Insurance Co. of North America v. Miller

CATHELL, Judge. This case involves an analysis of the fiduciary duty that an agent owes to its principal. Appellant, Insurance Company of North America et al. (INA), 1 filed a Complaint in the Circuit Court for Baltimore County against William Ray Miller, II, appellee, and North American Risk Management, Inc. (NARM), 2 alleging several causes of action, including conversion, breach of fiduciary duty, and negligence arising out of Miller’s knowledge of, and participation in, a premium diversion scheme. Appellant filed a Motion for Partial Summary Judgment for the breach of fiduciary duty claim against Mr. Miller, which was denied by the Circuit Court. 3 When the case went to trial on November 30, 1999, appellant proceeded against appellee on the claims for breach of fiduciary duty and negligence.

After the evidentiary phase of the bench trial was concluded, the trial judge entered judgment in favor of NARM on all claims, and entered judgment in favor of appellee on the claims for conversion and “suit on account.” Then the Circuit Court, prior to closing arguments, ³⁶⁴ requested that the parties prepare trial memoranda on the relevant law concerning the fiduciary duty that an agent owes to a principal. Closing arguments took place on December 10, 1999, after which the Circuit Court entered judgment in favor of appellee on all remaining counts. Appellant filed a timely notice of appeal to the Court of Special Appeals. On our own initiative, we granted review prior to argument in the Court of Special Appeals.

Appellant presents two questions to this Court: 1. Did the trial court err by ruling that Miller did not breach any fiduciary duties and was not negligent by obtaining premium financing for an insurance premium of an INA insured, and using the funds to pay another premium financing company, instead of paying the funds directly to INA for the premium due? 2. Did the trial court err by ruling that Miller was not an agent of INA for the purpose of collecting premiums and forwarding premiums to INA, and, as a result, did not breach any fiduciary duties by failing to do so? We answer both questions in the affirmative.

Under the circumstances here present, appellee was an agent of INA for the purpose of collecting and forwarding premiums, which imposed upon him a fiduciary duty to INA, which he breached by failing to forward to INA the relevant premiums and/or by not notifying INA, or timely sharing with INA his knowledge, that the premiums at issue were being improperly diverted. Additionally, appellee breached his fiduciary duty to INA when he actively participated in obtaining premium financing for an insurance premium of an INA insured, and used the funds to return to another premium financing company monies due it on a completely unrelated transaction, instead of causing the funds to be remitted directly to INA for the premium due it. We also hold that appellee’s actions in the double financing scheme, at a minimum, could constitute negligence. Accordingly, we reverse the ruling of the Circuit Court for Baltimore County and shall remand the case to that court for further proceedings consistent with this opinion. ³⁶⁵ I. Facts Appellee has been a licensed insurance agent in the State of Maryland since 1992.

Appellee worked at J.L. Hickman & Company, Inc., 4 a Texas-based insurance brokerage, from approximately 1993 to early 1997, when the Hickman Agency went out of business. The Hickman Agency’s primary line of business was writing coverage for the funeral industry. At some point prior to August 1995, appellee became the Chief Operating Officer and Executive Vice President of the Hickman Agency, and held himself out as such. He was paid a salary as an employee of the Hickman Agency and earned commissions on insurance sales generated by himself and the Hickman Agency.

Effective August 1, 1995, the Hickman Agency entered into a CIGNA Agency Company Agreement with INA. This agreement was signed by appellee as Chief Operating Officer and Executive Vice President of the Hickman Agency. The agreement created a principal-agent relationship between INA and the Hickman Agency, respectively, from August 1, 1995 until the Hickman Agency ceased operations in early 1997. The agreement provided: 1 Our Relationship a Authority.

You will act as our agent for those lines of business and those territories in which you and we [5] are both licensed and where we specifically authorize you to do business.... 2 Your Authority and Duties ³⁶⁶ b Collection of Premiums. ' 3 All premiums, including return premiums, which you receive are our property. You will hold such premiums as a trustee for us. This trust relationship and our ownership of the premiums will not be affected by our books showing a creditor-debtor relationship, the amount of balances at stated periods or your retention of commissions. Unless we agree otherwise in writing, you must maintain premium monies in a separate bank account and not mingle such monies with your own funds.

On at least two separate occasions, Mr. Miller acknowledged that his personal relationship with INA was that of agent and principal. At trial, Mr. Miller, through counsel, stipulated that he was an appointed agent for INA from October 1995 through the Spring of 1997. Additionally, in a third-party action filed by appellee in the Circuit Court for Baltimore County against Utica Mutual Insurance Company, case number 03-C-97-007281, he again recognized the principal-agent relationship between INA and himself and that the provisions of the agreement applied to him individually. INA has brought this complaint against appellee for his actions and involvement in a complex double financing scheme.

