINATION “RE: POLICY(IES) # WC7-581-962477-046 Eff.

Date 7/1/86 “An initial computation of dividends is made in conformity with the Directors’ vote approximately ten months after expiration of the policy subject to all applicable legal requirements. The first computation will be considered final, if all claims under the policy are closed. “Upon any computation of dividends subsequent to the initial, if the redetermined dividend is greater than the dividend previously computed, the company shall immediately pay to the insured the additional dividend shown to be due, whereas, if the redetermined dividend is less than the dividend previously computed, the insured shall immediately refund the amount by which the dividends previously computed exceed the redetermined dividend.” (Emphasis added). The above-quoted relevant portions of the July 1, 1986 confirmation letter are, substantially verbatim, the text of an endorsement headed, “Dividend Redetermination Endorsement,” that was part of the Policy. Ms. Fink and management witnesses from Lewis acknowledged that they had read neither the dividend redetermination endorsement nor the 1986 confirmation letter.

Their position was that they relied on the representations quoted above and that they were unaware of the change. In the first retrospective adjustment of the Policy, made in June 1988, Lewis received a total credit of $94,090, but by the fourth retrospective adjustment, made in 1991, the dividend for the Policy period had been completely eliminated by charge backs. Set forth below are summaries of the accountings by Liberty at each annual adjustment of premium and of dividend. ⁴⁵⁸ Summaries of Retrospective Premium and Dividend Adjustments on Policy WC7-581-962477-046 Covering Policy Period 7-1-86 to 7-1-87 First Retrospective Adjustment Made in 1988 Loss—$8,900 (reserve) Premium Adjustment Standard Audited Premium $137,537 First Computation Retro Premium 83,880 ' $53,657 credit Dividend Adjustment Preliminary Dividend $ 0 First Computation Retro Dividend 40,423 40,423 credit Balance to Lewis $94,080 Dividend not previously paid _10 $94,090 credit Second Retrospective Adjustment Made in 1989 Loss—$33,500 Premium Adjustment First Computation Retro Premium $ 83,880 Second Computation Retro Premium 114,433 $30,553 debit Dividend Adjustment First Computation Retro Dividend $ 40,423 Second Computation Retro Dividend 41,456 1,033 credit Balance due Liberty $29,520 debit (Audited premium adjusted by $120 to $137,657) Third Retrospective Adjustment Made in 1990 Loss—$70,990 ⁴⁵⁹ Premium Adjustment Second Computation Retro Premium $114,433 Third Computation Retro Premium 137,537 $23,104 debit Dividend Adjustment Second Computation Retro Divi- $41,456 dend Third Computation Retro Divi- 19,572 dend 21,884 debit Balance due Liberty $44,988 debit Fourth Retrospective Adjustment Made in 1991 Loss—$93,100 Audited (Maximum) Premium $137,657 Previous Dividend $ 19,572 Dividend Offset $ 19,572 (This presentation omits the $10.00 dividend item not subject to retro) Fifth and Final Retrospective Adjustment Made in 1992 Loss—$98,100 Audited (Maximum) Premium $137,657 Dividend Credit 0 Thus, by the fourth retrospective adjustment, the losses charged to the Policy had caused the premium to reach its maximum, and Liberty charged back against Lewis the remaining balance of the highest amount of dividend that had been credited to Lewis’s account. II Liberty sued Lewis in a single count complaint for the balance due on the running account covering all lines.

Lewis filed a boilerplate answer containing thirteen numbered defenses, none of which averred any facts and one of which was a general denial under Maryland Rule 2—328(d). Another of the defenses simply named thirteen of the twenty-one affirmative defenses that are listed in Rule 2-32S(g). Among these ⁴⁶⁰ was “Fraud.” The answer did not mention negligent misrepresentation. Lewis subsequently filed a counterclaim. 2 The counterclaim alleged breach of contract by Liberty and claimed damages of $94,080, the amount credited to Lewis resulting from the first retrospective adjustment of premium and of dividend. 3 Liberty answered the counterclaim and filed a motion for summary judgment.

In its answer to Liberty’s motion Lewis stated that “it is not necessary that [Lewis] show that false representations were intentionally made.” In addition Lewis’s answer to the motion stated that Liberty engaged in fraud or “at least that Liberty [] made a false representation of material fact.” The circuit court denied Liberty’s motion for summary judgment. The case was tried to a jury. Lewis’s defense was that the statements made by Liberty’s representative to Ms. Fink constituted a fraudulent or negligent misrepresentation which induced it to accept the Policy. Lewis focused on the difference in the treatment of dividends in readjustments under the contract in effect for the year ending June 30,1986, and under the Policy, and maintained that the representation was that “dividends” paid on the first readjustment under the Policy could not be readjusted for later losses.

Lewis submitted that the misrepresentation had two effects. First, used defensively, the misrepresentation effected a rescission of the Policy so that Liberty’s claim for $63,725:70 failed. 4 Second, under ⁴⁶¹ Lewis’s theory the rescission, in turn, gave rise to an implied in fact contract that was based on the representations by the Liberty representative and that was identical, at least as to dividends, with the policy in effect for the period ending June 30, 1986. Its damages on the counterclaim, Lewis argued, were the difference between the $94,080 in “dividends” which had been charged back by Liberty against Lewis and the $63,725 of the charge back that had been utilized by Lewis to offset the claim asserted in Liberty’s complaint. 5 At the conclusion of all of the evidence Liberty orally moved for judgment in its favor on the counterclaim on grounds that we need not consider here. Liberty supplemented the grounds for its motion at the commencement of the next day’s proceedings when it argued, in effect, that Lewis could not claim misrepresentation because Lewis had a duty to read the Policy.

