INSURANCE COMMISSIONER FOR THE STATE v. Engelman

KARWACKI, Judge. We are principally called upon in this case to review the propriety of an administrative enforcement proceeding ⁴⁰⁶ brought under the Maryland Insurance Code (“the Code”), Maryland Code (1957, 1991 Repl.Vol., 1992 Cum.Supp.), Article 48A, §§ 1-697. 1 We are asked whether the Maryland Insurance Administration (“the MIA”) may prohibit, by adjudication, bail bondsmen from accepting installment payments on bond premiums 2 when their surety’s approved rate filings 3 neither permit nor prohibit such activity. For the reasons explained below, we shall answer that question in the negative and affirm the judgment of the circuit court. Because this case results from the consolidation on judicial review of two separate administrative actions, we shall recount the facts relevant to each Respondent seriatim.

I. a. Engelman Steven E. Engelman 4 began operating a bail bonding company known as Professional Bail bonds on October 22, 1992. Engelman subsequently incorporated the entity as Professional Bail Bonds, Inc. (“Professional”), which began issuing bonds in its own name in January of 1993. ⁴⁰⁷ In March of that same year, Sandra Castagna, Senior Market Conduct Examiner for the MIA, and William McGarvey, a Market Conduct Examiner for that same organization, performed an examination of Professional’s business activities as well as those of Engelman, for the period November 1,1992 through February 28, 1993. By a letter dated April 19, 1993, 5 Castagna informed Engelman of the March examination results, questioning a $12,766.25 discrepancy between insurance premiums charged and premiums actually collected.

Castagna also informed Engelman that “Professional” was not a registered trade name and that the corporation was not on record as having a Certificate of Qualification as required by § 168(e)(2) of the Code. On April 22, 1993, Engelman responded to Castagna’s letter, averring that he had registered Professional as a trade name and completed the corporation’s Certificate of Qualification and was filing it that same day. Unsure of the alleged discrepancy period, however, Engelman requested further information so that he could adequately respond. Within six days, Engelman’s father, who also was his accountant, in ⁴⁰⁸ formed Castagna by letter that, with respect to the discrepancy between premiums charged and premiums collected, “there are numerous situations where premiums are not paid in full because of broken promises, bad checks and the bad credit of essentially indigent persons who make up the bulk of his clientelle. [sic] At the time of these shortfalls, Steven [Engelman] provides his client with a written receipt and obtains a promissory note for the balance due.

Steve keeps a record of these balances due but in time, many of these receivables go on to becoming write offs ...” Following its investigation, the MIA alleged, inter alia, that by failing to collect bond premiums in full at the time the bonds were written, Engelman violated §§ 226(a), 230(b), and 242(e) of the Code, discussed further beginning in Part III, infra. The MIA also charged Engelman with violations of § 168(e)—(f), 6 for failing to timely acquire a Certifícate of Qualification and for faffing to timely register Professional’s trade name with the agency. At a hearing held before an Administrative Law Judge (“ALJ”) of the Office of Administrative Hearings, 7 Engelman ⁴⁰⁹ stipulated that from November 1, 1992 to February 28, 1993, he and his employees had accepted less than the full premium for thirty-five issued bonds, although the balance of the premiums due had been secured by promissory notes. The sureties underwriting the bonds did not have a rate filing permitting installment payments.

Engelman also conceded that he did not register Professional’s trade name until April 20, 1993— almost five months beyond the date it began issuing bonds and collecting premiums in its own name. The ALJ recommended granting Engelman’s Motion for Summary Decision on the installment payment issue, concluding that none of the cited statutes prohibited the practice. The ALJ did, however, conclude that Engelman’s failure to comply with § 168(e)—(f) warranted a three-day suspension under § 175(12). 8 On March 8, 1995, the Insurance Commissioner (“Commissioner”) rejected the ALJ’s conclusions of law with respect to installment payments, concluding that “[they] ... plainly constitute[ ] a ‘special favor ... benefit ... or valuable consideration’ as those terms are used in § 226(a) of Article 48A,” and that § 230(b) prohibited the collection of partial premiums. ⁴¹⁰ The Commissioner imposed a thirty-day suspension for the totality of Engelman’s alleged violations. Engelman then sought judicial review in the Circuit Court for Baltimore City. b.

