Government Employees Insurance v. Insurance Commissioner

Levine, J., delivered the opinion of the Court. We are confronted here with appeals in two cases, No. 74, September Term, 1974, Government Employees Insurance Company v. Insurance Commissioner-of Maryland and No. 136, September Term, 1974, The Travelers Indemnity Company v. Insurance Commissioner of Maryland. Since these appeals present identical questions of law and require an application of the same statutory provisions, we shall decide them in one opinion following a recital of the facts in each case. ⁴⁶⁹ In broad terms, the issue we are faced with here is whether the action of each insurance carrier in refusing to renew an automobile insurance policy was in compliance with applicable statutory requirements. In both cases, appellee (the Commissioner) held that it was not, and was affirmed on appeal to the Baltimore City Court.

We reverse. No. 74, September Term, 1974 Government Employees Insurance Company v. Insurance Commissioner of Maryland On December 20,1972, Edmund F. Schoberg (the insured), a mail carrier residing in Westminster, applied for an automobile insurance policy in a telephone call to appellant, Government Employees Insurance Company (Geico). At that time, in response to a series of questions put to him by a Geico employee, he stated that in only one instance during the preceding three years had he been convicted of, or had he paid a fine for, a driving violation. That violation, the insured indicated, consisted of driving in October 1972 at 55 miles per hour in a 50 mile per hour zone.

On the strength of that telephone call, he was issued a temporary binder, but was instructed to complete a written application form on or before January 7, 1973, to avoid the loss of his coverage. On January 2, the insured completed the application and returned it to Geico. Near the top of the form, in conspicuous red print, appeared this warning: “IMPORTANT! ISSUANCE OF A VALID POLICY IS DEPENDENT UPON YOUR TRUE ANSWERS.” The form also contained this question: “Indicate dll driving violations or citations (other than parking) that you or any member of your family have been convicted of, forfeited bail or paid any fines for during the past three years?

(Give full details, including approximate dates, on separate sheet.)” (emphasis in original). The answer inserted by the insured was: “Speeding five mi. over limit 10-72.” Since the responses given by the insured purportedly brought him within Geico’s underwriting requirements, a ⁴⁷⁰ one-year policy was issued effective December 26, 1972. Immediately thereafter, in January 1973, Geico directed a routine inquiry to the Motor Vehicle Administration regarding the insured’s driving record. The response revealed that in addition to the previously mentioned violation, which actually had occurred on September 13, 1972, there had been three other infractions within the three-year period preceding the date of application.

The report read: “Date Disposition Description Points 4-16-70 $10.00 Speeding 1 7-14-70 15.00 Speeding 1 1-1-72 Improper Passing 1 .9-13-72 Speeding 1 ” Although each of the four violations had resulted in an assessment of one point by the Motor Vehicle Administration, only the two most recent points were yet viable when the application was made. No immediate action was taken by Geico in consequence of this newly acquired information. In anticipation of the December 1973 expiration date, however, and well in advance of the forty-five day deadline imposed by Maryland Code (1957, 1972 Repl. Vol.) Art. 48A, § 240AA, Geico wrote to the insured on September 10,1973, and informed him that it would not renew the policy.

As its stated reason for this action, it quoted the question and answer pertaining to the previous violations contained in the application, enumerated the three infractions which had not been disclosed, and then concluded with this statement: “Thus, the decision not to offer to renew your policy was made by reason of your failure to furnish a complete disclosure of information requested by our application- and considered necessary to a proper determination as to whether to accept your application initially.” As required by subsection (b)(vi) of § 240AA, the insured was also informed of his right “to protest the proposed action ...” to the Commissioner. He elected to exercise this ⁴⁷¹ right, and on October 29, 1973, the matter was heard by a Hearing Officer designated for that purpose by the Commissioner. At the proceeding before the Hearing Officer, a Geico representative testified that it was the practice of his company to insure applicants who had not been involved in more than one accident, and had not committed more than one violation within three years immediately preceding the application; but that a person having two or more of either was “unacceptable.” The witness explained: “I would prefer to say acceptable rather than eligible because ... we in fact now have no eligibility requirements. He could have one accident and one violation and be acceptable.

