Government Employees Insurance v. Taylor

Digges, J., delivered the opinion of the Court. For the first time, we are presented with a case requiring a construction of Maryland Code (1957, 1972 Repl. Vol.), Art. 48A, §§ 486A-G, which was designed and enacted by the General Assembly originally in 1964 to regulate insurance premium finance agreements in this State. Very simply stated, a premium finance agreement permits a financial institution (the premium finance company 1 ) to secure the loan it makes to a prospective insured by retaining the power, upon default, to cancel the insurance policy procured ¹⁴ through that loan and recover any unearned premium as a credit on the borrower’s indebtedness.

Though tangentially concerned with the entire statute, in order to answer the questions presented by this appeal, we will focus principally on the cancellation provisions contained in § 486F. This declaratory judgment action, though instituted by the insureds, Martha and Henry Taylor, appellees, 2 presents primarily a dispute between Government Employees Insurance Company (GEICO), appellant, and the Unsatisfied Claim and Judgment Fund Board (Fund) as to which of the two must defend the Taylors from liability claims made as a result of an automobile accident on August 4, 1966 and pay any judgments which may be rendered against them. 3 The principal facts are not in dispute and are here summarized from the stipulation of counsel filed in the trial court. These facts reveal that in early December of 1965 the Taylors, with the assistance of the Allrisk Insurance Agency, contacted a premium finance company, Interstate Credit Development Corporation (ICDC), an additional appellee, and arranged with it to finance the premium of an automobile liability insurance policy Henry Taylor was purchasing from GEICO. The Taylor-ICDC financing agreement required that the borrowers make eight monthly installment payments to discharge their loan obligation.

In addition, it granted ICDC the power, typically contained in premium finance agreements, to cancel the insurance policy and to recover any unearned premium in the event that the Taylors defaulted in their repayment obligation. At the latest, GEICO became aware of the existence of this contract when that company accepted ICDC’s draft in payment of the Taylor’s policy premium and then endorsed it just below a statement which read: “By endorsement hereof the insurer hereby ¹⁵ acknowledges that the policy for which this draft constitutes payment of premium has been assigned to ICDC Inc., and in the event of cancellation of said policy for any reason the insurer agrees to pay all unearned premium refunds to ICDC.” In due course, the Taylors received from GEICO their insurance policy and a payment book from ICDC which informed them that the first monthly payment would be due on January 4, 1966. When neither the first installment nor the one due on February 4 was received, the finance company sent the Taylors past due notices informing them that delinquent charges had been added and that unless payment was made within five days 4 it would be forced to order cancellation of the insurance policy which secured its loan. Despite these admonitions, payment was not received 5 and thereupon ICDC, on February 14, dispatched to the Taylors a “Notice of Default” and “Notice of Cancellation” stating that since the overdue installments had not been paid the “default to date constitutes an election by you [the Taylors] to cancel [your] policy,” and that “in accordance with the authority which you have given us in consideration of our financing the premium” your policy is cancelled effective February 28, 1966.

This cancellation announcement was also sent to GEICO containing a provision for the insurer which stated: “This is a true copy of the Notice of Cancellation which was served upon the insured cancelling the policy listed below .... The return premium is to ¹⁶ be calculated as of the effective date of cancellation indicated.” With this notice, communications between the finance company and the Taylors ceased, but a skirmish through the exchange of letters began between GEICO and ICDC concerning the return of the unearned premium. First, on March 7, the insurance company requested that it be supplied with a copy of the Taylor-ICDC' financing agreement. Although furnished this document on March 10, and despite the fact that on April 28 it did notify the Taylors their policy was cancelled effective April 21, GEICO continually failed to respond to the finance company’s repeated requests throughout April and May that the unearned premium be returned.