According to Ms. Mannino’s 6 testimony, the Hickman Agency had three bank accounts: Account Number 346 was a money market account; Account Number 80900 was referred to as a commission account; and Account Number 722 was a trust account to which premium trust monies were to be deposited so as to be available to pay premiums to insurance carriers. These accounts were not managed properly — as discussed, infra, the premium dollars, intentionally, were not held “in trust” at the agency. ³⁶⁷ The Hickman Agency and appellee 7 were required under Maryland insurance regulations and its agreement with the CIGNA Companies to hold premium dollars paid by an insured or a premium financing company in trust for INA. 8 On redirect examination, Mr. Miller acknowledged that it was a general practice that an insurance company would expect proceeds of a premium financing agreement to be paid directly to it, without being retained by the insurance agency. The Hickman Agency’s cash flow management plan involved agents, including appellee, obtaining an insurance policy for a customer and setting up an installment payment plan for the premium due with the insurance company. The agent would not always inform the insured of the installment plan.

At the same time, the agent, in this case appellee, would obtain financing of the same premium amount for the insured through a premium financing company. Generally, the premium financing company would pay the full amount of the premium to the Hickman Agency, with the expectation that the full amount would be paid directly to the insurance company. However, under the scheme utilized by the Hickman Agency and known to appellee, the full amount received from the premium financing company was not immediately paid over to insurance companies, including INA. Instead, the Hickman Agency would deposit the premium payment into its own bank account, and only pay the insurance company the amount of the “installment” that the insurance company believed, as a result of information furnished by the agency, was due.

The insured’s premiums would generally be used to repay the premium financing company over a period of time. Apparently, neither the insureds, nor the premium financing companies, nor the insurer were aware of the ³⁶⁸ scheme. 9 The money that improperly remained with the Hickman Agency was moved with appellee’s knowledge and sometimes with his active participation out of the trust account and was apparently used to pay other expenses within the Hickman Agency. This was true for premiums paid to the Hickman Agency on INA accounts as well as accounts of other insurance companies. In other words, the premiums were held “out-of-trust.” By depositing the full amount of the insured’s premium advanced by the premium financing company (or the insured) into its own bank account, the Hickman Agency had the benefit of having the money (or part of it) for its own use from the time the money was received until the money was needed to pay installments to the insurance company. 10 Appellee was aware of, and actively participated in, and was in charge of, several accounts that had this “double financing” scheme in place.

The evidence presented on the record demonstrates that he was responsible for signing checks and sending premium payments to INA for “installments” that INA believed were due on numerous accounts. Mr. Miller admitted, during direct examination, that “it wouldn’t be necessary for the insured to stretch out payments over time with an installment plan if they had an insurance premium financing plan in place.... ” Ms. Suzanne DiSanti, a financial coordinator for the CIGNA Companies, testified that no “rule ³⁶⁹ or regulation or policy of the CIGNA Companies allow the use of premium funds for anything other than paying CIGNA’s premiums as they are due[.]” She further testified that had CIGNA known of the double financing scheme, it would not have permitted it “[bjecause a policy would never be put on installments if it was known to be premium financed.” She continued, “if we find out that a policy is premium financed and have not been told by the agent or broker, we immediately notify the underwriting department so that they can contact the agent or broker and tell them that all monies have to be paid up front and that the policy is then put back on annual pay.” One example of appellee’s participation in the double financing scheme is his actions in January and February of 1997, with respect to an INA insured, Gunther’s Leasing Transport, Inc. (Gunther’s Leasing). 11 The Gunther’s Leasing account included general liability, auto and workers’ compensation coverage and “produced something in excess of a million dollars in premium.” Gunther’s Leasing account had premium financing in place with INAC, a premium financing company. Sometime in 1996, INAC contacted the Hickman Agency and requested $400,000.00 in premium funds to be returned because of a problem with the Gunther’s Leasing account. Because the Hickman Agency was not segregating premium financing funds, and was using premiums paid into the agency for purposes other than paying premiums, the $400,000.00 that had been paid to the Hickman Agency by INAC, in respect to the Gunther’s Leasing premiums, was not in the Hickman Agency Trust Account.

Appellee testified that he became aware of the fact that the funds were out-of-trust in late December 1996 or January 1997. Appellee also testified that ³⁷⁰ the double financing scheme was inappropriate. However, instead of explaining to INAC that the funds were out-of-trust, appellee, himself, obtained premium financing on a completely unrelated Gunther account expressly for the improper purpose of paying back INAC funds relating to the Gunther’s Leasing account. To effectuate the scheme, appellee arranged for premium financing of a separate INA policy for workers’ compensation for Gunther’s Leasing, which had a premium of approximately $671,000.00.