Conversely, he could have an accident and a violation and be unacceptable. The rule of one accident, one violation, is simply a guide to the underwriter, and it is not a hard and fast rule, or an eligibility requirement. It’s a flag that normally someone with one accident, and one violation would not be acceptable but depending on the circumstances he could be qualified to be acceptable.” The insured testified that he had overlooked two of the three undisclosed violations because, in completing the questionnaire, he had associated such violations with the points assessed by the Motor Vehicle Administration, and the points assessed for the first two had by then expired. He had simply forgotten the third violation.

Another belated disclosure, divulged by the insured for the first time at the hearing, was that a year prior to submitting the subject application, he had spoken to a Geico employee on the phone about obtaining coverage at that time. He apparently had reported the 1970 violations in that conversation, and was thus informed that because there had been two within the prior three-year period, he was unacceptable. It was also explained at the hearing that Geico is what is known as a “preferred-risk” company. By this was meant that because it offered somewhat lower premiums than do most other ⁴⁷² carriers, it must “be very selective in the types of risks” that it does insure.

The Commissioner subsequently found that Geico “[had] not met the burden of proving its proposed action to be justified ” and therefore disallowed it. (emphasis added). On appeal to the Baltimore City Court, following a hearing, that decision was affirmed. There, as he had before the Commissioner, the Geico representative testified that had the insured made an accurate disclosure on his application, the policy would not have been issued since, “[w]ith four violations on his record, that would not have been considered, by us to be an acceptable record ... for insurance as far as being a preferred driver.” After carefully tracing the history of § § 234A and 240AA of Art. 48A, the application of which controls the outcome of these cases, Judge Cole, sitting in the Baltimore City Court, said: “It should be clear to any reasonable man that the fact that an insured had had an accident or received a number of moving violations would not, in and of itself, mean that he was a poor risk for insurance, (emphasis in original). “Nor would it necessarily follow that the same experience of one motorist would cause him to be ineligible for liability insurance by all insurance underwriters. “The legislature designated the Commissioner to determine if the insurance company could justify its proposed action and cast the burden on the company to do so. “While the Courts are loathe, in some instances to set forth a check list, it seems apparent that the Commissioner might consider many factors in determining if the proposed action is justified-.

(emphasis added). “1.) The rates of the company applied to the attendant risk. ⁴⁷³ 2. ) The established guidelines of the company in its underwriting practices. 3. ) The intentional falsification of an application by an insured as opposed to an honest mistake. 4. ) The frequency of accidents where the insured has been adjudicated to be at fault. 5. ) The frequency of accidents where the insured can be determined to be factually at fault. 6. ) Frequency of serious moving violations. “The real test which the Commissioner should use in determining if the burden has been met is whether the insurer has demonstrated that it can no longer maintain the insured as a risk under its rating structure. To state the proposition differently: Does the insurer show by proof that the proposed action is consistent with its underwriting standards? (emphasis added). “As to G.E.I.C.O., it clearly had the right to cancel Mr. Schoberg’s policy upon learning that he had made a material misrepresentation. ... As such it waived its right to cancel.

Unless G.E.I.C.O. could demonstrate some experience during the term of this policy, which made Mr. Schoberg an unacceptable risk, it should renew the policy. It failed to meet its burden by justifying its proposed action.” (emphasis added)-. No. 136, September Term, 1974 The Travelers Indemnity Company v. Insurance Commissioner of Maryland On March 4, 1972, appellee, The Travelers Indemnity ⁴⁷⁴ Company (Travelers), issued a new one-year automobile liability insurance policy to Lloyd St. Rose (the insured) of Takoma Park. Within that month — on March 31 — he sustained a conviction for speeding and his driving record was assessed one point by the Motor Vehicle Administration.

On May 24, 1972, within three months after issuance of the policy, the insured was involved in a collision, and received three more points on his record upon a conviction of “failure to reduce speed to avoid an accident.” As a consequence of the property damage and personal injury claims which ensued from that incident, Travelers paid out in excess of $2,400 under the policy. Also, because four points had accumulated, the Motor Vehicle Administration found it necessary to issue a warning letter to the insured on July 20,1972. Anticipating a renewal of the policy, the insured completed a questionnaire for Travelers on November 21, 1972. In answer to the question, “During the past 12 months have you or any other resident driver been convicted of or forfeited bail with respect to a moving traffic violation as a result of operating an automobile,” he indicated “No.” He then affixed his signature immediately beneath a declaration that “. . . the information furnished on this form is true to the best of my knowledge.” Although manifestly aware of the single May 24 occurrence, Travelers had not been informed of the earlier one, and thus relied upon the response in renewing the policy on the March 1973 anniversary date.

