Harleysville Mutual Insurance v. Zelinski

WILNER, J. We granted certiorari in this case to consider two issues of importance. The first is whether an insurer may lawfully ⁸⁵ cancel or non-renew, or threaten to cancel or non-renew, a commercial automobile liability insurance policy unless the insured agrees to the exclusion of one or more named individuals from the policy—whether, in other words, a “named driver exclusion” endorsement is valid in the context of a commercial, as opposed to a family, policy. The second is whether a declaratory judgment that there is no coverage for a particular claim, entered in an action between the insurance company and its insured, binds a person who (1) has filed a claim against the insured, but (2) was not a party to that action. Each of the two issues has several sub-parts.

Because we shall answer the first question in the affirmative, it will not be necessary for us to address either the second issue or some of the sub-parts of the first. BACKGROUND On December 18, 2000, Angela Zelinski and her young son, Dylan, were seriously injured when their car was struck, head-on, by a truck negligently driven by Robert Townsend, III (Robert III). The truck was owned by Mac’s Septic Service, an unincorporated entity owned and operated by Robert Ill’s parents, Robert Townsend, Jr. and Louise Townsend. Robert, Jr. had given his son, who worked in the business, permission to use the truck that day.

The truck was one of several vehicles insured under two insurance policies issued by petitioner, Harleysville Mutual Insurance Company—a commercial automobile liability policy with a liability limit of $500,000, and an umbrella policy providing an additional $1,000,000 of coverage. Both policies became effective June 19, 2000, and ran for a year. The basic policy listed seven persons as “operators” of the insured vehicles, including Robert III. A special endorsement, titled “Maryland Changes—Cancellation and Nonrenewal,” permitted Harleysville to cancel the policy prior to its expiration, upon 45 days notice, “[i]f your driver’s license, or that of one or more but not all drivers who live with you or customarily use a covered ‘auto’, has been ⁸⁶ suspended or revoked during the policy period.” 1 The endorsement continued, however: “[Bjefore canceling this policy we will offer to continue this policy with a provision excluding coverage for each driver whose license has been suspended or revoked during the policy period.

If such an offer is accepted, we will issue an endorsement to that effect.” The umbrella policy provided coverage for “ultimate net loss” in excess of the “applicable underlying limit” but, in an “Auto Liability Limitation,” provided that the umbrella insurance did not apply to liability for bodily or personal injury or property damage arising out of the operation or use of an “auto” “unless the liability is covered by valid and collectible ‘underlying insurance’ as listed in the Schedule of Underlying Insurance, for the full limit shown----” The Schedule of Underlying Insurance listed only the basic commercial automobile policy issued by Harleysville. At some point, after the policy had been in force for about three months, Harleysville discovered that Robert Ill’s license had been suspended. 2 Acting pursuant to the endorsement in the policy, Harleysville offered Robert, Jr. the option of either having the policy cancelled or accepting an endorsement that excluded from the policy “any claims arising from accidents which occur while any ‘auto’ is being operated by [Robert III].” On September 1, 2000, Robert, Jr. elected to accept the endorsement. Robert III thereafter obtained for himself the minimally required insurance—$40,000 aggregate—from the Maryland Automobile Insurance Fund (MAIF). He was insured, to that extent, by MAIF at the time of the accident. ⁸⁷ The Zelinskis must have made a claim promptly after the accident.

On January 29, 2001, Harleysville filed suit against Mac’s Septic Service, Robert, Jr., and Robert III in the U.S. District Court, seeking a declaratory judgment that Harleysville had no duty to defend or indemnify those defendants against any claims or for any sums which they may incur and pay by reason of injuries sustained by any member of the Zelinski family as a result of the December 18, 2000 accident. The Zelinskis became aware of the action, informed Harleysville that they had an interest in it, and, through counsel, attended depositions taken in the case, but they were not made parties by either Harleysville or the defendants and did not seek to intervene. In September, 2002, the court granted Harleysville’s motion for summary judgment and entered an order declaring that Harleysville was “relieved of any duty to defend or indemnify Defendants for any claims arising out of the December 18, 2000 accident.” Relying on Maryland Code, § 27-606(a)(2) of the Insurance Article, the court held that Maryland law allows an insurance company to exclude coverage for a named driver whose driving record could have justified the cancellation or non-renewal of the policy and that Harleysville had effectively excluded coverage for Robert III. See Harleysville Ins.

Co. v. Mac’s Septic Service, 225 F.Supp.2d 595 (D.Md.2002). It does not appear that any appeal was taken from that judgment. While the declaratory judgment action was pending in Federal court, Keith Zelinski, as Angela’s guardian and Dylan’s father and next friend, sued Robert, Jr., Louise, and Robert III in the Circuit Court for Cecil County to recover for the injuries and losses sustained as a result of the accident. MAIF petitioned to intervene and offered to tender the $40,000 limit of its policy in settlement of all pending claims.

It does not appear that the court ever took any action on that petition. On November 20, 2002, a jury returned a verdict finding that Robert III was negligent, that he was acting within the scope of his employment at the time of the accident, and that Robert, Jr. and Louise were the owners of Mac’s Septic Service. After appropriate modifications to the verdict, ⁸⁸ judgments were entered against all three defendants in the amount of $1,070,206 in favor of Angela and $647,282 in favor of Dylan, a total of $1,717,488. This action commenced in March, 2003, when Keith, on behalf of his wife and son, caused to be issued by the Circuit Court for Cecil County a writ of garnishment against Harleysville, alleging that it held property of the judgment debtors, Robert, Jr., Louise, and Robert III.