According to Ms. Mannino’s testimony, premium financing was obtained, at appellee’s direction, from another premium financing company, AI Credit, for approximately $494,000.00 of this premium, not for the stated purpose of remitting the sum to INA on the workers’ compensation policy, but for the purpose of returning to INAC $400,000.00 advanced by INAC on a completely unrelated policy. Ms. Mannino also testified that, pursuant to appellee’s authorization, she signed this premium financing agreement using appellee’s signature stamp. No employee of the Hickman Agency told Gunther’s Leasing, INA, or INAC about the double premium financing arrangement. Specifically, the arrangement was concealed from Gunther’s Leasing, INA, INAC, and AI Credit.

Gunther’s Leasing was instructed to pay the premium to the Hickman Agency in installments of approximately $58,000.00. Realizing the potential problems of such activities, Ms. Mannino prepared a Memorandum to John Hickman, dated February 17,1997, in which she outlined the scheme: WE ALSO NEED TO REMEMBER THAT RAY [APPELLEE] HAS FINANCED THIS PREMIUM TO PAY THE BALANCE DUE BACK TO INAC. THE MONTHLY INSTALLMENTS ARE DUE IN THE AMOUNT OF $56,612.18 BY 2/15/97. IF WE DO NOT PAY THIS CINDY [12] WILL BE GETTING A NOTICE FROM AI CREDIT FOR THE PAYMENT DUE AND WE DO NOT ³⁷¹ WANT THAT TO HAPPEN.

I KNOW WE HAD A BALANCE OF 94,000.00 REMAINING FROM THIS AMOUNT FINANCED AFTER WE RETURNED THE 400,000.00 TO INAC. I SAY WE SENT AI CREDIT THE $94,000.00 BACK AND GET THE INSTALLMENTS ADJUSTED AND THEN WE WILL NEED TO REMEMBER THAT WE NEED TO MAKE THESE MONTHLY PAYMENTS ON THE 15TH OF EACH MONTH UNTIL OCTOBER. WE ALSO NEED TO REMEMBER TO MAKE THE PAYMENTS ON TIME SO THAT WE AVOID A CANCELLATION NOTICE BEING SENT TO EITHER GUNTHER’S OR CIGNA [ (INA) ]. Once the agreement was signed, AI Credit, paid $494,000.00 to the Hickman Agency, which deposited the money into its trust account in January 1997.

Immediately thereafter, the money was transferred to another account, from which a check for $400,000.00 was written to INAC. The proceeds of the financing arrangement for the Gunther’s Leasing worker’s compensation policy were not held in trust and were not used to pay the premium of the workers’ compensation policy to the insurer, INA. Instead they were used to pay INAC, the premium financing company on the separate policy. The premium was diverted from INA and, as a result, INA was not paid the proceeds of the financed workers’ compensation policy.

INA was not paid the premium for numerous insureds with policies bound through the Hickman Agency. After the Hickman Agency collapsed in 1997, Ms. Mannino sent letters to INA on behalf of several insureds to explain that the insureds had paid the premium for their policies, and that INA should not cancel their policies even though it had not received the premium payments. 13 At trial, appellant introduced two examples of installment payments by the Hickman Agency to ³⁷² INA for installments INA believed were due, based on the improper representations to INA that the policy premiums would be paid in installments. Appellee signed the checks payable to INA for these improper installment payments. The Hickman Agency collapsed shortly thereafter and its employees tendered their resignations in March 1997.

Appellee admitted that by at least as early as the latter part of 1996, he was aware that the Agency was “out-of-trust” and of the double financing scheme. He did not advise the Maryland Insurance Administration or INA that the Hickman Agency was out-of-trust and he participated in the scheme until at least the end of March 1997. Prior to Ms. DiSanti’s testimony, the parties agreed that the amount of money owed to INA by the Hickman Agency was $597,850.00. Ms. DiSan-ti’s report which contained this information was entered into evidence as plaintiffs exhibit 23.

The trial court did not consider the issue of damages in its opinion.

II

Discussion In an action tried without a jury, an appellate court “will review the case on both the law and the evidence. It will not set aside the judgment of the trial court on the evidence unless clearly erroneous, and will give due regard to the opportunity of the trial court to judge the credibility of the ■witnesses.” Md. Rule 8-131(c). However, “[t]he clearly erroneous standard for appellate review in [Maryland Rule 8-131] section (c) ... does not apply to a trial court’s determinations of legal questions or conclusions of law based on findings of fact.” Heat & Power Corp. v. Air Products & Chem. Inc., 320 Md. 584, 591 , 578 A.2d 1202, 1205 (1990).

