Great Southwest Fire Insurance v. Huss

Moore, J., delivered the opinion of the Court. This is an appeal by an insurer from a judgment against it for $29,400 in favor of its insureds in connection with a fire loss; and a cross-appeal by the insureds solely to preserve their right to proceed against their insurance broker and their premium finance company, the other two original defendants, for alleged negligence in failing to effect reinstatement of their cancelled insurance coverage after their indebtedness to the finance company for delinquent installments payments had been fully paid. As it was tried, the primary issue in the case was whether the insurer had complied with the insurance contract cancellation provisions ⁴⁴⁹ of Md. Ann. Code art. 48A, § 486F; and it was determined that it had not. We find error and reverse the judgment against the insurer.

We also reverse the judgments in favor of the broker and the premium finance company, and remand for a new trial of the insured’s claims against them. I Thomas and Janet Huss, the appellees and cross-appellants (plaintiffs below), purchased from The Great Southwest Fire Insurance Company (Great Southwest), appellant and cross-appellee (one of three defendants below), a fire insurance policy which insured the contents of the "New Old Mill Inn,” a tavern in Port Deposit, in the amount of $35,000. The policy became effective on October 21, 1976. Their local insurance agent for some twenty years, L. L. Logan, assisted the plaintiffs in obtaining the policy by contacting the Hardester Corporation, an excess and surplus line insurance agency, 1 which in turn placed the insurance with America’s Insurance Center (A.l.C.), an underwriter of insurance and a general agent for Great Southwest.

A.l.C. is not a party to this appeal. 2 The premium of $1,365 was paid in full to Great Southwest in October 1976 by Tifco, Inc. (Tifco), a premium finance company through which plaintiffs financed the premium. 3 ⁴⁵⁰ The Premium Finance Agreement provided for nine monthly installments commencing in November 1976 and, in the event of plaintiffs’ default, Tifco was authorized to cancel the policy. Mr. and Mrs. Huss were late in some of their payments and when this occurred again in April 1977, Tifco, pursuant to Md. Ann. Code art. 48A, § 486F, infra, sent the plaintiffs a written notice of its intent to cancel the policy. After ten days elapsed, Tifco sent a Notice of Cancellation, effective May 12, 1977, to the Husses, Logan, Hardester, and Great Southwest. (A.I.C. received a copy of the Notice of Cancellation from Hardester and also from Great Southwest.) Six days later, on May 18, 1977, the Husses brought their payments up to date and made the remaining payments to Tifco on time through July, 1977 when their obligation was fully discharged.

On May 19, 1977, Tifco sent a Reinstatement Request to the Husses, Logan, and Hardester, but not to Great Southwest. This was a printed form requesting the insurance company to rescind the cancellation and reinstate the policy.* ** 4 The Husses believed that the policy was then reinstated by the insurer. Both Great Southwest and A.I.C. denied at trial that they received the Reinstatement Request despite testimony by a Hardester manager that he mailed it to A.I.C. on May 20, 1977. At all events, the policy was not reinstated and the Husses were unaware of their lack of coverage until after the fire.

On this appeal, there is no claim by the Husses of a wrongful refusal by the insurer to reinstate the policy, nor that there was any duty to reinstate the policy if the Reinstatement Request had been received. Meanwhile, A.I.C. calculated the unearned premium resulting from the cancellation and forwarded to Hardester a credit memo, dated June 10, 1977, which credited ⁴⁵¹ Hardester with a return of the unearned portion of the premium on the plaintiffs’ policy. 5 The unearned premium was subsequently paid by check, dated August 17, 1977, from A.I.C. to Hardester. 6 On July 27, the New Old Mill Inn was destroyed by a fire of unknown origin. Great Southwest did not honor the plaintiffs’ claim under the policy of insurance for the contents of the Inn because it said the policy had been cancelled, pursuant to Tifco’s notice, effective May 12, 1977, and never reinstated. Plaintiffs then filed suit in the Circuit Court for Cecil County against Great Southwest, Hardester, and Tifco.

They alleged that Great Southwest "failed, as required by statute, to forward to Tifco or plaintiffs the unearned premium ... [or] notify the plaintiffs or their agent that the Reinstatement Request was denied.” "Alternate” claims of negligence were separately alleged against Hardester and Tifco, pertaining to Great Southwest’s failure to reinstate the policy following cancellation. Hardester and Tifco filed a third-party claim against A.I.C. Great Southwest cross-claimed against Hardester and Tifco. The court found no actionable negligence by Tifco in its handling of the Reinstatement Request and directed a verdict in its favor. Hardester’s "liability” with respect to the reinstatement of the insurance policy was not considered "actionable.” The court, however, denied Hardester’s motion for a directed verdict.