In fact, it was not until September 22, almost two months after Mrs. Taylor, while operating her husband’s automobile with his permission, was involved in a collision on August 4, that GEICO finally responded by sending ICDC a check in the amount of the unearned premium calculated as of April 21. On August 12, eight days following this mishap, the Taylors wrote GEICO informing it of the accident and that claims for resulting damages were being made against them. The insurance company answered their letter by stating that the policy of insurance covering the Taylor automobile had been cancelled on April 21 and, therefore, its obligation had ceased as of that date. When those claiming damages against the Taylors became aware of GEICO’s contention, they notified the Fund of the accident and of the possible claims against it.

Upon receipt of this notice, the Fund referred the matter to the General Adjustment Bureau (GAB), an insurance adjusting agency, for investigation and whatever other action it deemed appropriate. The course of action selected was the institution of this declaratory judgment suit in the Court of Common Pleas of Baltimore City, which was brought in the Taylors’ names and with their consent, requesting a declaration that the insurance policy issued by GEICO, covering the Taylors’ automobile, was in full force and effect ¹⁷ on August 4 at the time of the accident because there had been no compliance with the cancellation provisions of § 486F. When Judge David Ross made this requested declaration, GEICO appealed. We shall affirm that judgment of the trial court for reasons which we think logically flow from the discussion that follows.

Locomotion by motor vehicle has practically become a sine qua non for most of this country’s population and since automobile liability insurance is now compulsory in this State, ownership of some type of liability coverage becomes a concomitant requirement for all of our motor vehicle operators. Partially to meet the needs of those who found it a burden to pay for insurance in one lump sum, American business ingenuity developed a system of premium financing as a distinct form of consumer credit to meet a specific public need. However, as is often the case, this plan created to cure one evil begot others. Included in the mischief which resulted from unregulated premium finance agreements was the extraction of usurious interest and excessive service charges.

But, perhaps the greatest danger posed by these agreements flowed from the finance company’s right to cancel an insurance policy without notice to the insured when a repayment installment was not made, usually leaving the insured unaware that he was without coverage and significantly jeopardizing the protection available to an innocent victim of the now uninsured’s negligence. In response to these dangers, while at the same time recognizing the great value inherent in permitting premium financing, Maryland in 1964 adopted a statute regulating this form of credit transaction. This law is but one of several statutes which have been enacted by the General Assembly to protect the public from uncompensated injury caused by the operation of motor vehicles upon the highways of this State. 6 It is remedial legislation and, as such, must be liberally construed to advance the remedy which was designed to eradicate and eliminate the mischief found to ¹⁸ exist. An application of the benefits intended by the statute can be achieved only by requiring strict compliance with its regulatory provisions.

Moore v. London Guarantee, 233 Md. 425, 429 , 197 A. 2d 132 (1964). 7 Accordingly, we must follow the ukase of the Legislature contained in Art. 48A, § 486F (a) that an insurance policy “may not be cancelled by the premium finance company unless such cancellation is effectuated in accordance with” the provisions of § 486F (b) -(f). At the crux of this appeal therefore, is what act was chosen by the Legislature to effect the cancellation of an insurance policy when the directive to cancel is initiated by a premium finance company. Fortunately, to discover the Legislature’s designation as to what constitutes this terminal point in the life of an insurance policy we need look no further than subsection (f) of § 486F which reads: “Whenever an insurance contract is cancelled in accordance with this section, the insurer shall return whatever gross unearned premiums are due under the contract to the premium finance company effecting the cancellation for the account of the insured or insureds.” (Emphasis added.) Clearly, therefore, cancellation of an insurance policy as controlled by the provisions of this law does not become operative until the unearned premium has been returned by the insurance company to the finance agency. And, as Mrs. Taylor was involved in the pivotal automobile accident on August 4, 1966, a date prior to September 22 of that year when GEICO returned the unearned premium to ICDC, the policy was in full force and effect at the time of the happening of the accident.

By analogy, the opinion of the Court in German Fire Ins. Co. v. Clarke, 116 Md. 622 , 82 A. 974 (1911), is helpful here. In that case, our