Wynder After an initial hearing before the Associate Deputy Insurance Commissioner (“ADC”), Respondent Wynder was found to have violated various provisions of Art. 48A for concededly collecting bond premiums in installments. Wynder sought judicial review of the ADC’s Order in the Circuit Court for Baltimore City, which remanded the case for a de novo hearing. The ALJ assigned to hear Wynder’s case delayed his ruling pending the Engelman decision. On April 17, 1995, Wynder received a recommended suspension of sixty days under § 175(1), (6), and (12), see n. 6 supra, which the Commissioner adopted in a Final Order, dated April 21, 1995.

Wynder once again sought judicial review in the Circuit Court for Baltimore City.

II

Engelman and Wynder’s cases were consolidated on judicial review. The circuit court reversed Respondents’ suspensions for accepting “short money.” In its Memorandum Opinion and Order, the court ruled that “installment plans, with or without interest, are permitted under the [Insurance] Code, and do not constitute a ‘valuable consideration’ given in exchange for the purchase of the bond [within the meaning of § 226(a) ].” The court further concluded that even assuming that the Commissioner himself prohibited the practice of accepting “short money,” that policy was unknown and unknowable to Engelman and Wynder and fairness dictated that the Commissioner adopt a specific rule prohibiting the practice. The court, however, affirmed Engelman’s suspension for failing to register and qualify Professional in a timely manner, but remanded the case so that the Commissioner could consider what portion of Engelman’s suspension was attributable to his registration and qualification failures. The Commissioner ⁴¹¹ appealed that judgment to the Court of Special Appeals.

Engelman filed a cross-appeal. We granted a writ of certiorari in both cases before argument in the intermediate appellate court to consider the issues raised.

III

Ordinarily, a final order of the Commissioner must be upheld on judicial review if it is legally correct and reasonably supported by the evidentiary record. Montgomery County v. Buckman, 333 Md. 516, 519 , 636 A.2d 448, 450 (1994); Younkers v. Prince George’s County, 333 Md. 14, 18-19 , 633 A.2d 861, 862-63 (1993). This standard of review is both narrow and expansive. It is narrow to the extent that reviewing courts, out of deference to agency expertise, are required to affirm an agency’s findings of fact, as well as its application of law to those facts, if reasonably supported by the administrative record, viewed as a whole.

United Parcel Service v. People’s Counsel, 336 Md. 569, 577 , 650 A.2d 226, 230 (1994); Supervisor v. Asbury Methodist Home, 313 Md. 614, 625-27 , 547 A.2d 190, 195-96 (1988); Bulluck v. Pelham Wood Apts., 283 Md. 505, 513 , 390 A.2d 1119, 1124 (1978). The standard is equally broad to the extent that reviewing courts are under no constraint to affirm an agency decision premised solely upon an erroneous conclusion of law. United Parcel Service, 336 Md. at 577 , 650 A.2d at 230 ; Baltimore Lutheran High Sch. Ass’n v. Employment Security Admin., 302 Md. 649, 662 , 490 A.2d 701, 708 (1985).

The fact that both Engelman and Wynder secured bond premiums with promissory notes or otherwise extended credit to their customers is undisputed. Therefore, the only remaining question is whether that practice is proscribed by the Insurance Code when not part of an approved rate filing.

IV

Leaning on the oft quoted principles of statutory construction, see generally Kaczorowski v. Mayor, 309 Md. 505, 515 , 525 A.2d 628, 632-33 (1987), the Commissioner maintains that ⁴¹² when read together, the package of Code provisions addressing the regulation of rate filings compels the conclusion that installment payments are prohibited if not part of an approved rate filing. Specifically, the Commissioner points to §§ 226(a), 230(b) and 242(e) of the Code. They provide in pertinent part: “§ 226. Unfair discrimination and rebates—Property, casualty and surety insurance.

(a) Giving of rebates inducement by insurer, agent or broker prohibited.—No insurer or any employee or representative thereof, and no agent or broker shall pay, allow, or give or offer to pay, allow, or give, directly or indirectly, as an inducement to insurance, or after insurance has been effected, any rebate, discount, abatement, credit, or reduction of the premium named in the policy of insurance, or any special favor or advantage in the dividends or other benefits to accrue thereon, or any valuable consideration or inducement whatever, not specified in the policy, except to the extent provided for in an applicable filing with the Commissioner as provided by law. § 230. Illegal dealing in premiums; improper charges for insurance; raising policy limits of coverage. (b) A person willfully may not collect as premium or charge for insurance any sum in excess of or less than the premium or charge applicable to the insurance, in accordance with the applicable classifications and rates as filed with and approved by the Commissioner; or, in cases where classifications, premiums or rates are not required by this article to be so filed and approved, the premiums and charges shall not be in excess of or less than those specified in the policy and as fixed by the insurer ... § 242. Property, casualty, surety and marine rating.