The case was then submitted to the jury on special issues as follows: 1. Was Hardester the agent of Tifco at the time it received the Credit Memo on June 10, 1977 for the purpose of forwarding and returning the premium to Tifco on Plaintiffs’ policy? ⁴⁵² [If the answer to Question 1 was "no,” the jury was instructed to ignore Questions 2 and 3, and move on to Question 4.] 2. Did Hardester have a duty to tell the Plaintiffs of its June 10, 1977 receipt of a credit memo from the Insurer for the unearned premium? Note: If the answer to Question 2 is "no,” ignore Question 3. 3.

If the answer to Question 2 is "yes,” was Hardester’s failure to do so the proximate cause of Plaintiffs’ loss? 4. Did Hardester Corporation breach its Correspondent’s Agreement with America’s Insurance Center by failing to return the unearned premium to Tifco, Inc. for the account of the Plaintiffs prior to the loss? 5. In what amount, if any, do you find that the Plaintiffs have sustained damage to contents of the New Old Mill Inn as a result of the fire of July 27, 1977? 6. Shall interest be allowed: (a) If so, from when?

Because the jury answered "no” to the first issue, a verdict was entered by the court in favor of the Husses and judgment in the amount of $29,400 was entered against Great Southwest in accordance with the jury’s response to issue No. 5. The court entered a judgment nisi for Great Southwest in its cross-claim against Hardester. This was later set aside when the court granted a judgment n.o.v. for Hardester. II In the first of these two appeals, Great Southwest seeks a reversal of the $29,400 judgment rendered against it, and maintains principally, as it did below in unsuccessful motions for summary judgment and for a directed verdict, ⁴⁵³ that the return of the unearned premium was not a condition precedent to effective cancellation by the premium finance company; and that the policy was cancelled prior to the fire loss.

In the cross-appeal, seeking to preserve their claims against Tifco and Hardester should their judgment against Great Southwest be reversed, the Husses contend that the court erred in granting a directed verdict for Tifco and in entering judgment for Hardester. 7 A. Appeal by Great Southwest The issue presented by Great Southwest was all-pervasive at the trial below and, indeed, has been given primary emphasis by the parties on appeal. The trial court held, as a matter of law, that Great Southwest was required to return the unearned premium to Tifco to complete the act of cancellation. The jury was instructed that unless they found that Hardester acted as agent for Tifco for the return of the unearned premium, the policy was still in effect on the date of the loss and the Husses were entitled to recover. 8 Great Southwest argues that the policy was cancelled by the premium finance company as of May 12, 1977 (before the fire), and therefore, it was under no obligation to satisfy the insureds’ loss claim. Great Southwest’s appeal requires us to construe the provisions of Article 48A, § 486F.

These provisions, effective now and at the time of the proceedings below, are as follows: "§ 486F. Cancellation of insurance contracts. (a) When in connection with a premium finance agreement, a power of attorney or other authority to cancel any insurance contract or contracts on behalf of the insured is given to a premium finance company, the insurance contract or contracts may not be cancelled by the premium finance company ⁴⁵⁴ unless such cancellation is effectuated in accordance with the following provisions: (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 or contracts 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 mailing 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.

No policy may be cancelled by the holder of a power of attorney because the delinquency and collection charge as provided in § 486E has not been paid. (d) Upon receipt of a copy of such cancellation notice by the insurer or insurers, the insurance shall be cancelled effective as of the date specifíed in the notice as if the aforesaid notice of cancellation had been submitted by the insured himself, but without requiring the return of the insurance policy. (e) All statutory, regulatory, and contractual restrictions providing that the insured may not cancel his insurance contract unless notice is given to a governmental agency, mortgagee or other third party shall apply where cancellation is effected under the provisions of this section. The insurer, in accordance with said prescribed notice where it is required to give such notice in behalf of itself or the insured, shall give notice to such governmental agency, mortgagee or other person; and it shall determine and calculate the effective date of cancellation from the day it receives the copy of the notice of cancellation from the premium finance company. ⁴⁵⁵ (f) 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 fínance company for the account of the insured or insureds within a reasonable time not to exceed 60 days after the receipt by the insurer of the notice of cancellation, or after the completion of any payroll audit necessary to determine the amount of premium earned while the policy was in force.