The circuit court denied Liberty’s motion for judgment, and the complaint and counterclaim were submitted to the jury on special interrogatories. The circuit court’s initial instructions did not explain negligent misrepresentation. When the jury sent a note asking for an instruction on that subject the circuit court furnished the jury with a written instruction that modified the pattern jury instruction on the tort of negligent misrepresentation. That instruction includes the element of justifiable reliance.

Set forth below is the jury’s verdict. “VERDICT SHEET “LIABILITY: “1. As to Count # 1 of the Complaint: BREACH OF CONTRACT—Do you find that [Lewis] is liable to [Liberty] for the premium? Yes / No ⁴⁶² “2. Do you find that [Lewis] has proved fraud in the inducement by clear and convincing evidence?

Yes No / “3. Do you find that [Lewis] has proved negligent misrepresentation by a preponderance of the evidence? Yes / No “4. As to Count #2 of the Counter-Complaint: BREACH OF CONTRACT—Do you find that [Liberty] is liable to [Lewis]?

Yes / No “If your answer to any of the Questions above are “YES,” then go to the DAMAGES section and award accordingly. “DAMAGES: “In what amount, if any, do you award [Liberty] on the following Count of the Complaint? “a. Count # 1—BREACH OF CONTRACT $ 63,725.00 “Total $_ “In what amount, if any, do you award [Lewis] on the following Count of the Counter-Complaint? “a. Count # 2—BREACH OF CONTRACT $ 31,909 “Total $ Immediately following the return of the verdict Lewis orally moved for the court to strike the $63,725 verdict in favor of Liberty on the ground that the jury found that Lewis had proved negligent misrepresentation which was Lewis’s defense to the claim for unpaid premiums. The circuit court struck the verdict in favor of Liberty and entered judgment for Lewis for $31,909 on the counterclaim.

Liberty appealed to the Court of Special Appeals which reversed. Liberty Mut. Ins. Co. v. Ben Lewis Plumbing, Heating & Air Conditioning, Inc., 121 Md.App. 467 , 710 A.2d 338 (1998).

The Court of Special Appeals held that the defense based on negligent misrepresentation should not have been entertained because Lewis did not plead it as an affirma ⁴⁶³ tive defense in its answer. Id. at 475-79 , 710 A.2d at 342-44 . Accordingly, the Court of Special Appeals reversed the circuit court’s striking of the verdict in favor of Liberty for $63,725. The intermediate appellate court also held that Lewis’s counterclaim should not have been submitted to the jury, relying substantively on Twelve Knotts Limited Partnership v. Fireman’s Fund Insurance Co., 87 Md.App. 88 , 589 A.2d 105 (1991), and factually on the admitted failure of Lewis to read the Policy. 121 Md.App. at 472-74 , 710 A.2d at 341-42 .

Although the parol evidence rule had not been raised by Liberty by way of objection to Ms. Fink’s evidence, or by way of an assigned ground for a motion for judgment, and had not been argued by Liberty in support of reversing the circuit court’s judgment on appeal, the Court of Special Appeals observed that the circuit court “should not have allowed Lewis to proceed on its counterclaim” under the parol evidence rule. Id. at 475 , 710 A.2d at 342 . 6 Lewis petitioned for certiorari and Liberty cross-petitioned, raising alternative grounds in support of the judgment of the Court of Special Appeals. Lewis contends that the intermediate appellate court misinterpreted Maryland Rule 2-323 and that it erred in holding that Lewis could not recover on its counterclaim because its representatives had not read the Policy. From among the questions raised in Liberty’s cross-petition we are obliged to consider only those that are essentially the converse of the questions presented by Lewis.

Ill In holding that Lewis could not assert negligent misrepresentation as a defense because it had not been affirmatively pleaded, the Court of Special Appeals erred. Sections (a), (d), and (g) of Rule 2-323 come to play in the analysis. In relevant part they read: ⁴⁶⁴ “(a) Content. A claim for relief is brought to issue by filing an answer.

Every defense of law or fact to a claim for relief in a complaint, counterclaim, cross-claim, or third-party claim shall be asserted in an answer---- The answer shall be stated in short and plain terms and shall contain the following: (1) the defenses permitted by Rule 2-322(b) that have not been raised by motion, (2) answers to the averments of the claim for relief pursuant to section (e) or (d)' of this Rule, and (3) the defenses enumerated in sections (f) and (g) of this Rule. “(d) General denials in specified causes. When the action in any count is for breach of contract, debt, or tort and the claim for relief is for money only, a party may answer that count by a general denial of liability. “(g) Affirmative defenses. Whether proceeding under section (c) or section (d) of this Rule, a party shall set forth by separate defenses: (1) accord and satisfaction, (2) merger of a claim by arbitration into an award, (3) assumption of risk, (4) discharge in bankruptcy or insolvency from the plaintiffs claim, (5) collateral estoppel as a defense to a claim,