(e) Use of rates.—No insurer, officer, agent or representative thereof shall knowingly issue or deliver, or knowingly permit the issuance or delivery of, a policy or insurance, or any endorsement, certificate, or addition to the policy, except in accordance with the filings which are in effect for the' insurer as provided in this section or in accordance with ⁴¹³ subsection (H) of this section. As compensation for procuring business, any insurer may pay or allow a commission to any licensed agent of the insurer.” y. One of the principal aims of the above-quoted provisions, and of the entire Code itself, is the prevention of excessive, inadequate, or unfairly discriminatory insurance rates. § 241. To that end, the practice of rebating was identified by the General Assembly over one hundred years ago as an undesirable custom within the insurance industry resulting in unfair discrimination. 9 Unfair discrimination, as the term is employed by the Insurance Code, means discrimination among insureds of the same class based upon something other than actuarial risk.

Rebating occurs when an insurer or its agents offer inducements to insure which are not specified in the policy of insurance. Such practices include, refunding part of the premium or accepting less than the premium specified in the policy, splitting agent commissions with the insured, selling insurance company stocks or bonds discounted by the proposed rebate amount, and raising policy limits beyond that for which was originally contracted and paid. For an excellent discussion of the various forms rebating may take, see Kimball and Jackson, The Regulation of Insurance Marketing, 61 Colum.L.Rev. 141, 146-149, 187-89 (1961). In effect, rebating undermines rate classifications on file with the Commissioner. 10 When insurers offer insureds within the same rate class different terms on the same insurance product, the rate actually paid by the favored party is something less than that reflected in the insurer’s rate filing.

Ademec, Premium Rebating: An Unnecessary Evil, 39 Fed’n Ins. & Corp. Couns. Q. 3, 5 (1988). State legislatures have ⁴¹⁴ variously targeted this practice primarily to protect insureds from the concentrated power of large insurance concerns with the financial capacity to offer large rebates, from unethical sales practices engaged in by competing agents and a concomitant decrease in service, and from generally discriminatory practices. Id.

It has also been suggested that anti-rebating statutes were aimed at averting insurance company insolvency, but the response to that suggestion has been that capital surplus and security laws are designed expressly for, and better accomplish, that purpose. Id. at 6; see also §§ 48-50. Anti-rebating statutes are currently in effect in some form in all fifty states. 11 Maryland’s General Assembly first addressed these issues ⁴¹⁵ in 1890. See Chapter 254, § 1 of the Acts of 1890, 12 now codified and as amended in scattered sections of Md.Code (1957, 1994 Repl.Vol., 1996 Supp.), Art. 48A.

Section 226(a), one of several antirebating provisions of the Maryland Insurance Code, employs language that closely parallels that of the model Unfair Trade Practices Act adopted by the National Association of Insurance Commissioners (“NAIC”) in 1945. 13 As currently amended, the Model Act provides in Section H.(l), entitled “Rebates:” “Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any life insurance policy or annuity, or accident and health insurance or other insurance, or agreement as to such contract other than as plainly expressed in the policy issued thereon, or paying or allowing, or giving or offering to pay, allow, or give, directly, or indirectly, as inducement to such policy, any rebate of premiums payable on the policy, or any valuable consideration or inducement whatever not specified in the policy; or giving, or selling, or purchasing or offering to give, sell, or purchase as inducement to such policy or annuity or in connection therewith, any stocks, bonds, or other securities of any insurance company or other corporation, association, ⁴¹⁶ or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the policy. Although the Model Act speaks in both general and specific terms (such as a prohibition on the sale of stock or bonds in connection with the sale of insurance), it makes no attempt to exhaustively list those practices that would fall within the purview of the Act. And as some commentators have suggested, such an attempt would be futile. See Kimball & Jackson, supra, at 186-189.