The determination of the existence of a principal-agent relationship is, generally, a question of fact. The evidence presented in this case, however, demonstrates that Mr. Miller (1) stipulated to the fact that he was an appointed agent of INA, and (2) asserted in court memoranda in a related court proceeding that he was an “appointed agent.” ³⁷³ Although the trial court acknowledged this stipulation, it improperly limited the scope of his agency under the relevant Maryland law surrounding such principal-agent relationships. A. Principal-Agent Relationship “Agency is the fiduciary relation which results from the manifestation of consent by one person [the principal] to another [the agent] that the other shall act on his behalf and subject to his control and consent by the other so to act.” Green v. H & R Block, Inc., 355 Md. 488, 503 , 735 A.2d 1039, 1047 (1999) quoting Restatement (Second) of Agency § 1 (1958); see Brady v. Ralph Parsons Co., 308 Md. 486, 509 , 520 A.2d 717, 729-30 (1987); Patten v. Board of Liquor License Comm’rs, 107 Md.App. 224, 238 , 667 A.2d 940, 947 (1995). Although such a relationship is not necessarily contractual in nature, it is always consensual, Lohmuller Bldg.

Co. v. Gamble, 160 Md. 534, 539 , 154 A. 41, 43 (1931), and its creation is to be determined by the relations of the parties as they exist under their agreements or acts. American Casualty Co. v. Ricas, 179 Md. 627, 631 , 22 A.2d 484, 487 (1941). The ultimate question is of intent. See Howard Cleaners v. Perman, 227 Md. 291, 295 , 176 A.2d 235, 237 (1961); American Casualty Co., 179 Md. at 631 , 22 A.2d at 487 .

The record of the case sub judice provides: Q. Can you tell us whether Mr. Miller was an appointed agent by the CIGNA Companies? MR. CONTE: [14] Objection. THE COURT: Is that issue in dispute?

MR. CONTE: That is not in dispute. Objection withdrawn. THE COURT: The fact that he was an agent during the time period.... ³⁷⁴ MR.

CHASON: As of October of 1995. If counsel will stipulate to that, we can move on. THE COURT: And continuing? MR.

CHASON: And continuing into 1997. THE COURT: You’re not disputing that Miller was an agent for the CIGNA group from 1995 through 1997, is that correct? MR. CONTE: Through — until May of '97.

THE COURT: From what? MR. CONTE: May of '97. MR.

CHASON: That’s fine. May of 1997. THE COURT: That’s good. MR.

CHASON: We’ll take as established. [15] Through counsel, both during the trial of the case at bar, and in the related third-party action, appellee made a judicial admission that he was an agent arising from the Agreement between the Hickman Agency and CIGNA. Under Maryland law, there is a prima facie presumption that an attorney has the authority to bind his client by his actions related to litigation. As we have said: [T]here is a prima facie presumption that an attorney has authority to bind his client by his actions relating to the . conduct of litigation. Posko v. Climatic Control Corp., 198 Md. 578, 584 [, 84 A.2d 906 ]; Wanzer v. State, 202 Md. 601, 608 [, 97 A.2d 914 ]; Thomas v. Hopkins, 209 Md. 321, 327 [, 121 A.2d 192 ]; Smith v. Warden, 213 Md. 643 [, 131 A.2d ³⁷⁵ 392].

Cf. 2 Restatement (Second), Agency, § 284, comment e (1958). This is particularly true of stipulations or admissions made in the course of a trial. The appellee contends, however, that while a client may be bound by an admission by counsel in a pending case, he is not bound in subsequent litigation, and especially where a different issue is presented. We see no reason for the distinction.

It is generally recognized that admissions made by an attorney may be available, for proper evidential purposes, in other litigation. See 4 Wigmore, Evidence, § 1063 (3d ed., 1940), McCormick, Evidence, § 244, p. 520 (1954), and McGarity v. New York Life Ins. Co., 359 Pa. 308 , 59 A.2d 47, 50 . Secor v. Brown, 221 Md. 119, 123-24 , 156 A.2d 225, 227 (1959).