After a brief round-trip detour to the U.S. District Court, Harleysville filed an answer and a motion to dismiss the writ, arguing that, by virtue of the named driver exclusion endorsement validated in the Federal court action, it had no duty to indemnify the judgment debtors and therefore held none of their property. In November, 2003, the Circuit Court entered an order granting the amended motion to dismiss and quashing the writ of garnishment. Zelinski appealed, raising two issues: whether the Circuit Court erred in concluding that the writ of garnishment was barred by res judicata or collateral estoppel, based on the judgment entered in the Federal declaratory judgment action, and whether it erred as well in determining that the named driver exclusion endorsement was authorized under Maryland law. The Court of Special Appeals answered both questions in the affirmative and therefore vacated the Circuit Court order and remanded for further proceedings.

Zelinski v. Townsend, 163 Md.App. 211 , 878 A.2d 623 (2005). We disagree with the intermediate appellate court’s conclusion regarding the validity of the named driver exclusion endorsement and, on that ground, shall reverse that court’s judgment. DISCUSSION Insurance policies are contracts and, in Maryland, are treated and construed just like other contracts. As we pointed out in Mesmer v. M.A.I.F., 353 Md. 241, 252 , 725 A.2d 1053, 1058 (1999), “[e]xcept as modified by statutes or regulations, the legal principles applicable to contracts generally are also applicable to insurance policies.” That includes the principle that “any clause in an insurance policy that is contrary to ⁸⁹ the public policy of this State, as set forth in any statute, is invalid and unenforceable.” Stearman v. State Farm, 381 Md. 436, 441 , 849 A.2d 539, 542 (2004).

The policy in question—the contract entered into between Harleysville, as insurer, and the Townsends and Mac’s Septic Service, as insureds—is clear. The named driver exclusion endorsement agreed to by Robert, Jr. unambiguously excludes coverage for any claim arising out of an accident caused by Robert III. If we were dealing just with a construction of the policy, therefore, it would be beyond dispute that Harleysville has no duty to indemnify any of the insureds against the judgments entered in the tort action. The question is whether that endorsement is contrary to, and therefore not permitted by, Maryland law.

As we pointed out in Lewis v. Allstate Ins. Co., 368 Md. 44, 47 , 792 A.2d 272, 273 (2002) and earlier cases cited there, the General Assembly has enacted comprehensive statutes regulating motor vehicle insurance—statutes that mandate such insurance (purchased or approved self-insurance) for every motor vehicle required to be registered in Maryland, that require policies to contain certain coverages in specified minimum amounts, that require insurers to offer to their insureds certain other kinds of coverages, and that prohibit insurers from engaging in certain practices. The Zelinskis contend that, although a named driver exclusion endorsement is permitted in family and personal automobile insurance policies, it is not permitted in commercial motor vehicle insurance and that the endorsement added to the policy in question here is therefore void and unenforceable. They thus ask that we apply what we said in Salamon v. Progressive, 379 Md. 301, 315 , 841 A.2d 858, 867 (2004), that “we shall not uphold any exclusion, not authorized by the General Assembly, that excuses or reduces benefits below the statutory mínimums.” So far as we know, it was always permissible for an automobile insurance company, in the absence of a statute to the contrary, to decline to offer or renew coverage to a person who did not meet the company’s legitimate underwriting crite ⁹⁰ ria, especially a person who, because of a poor driving record, constituted a particularly bad risk.

Prior to 1972, it was not legally compulsory for drivers and motor vehicle owners to have liability insurance, and the only constraints in Maryland on an insurer’s ability to cancel or refuse to underwrite or renew a policy of motor vehicle insurance, for a reason other than non-payment of premium, were that (1) by virtue of laws enacted in 1970 and 1971, an insurer was prohibited from refusing to underwrite or renew a particular insurance risk for any reason based on the race, creed, color, or sex of an applicant or policy holder or for any other “arbitrary, capricious, or unfairly discriminatory reason,” and (2) the insurer had to give 45 days advance notice of cancellation or non-renewal, inform the policy holder of his or her right to replace the insurance through the “assigned risk” plan then in effect, and, upon request, advise the insured of the “actual reasons” for the cancellation or non-renewal. See Maryland Code (1957, 1972 Repl.Vol.) Art. 48A, §§ 234A and 240A through 240C. Section 243 of then-Art. 48A required motor vehicle insurers to participate in an automobile insurance plan, known as the “assigned risk” plan, under which persons, including corporations, who were unable to obtain motor vehicle insurance through “ordinary methods,” were eligible for insurance through that plan. Although the statute required that premiums charged for insurance under the plan not be “excessive, inadequate or unfairly discriminatory,” the premiums charged were, in fact, significantly higher than those charged for comparable policies issued directly by insurers.

During the late 1960’s and early 1970’s, even after the 1970 and 1971 legislation precluding arbitrary rejections, cancellations, and non-renewals, there were widespread complaints from Maryland motorists that those kinds of rejections were still occurring and that as many as 100,000 Maryland motorists had been forced either to obtain insurance through the higher-cost assigned risk plan or to be uninsured. Responding to those complaints, Governor Mandel, in January, 1971, directed the Secretary of Licensing and Regulation to conduct ⁹¹ a thorough study of the overall automobile insurance problem. The Governor expressed particular concern over “increasingly frequent arbitrary cancellation of automobile insurance policies,” the “soaring cost of this necessary protection,” and the fact that “the average driver is finding it difficult to obtain coverage at regular rates.” The Secretary conducted the study and made some dramatic recommendations. Although those recommendations were not accepted in precisely the form presented, based on the Secretary’s findings, the Governor presented comprehensive legislation to the 1972 session of the General Assembly.

The bill, ultimately enacted as 1972 Md. Laws, ch. 73, dealt with the problem in four principal ways. First, it