Two weeks later, on March 19, the insured committed yet another violation — “exceeding the speed limit by ten or more miles per hour” — for which two more points were added to his driving record. The total accumulation of six points thus led to a hearing and a reprimand by the Motor Vehicle Administration in July 1973. Seeking a second renewal of his policy, which was to expire on March 4, 1974, the insured again completed a questionnaire in November 1973. Despite the March 19 speeding violation, he represented that he had not committed any traffic violations during the previous 12 ⁴⁷⁵ months.

In the following month, however, Travelers obtained a report of his driving record from the Motor Vehicle Administration, which revealed the violations we have just enumerated. As the evidence subsequently established, it was Travelers’ routine policy to obtain such records in alternating years rather than annually, for the sake of economy. Armed with this newly acquired information, Travelers wrote to the insured on January 11, 1974, stating that it would not renew the policy when it expired on March 4 because of the three violations and the accident. The insured protested the proposed action to the Commissioner whose designated representative conducted a hearing on February 19,1974.

At the hearing, a witness appearing in behalf of Travelers testified that his company followed a “three incident — two year” principle in weighing prospective renewals of automobile insurance policies. By this, it was meant that “three separate incidents during a two year period constituted a greater exposure than contemplated by our standard rates.” Curiously enough, although the insured also testified, no one apparently seemed interested in knowing why he had twice misrepresented his driving record to Travelers. With respect to the occurrences themselves, he not unexpectedly blamed the other operator for the May 1972 accident, and seemed to recall little of the two other violations. As in the companion case, the Commissioner found that Travelers had “not met the burden of proving its proposed action to be justified” and therefore ordered that it be disallowed.

Travelers appealed that decision to the Baltimore City Court where, following a hearing, the decision of the Commissioner was affirmed. In orally announcing its opinion from the Bench, the court quoted from its decision in the Geico case and then added: “What I intended to convey in those words was that the legislature, in its wisdom, saw fit to impose upon the insurer the obligation, because of ⁴⁷⁶ the differences in guidelines and underwriting practices, to convince the Commissioner what their guidelines were and what their underwriting practices were; and that it should be so clear an underwriting practice that it would indicate by itself why the insured should be included in this category. “. .. [I]t is incumbent upon the Court to make certain that the record spells out . . . clearly what those guidelines are and what the underwriting practices are so that the Court can determine whether the Commissioner was correct in what he did and determine, further, whether the insured would fit into certain risks patterns, and whether he was a risk or was not a risk. “I cannot say, after reading the testimony and hearing the testimony today, what the underwriting practices are. I get a very clear indication that there is some guideline having to do with points and also convictions, but what the spelled out nature of those convictions would be are not clear to me. “You would suggest, .. . Mr. Waxter, that there must be some room for underwriting judgment, but I suggest to you that to a large extent the legislature had in mind cutting out or reducing the kind of judgments which have led to all kinds of practices within the industry. . . . “I do not understand the evidence to clearly point that out to me, and for those reasons, I cannot say that Travelers has met its burden before the Commissioner, and I will affirm the Commissioner’s decision.” (emphasis added).

These appeals are from the two decisions of the Baltimore City Court. ⁴⁷⁷ As we have already suggested, the outcome of these cases is governed completely by § § 234A and 240AA of Art. 48A, particularly the latter. For the most part, however, it is a disagreement over what the' interplay between those two sections should be that lies at the heart of this contest. The Commissioner’s position is that the word “justified,” as used in subsection (f) of § 240AA, 1 establishes a substantive standard to be applied where cancellation or non-renewal of a policy is proposed by an insurance carrier. As a substantive standard, the Commissioner says, it requires the insurer to establish that the reasons assigned for non-renewal “are sufficiently supported by credible evidence,” and that “those reasons, once established in fact, are adequate and sufficient to warrant its proposed action when weighed by an unprejudiced mind guided by common