Mr. Miller’s acknowledgment, through counsel, both during the trial proceedings in the case sub judice, and in a third-party action filed by him against Utica Mutual Insurance Company, as to the significance of the Agreement to him individually, is germane to the issue at bar. As we have said, “ ‘[a] man shall not be allowed to blow hot and cold, to claim at one time and deny at another.’ ” Van Royen v. Lacey, 266 Md. 649, 652 , 296 A.2d 426, 428 (1972) quoting Cave v. Mills, 7 H. & W. 927. Mr. Miller was an appointed agent of the CIGNA Companies, including INA. B. Fiduciary Relationship The issue before us, therefore, is not whether Mr. Miller was an agent of INA but what was the scope of his agency relationship.

The trial court inappropriately limited the scope of Mr. Miller’s agency relationship to that of an “insurance agent” who sold insurance and ruled that his role as an insurance agent did not obligate him to ensure that premiums were forwarded to INA. Under this theory, Mr. Miller only had a duty to sell insurance and contractually bind INA, but then did not have the corresponding duty to see to the remittance of premiums to INA for insurance coverage bound. 16 ³⁷⁶ The scope of Mr. Miller’s agency is not limited by a description of “insurance agent.” As we discussed, supra, he stipulated to the fact that he was an appointed agent of INA. This relationship is not somehow limited because he is an insurance agent, rather, it is a broader relationship than that which the trial court found. Maryland Code (1995, 1997 Repl.Vol), section l-101(c) of the Insurance Article provides in relevant part: (c) Agent. — (1) “Agent” means a person that, for compensation, solicits, procures, negotiates, or makes insurance contracts, including contracts for nonprofit health service plans, dental plan organizations, and health maintenance organizations, or the renewal or continuance of these insurance contracts for persons issuing the insurance contracts.

(2) “Agent” does not include: (i) an individual who performs clerical, stenographic, or similar office duties while employed by an agent or insurer, including a clerical employee, other than a clerical employee of an insurer, who takes insurance information or receives premiums in the agent’s office, if the employee’s compensation does not vary with the number of applications or amount of premiums; (ii) a regular salaried officer or employee of an insurer who gives help to or for a qualified agent, if the officer or employee is not paid a commission or other compensation that depends directly on the amount of business obtained; or (iii) if not paid a commission, a person that obtains and forwards information for: 1. group insurance coverage; 2. enrolling individuals under group insurance coverage; or ³⁷⁷ 3. issuing certificates under group insurance coverage. (g) Appointment. — “Appointment” means an agreement between an agent and insurer under which the agent, for compensation, may solicit, procure, negotiate, or make policies issued by the insurer. [17] Appellee meets all of the criteria to be an appointed agent outlined above. Additionally, he does not meet any of the criteria set up in subsection l-101(c)(2) that would exempt him from status as an agent of INA. Specifically, section 1-101 clarifies that, under Maryland’s Insurance Code, an appointed agent generally has all the responsibilities and duties typically bestowed upon any agent.

That imposes upon him the duty to inform his principal of any improprieties of which he has knowledge and forbids his active participation in any such improper actions. The trial court erred in attempting to limit this relationship. The trial court’s reasoning also fails to acknowledge Mr. Miller’s obligations under standard Maryland insurance regulations. It is clear under the Code of Maryland Regulations (COMAR), that keeping funds “in trust” is one of the duties of insurance agents.

The Code of Maryland Regulations (CO-MAR) 31.03.03.01 provides: A. Every insurance agent and broker acting as such in this State who does not have the express written consent of his or its principals to mingle premium monies with his or its personal funds shall hold the premium monies separate from other funds in accordance with this regulation. B. Agents and brokers who do not make prompt remittance to principals and assureds of the funds shall deposit ³⁷⁸ them in one or more appropriately identified accounts in a bank or banks authorized to do business in this State or subject to jurisdiction of this State, from which withdrawals may not be made except as hereinafter specified (any such account is hereinafter referred to as a “premium account”). E. Withdrawals. (1) Withdrawals from a premium account may not be made other than for the following purposes: (a) Payment of premiums to principals.

(b) Transfer to an operating account of bank interest, if the principals have consented to it in writing. (c) Transfer to an operating account of commissions either actual or average. If average commissions are used, the agent or broker shall maintain on file in his office at all times a letter from each principal stating the percentage of the average commission. (d) Withdrawal of voluntary deposits.

(e) Payment of return deposits to assureds. (f) Payment of return premiums to assureds in the ordinary course of business when a written agreement with the principal authorizing this practice exists. (2) However, a withdrawal may not be made if the balance remaining in the premium account thereafter is less than aggregate net premiums, return premiums, and deposits received but not remitted. These provisions, and the terms of the 1995 agreement between CIGNA and Hickman, demonstrate that Mr. Miller’s duties, as an appointed agent of INA, with knowledge of what was