Likewise, § 226(a) makes no attempt to identify any particular practice as rebating. Rather, the statute speaks in broad terms, leaving its outer boundaries undefined. A hint, however, is provided by § 230(b), which prohibits persons from “willfully ... not collecting] as premium or charge for insurance any sum in excess of or less than the premium or charge applicable to the insurance.” When considered in light of the purposes of anti-rebating provisions generally, the aim of § 230(b) is clear—it prevents, inter alia, insurers and their agents from engaging in “wink and nod” transactions with selected insureds, leaving the latter something less than fully liable for the policy premium reflected in the applicable rate classification. In other words, § 230(b) obliterates any arguable distinction between post-transactional rebating versus waiving policy premiums or any portion thereof in the first instance.

The effect of such practices is the same as those generally targeted by § 226(a).

VI

The Commissioner contends that because of the time-value of money, by collecting bond premiums without the prior sanction of the Commissioner in an approved rate filing, a bond agent issues a rebate, discount, abatement, credit, inducement or reduction of the bond premium in the purchase of insurance, which is prohibited by § 226(a). 14 Using this same ⁴¹⁷ logic, the Commissioner also maintains that installment arrangements violate § 230(b), which prohibits bondsmen from “willfully [ ] not collecting] as premium or charge for insurance any sum in excess of or less than the premium or charge applicable to the insurance, in accordance with the applicable classifications and rates as filed with and approved by the Commissioner....” Finally, the Commissioner asserts that notwithstanding the above two provisions, § 242(e) prevents an insurer or its agents from charging rates “except in accordance with the filings which are in effect for the insurer.” The essence of the Commissioner’s position is that unapproved installment plans allow bond agents to unfairly discriminate among individuals in the purchase of insurance. Even though the insurance rate may be the same for individuals, the conditions of credit may vary greatly with no articulable basis—a breeding ground for discrimination. Moreover, the extension of credit to bond purchasers necessarily affects the profit and loss expectations of the surety. Respondents counter that the Commissioner’s position is unsupported by the Code.

As indicated in Part V., supra, § 230(b) prohibits insurers and their agents from “willfully” collecting any sum in excess of, or less than, the premium applicable to the insurance in accordance with the applicable classifications and rates filed with, and approved by, the Commissioner. It says nothing about the method of collection—only that they must be collected in accordance with the applicable rates and classifications for that particular insurance product on file with the Commissioner. The Commissioner’s reading of the statute is commercially unrealistic and simply does not square with the practice of many insurers who bill their customers for the entire amount of the premium, payable within thirty days. ⁴¹⁸ Even the simple act of accepting checks on bond premiums would constitute rebating under the Commissioner’s view, since those employing this commonly used form of commercial paper would arguably enjoy the use of the funds represented by the check longer than those who secure coverage with cash. Despite the Commissioner’s assertions to the contrary, nothing in the Code requires a strict temporal proximity between coverage and actual cash payment.

Moreover, the record evidence indicates, and the Commissioner does not suggest otherwise, that Engelman used best efforts to enforce the promissory notes executed in his favor. Engelman’s failure to collect certain specified sums was the result of defaults, and thus cannot be said to have been “willful” on his part. Section 242(e) is similarly silent about whether installment payments must be first sanctioned by the Commissioner in an approved rate filing. Once again, the statute only prohibits insurers and their agents from issuing or delivering a policy of insurance “except in accordance with filings which are in effect” for the surety under the rate filing provisions of the Code.

Stated otherwise, the only premium that an insurer may charge for a given insurance product is that which has been actuarially justified with the Insurance Commissioner. Section 242(e) compels no conclusion about how those premiums must be paid.

VII

The inquiry that remains, however, is whether in the final analysis the taking of a promissory note without interest and an indemnification agreement in lieu of cash or its equivalent in partial or full payment of a policy premium constitutes rebating as that term is employed in the Maryland Insurance Code—a question of first impression. We believe that it does not. Despite the uniform adoption throughout the several states of anti-rebating provisions, there is a paucity of administrative ⁴¹⁹ enforcement actions which have directly addressed the present issue. Rather, the propriety of no-interest loans on insurance premiums in light of anti-rebating provisions has been incidentally raised in other contexts.

For example, Pennsylvania’s intermediate appellate court considered the credit/rebate issue in a breach of contract action. Blouch v. Clifford R. Zinn & Son, Inc., 350