The audit shall be performed within 60 days after the receipt by the insurer of the notice of cancellation.” (Emphasis added.) 9 The appellees Husses 10 argue that subsection (a) of the statute requires that all of the conditions in subsections (b) through (f) in § 486F be met prior to cancellation. They rely on Government Employees Insurance Company v. Taylor, 270 Md. 11 , 310 A.2d 49 (1973), a case involving the cancellation of an automobile policy by a premium finance company, wherein the Court specifically held that the return of the unearned premiums by the insurer to the premium finance company was a condition precedent to cancellation of the policy under § 486F and strict compliance with the statute was required. That case, however, was decided under the 1973 version of the statute. At that time, subsections (d) and (f) read as follows: ⁴⁵⁶ "(d) Upon receipt of a copy of such cancellation notice by the insurer or insurers, the insurance contract shall be cancelled as if the aforesaid notice of cancellation had been submitted by the insured himself, but without requiring the return of the insurance policy.

(f) 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.” The Court of Appeals emphasized the phrase, "effecting the cancellation” in reaching its determination. Judge Digges wrote: "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.’ 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.” (Emphasis in original.) Id. at 18, 310 A.2d at 53 . The Court, it appears, construed the words, "effecting the cancellation” in subsection (f) as not ⁴⁵⁷ modifying the word, "company.” Rather, the words, ’’effecting the cancellation for the account of the insured or insureds,” were interpreted as the result of the required return of any unearned premiums.

At the next legislative session after Taylor , the General Assembly of Maryland amended § 486F (d) and (f). Very significantly, the 1974 amendment inserted in subsection (d) the words ’’effective as of the date specifíed in the notice” after the word "cancelled.” (Emphasis added.) Equally important was the deletion in subsection (f) of the phrase "effecting the cancellation,” 11 upon which the decision in Taylor appears to have rested. The appellees argue that the 1974 amendments to the statute "merely specified the beginning date the insurer should use in computing the 60 day period the insurer had to return the gross unearned premium.” That interpretation is off the mark. It completely overlooks the two critical amendments which we have discussed, including the deletion of the phrase underscored in Taylor .

In State v. Fabritz, 276 Md. 416 , 348 A.2d 275 (1975), the Court of Appeals commented on statutory construction as follows: "The cardinal rule in the construction of statutes is to effectuate the real and actual intention of the Legislature. ... Of course, a statute should be ⁴⁵⁸ construed according to the ordinary and natural import of its language, since it is the language of the statute which constitutes the primary source for determining the legislative intent. Where there is no ambiguity or obscurity in the language of a statute, there is usually no need to look elsewhere to ascertain the intention of the Legislature. Thus, where statutory language is plain and free from ambiguity and expresses a definite and sensible meaning, courts are not at liberty to disregard the natural import of words with a view towards making the statute express an intention which is different from its . plain meaning.” (Citations omitted.) Id. at 421-22 , 348 A.2d at 278 .

We think it plain (following on the heels of Taylor) that the insertion by the General Assembly in 1974 of the words "effective as of the date specified in the notice” in subsection (d) and the deletion of the words "effecting the cancellation” from subsection (f), manifest a clear legislative intent that the effective date of cancellation is not when the unearned premium is returned to the premium finance company but the date specified in the Notice of Cancellation issued by the premium finance company. 12 It is plainly stated in subsection (d) that upon receipt of the cancellation notice by the insurer, "the insurance contract shall be cancelled effective as of the date specifíed in the notice.” (Emphasis added.) The return of the gross unearned premiums by the insurer is still a requirement, under subsection (f), but it is not a condition, to the cancellation of the policy. 13 Those conditions are set forth in subsections (b) through (e), inclusive. Subsection (f) applies after the effective date of cancellation. ⁴⁵⁹ Therefore, the Husses’ insurance policy was effectively cancelled as of May 12, 1977, the date specified by Tifco in its Notice of Cancellation received by the insurer. The trial court erred in holding, as a matter of law, that Great Southwest was required to return the unearned premium to Tifco before cancellation could become effective. The judgment in the Husses’ favor against Great Southwest must therefore be reversed.

The appeal by Great Southwest from the judgment n.o.v. in favor of Hardester in its cross-claim need not be addressed; nor need we consider its alternative contention that the issuance of a credit memo by A.I.C. to Hardester crediting Hardester’s account with the amount of the unearned premium was a return of the unearned premium to Hardester. B. Cross-appeal by Husses In the second appeal herein, the Husses cross-appeal against Hardester and Tifco, although candidly stating that their "main thrust” in the appeal is in their "role as appellee to defend the lower court’s ruling as a matter of law.” We turn to the issues raised by their cross-appeal. 1. Huss v. Tifco In their declaration the Husses pleaded an "alternate claim” against