International Brotherhood of Teamsters v. Willis Corroon Corp.

WILNER, Judge. Title 29 U.S.C. § 502 (a), which is part of the Federal Labor Management Reporting and Disclosure Act. (LMRDA), requires that officials of labor organizations who handle funds or other property of the organization be bonded, in order to provide protection against loss by reason of fraud or dishonesty on the part of those officials, either directly or through connivance with others. The statute requires that the bond “of each such person” be in an amount not less than 10% of the funds handled by that person during the preceding fiscal year, up to $500,000.

See also 29 C.F.R. part 453 (supplementing that requirement). Petitioner, International Brotherhood of Teamsters (IBT), is a labor organization subject to the requirements of § 502. Among the officers required to be bonded in 1996 were IBT’s President, Ron Carey, and its Director of Government Affairs, William Hamilton. IBT employed respondent, Willis Corroon Corporation of Maryland (Willis), an insurance broker, to obtain the fidelity bond insurance mandated by § 502.

The policy procured by Willis from National Union Fire Insurance Company (National Union) for the period from April, 1996-April, 1997 limited the insurer’s liability to $500,000 “per loss,” rather than $500,000 per person covered. During that policy year, Carey and Hamilton, acting in concert, misappropriated over $906,000 of union funds as part of an unlawful scheme to help finance Carey’s bid for reelection. Their conduct necessitated a new election, which cost the union an additional $2 million. IBT made a claim on its policy to recover $1 million of that loss, $500,000 for each of the two bonded officials, and, when National Union resisted the claim, IBT filed suit on the policy.

We are not privy to the record in that case or to all of the various defenses that may have been raised by National Union, but one of the defenses, presumably, was that the policy limit was $500,000 “per loss.” Faced at least with that, ⁷²⁷ IBT settled the suit for $425,000 and released National Union from further liability. The release expressly reserved to IBT any claim that it might have against any insurance broker involved in the procurement of the policy. In an effort to obtain additional compensation for its loss, IBT sued Willis in the Circuit Court for Montgomery County for negligence and “breach of fiduciary duty.” 1 It alleged that (1) Willis held itself out to IBT as possessing special expertise, knowledge, and skill in the field of insurance, (2) Willis knew or should have known that LMRDA required IBT to bond each of its officers who handled union funds, separately, in the amount of $500,000, (3) IBT chose Willis as its insurance broker and relied on its expertise to procure a policy that would comply with LMRDA, (4) Willis procured from National Union a Form A policy that contained a policy limit of $500,000 “per loss,” rather than the Form B policy offered by National Union that provided separate coverage for each employee, acting alone or in collusion with others, (5) during the policy year, Hamilton diverted a total of $735,000 in union funds to third parties in exchange for illegal contributions to Carey’s reelection campaign and unlawfully transferred an additional $150,000 to the AFL-CIO, (6) it was subsequently discovered that IBT was defrauded of an additional $21,532 through improper billing of Carey’s election campaign expenses to IBT, (7) rerun of the election cost IBT an additional $2 million, (8) a Form B policy, covering Carey and Hamilton separately, would have covered $1 million of the total loss, but (9) National Union paid only $425,000 of the loss under its Form A policy. Averring that Willis had, and breached, a duty to obtain a policy that complied with LMRDA, IBT sought $575,000 in compensatory damages, plus ⁷²⁸ interest, recovery of commissions and fees paid to Willis, and attorneys’ fees incurred in the action against National Union.

Willis answered the complaint and, relying principally on Twelve Knotts v. Fireman’s Ins. Co., 87 Md.App. 88 , 589 A.2d 105 (1991), moved for summary judgment on the ground that, by not reading the policy procured by Willis and thereby discovering, at the outset, the limitation of liability contained therein, IBT was contributorily negligent as a matter of law. The Circuit Court- credited that defense, and, as contributory negligence is an absolute defense in Maryland to an action for negligence, the court granted the motion and entered judgment for Willis. IBT appealed, and we granted certiorari, on our own initiative and prior to any proceedings in the Court of Special Appeals, to review that judgment.

We shall reverse. THE FACTS Because the case was decided on summary judgment, we must view the evidence presented to the court, and all reasonable inferences fairly deducible from that evidence, in a light most favorable to IBT. Lovelace v. Anderson, 366 Md. 690, 695 , 785 A.2d 726, 728 (2001). The question, then, is whether, viewing the evidence in that light, there was any basis upon which a trier of fact could lawfully find for IBT.

Certain facts, at this stage, are essentially undisputed, among them being (1) the statutory requirement, embodied in § 502(a), that IBT have in place, for each officer handling union funds or property, a bond in an amount not less than 10% of the funds handled by that officer in the preceding year, (2) that, for Carey and Hamilton, the required amount was $500,000 each, (3) that the “per person” coverage required by the statute was not afforded by the Form A policy procured by Willis, and (4) that a Form B policy would have afforded that “per person” coverage. In response to discovery requests, Willis admitted that it possessed and held itself out as possessing knowledge or expertise relating to fidelity bond coverage for labor organizations and the procuring of fidelity bond coverage. It admitted as well that it had knowledge of ⁷²⁹ LMRDA bonding requirements for officers and employees of labor organizations, but denied that it had never asked any insurer to offer a Form B policy and that the insurers it contacted were willing to offer such a policy. Willis began serving as IBT’s insurance broker in 1985 and, from that year until 1997, it procured for IBT a Form A fidelity bond providing “per loss” coverage.

From 1985 through 1988, the policy was issued by Delta Insurance Company; from 1988 through 1995, it was issued by Reliance Insurance Company. In 1995, IBT expressed some dissatisfaction with Reliance and requested Willis to find another insurer. Either in connection with that request or at some earlier point, IBT sent to Willis a copy of the LMRDA bonding requirement. On April 8, 1995, Willis sent to IBT a written proposal that contained a brief statement of policy coverage, quotations from Reliance, National Union, and Lloyd’s of London, an outline of coverage under a proposed National Union policy, a specimen of National Union Form A policy, and a copy of the A.M. Best rating for National Union.

The statement of policy coverage noted that the coverage was “Employee Dishonesty Coverage-Form A,” that the limit was $500,000 (without explanation as to whether that limit was “per loss” or “per employee”), and that the form was “Standard Industry Form, modified by endorsements as applicable by company — Simplified Form.” The outline of coverage, entitled “Proposed Fidelity Bond Coverage,” stated that the policy would provide coverage for loss of money, securities, or other property “resulting directly from one or more fraudulent or dishonest acts committed by an Employee acting alone or in collusion with others.” Nothing was said in this statement about the limit of liability other than that the limit would not be cumulative from year to year or period to period. The specimen policy, which conformed to the policy actually issued, contained a Table of Limits of Liability that stated a limit of $500,000 under “Insuring Agreement I Employee Dishonesty Coverage-Form A.” That Insuring Agreement provided coverage for loss of money, securities, and other property “to an amount not exceeding in the aggregate the amount stated in ⁷³⁰ the Table of Limits of Liability applicable to this Insuring Agreement I, resulting directly from one or more fraudulent or dishonest acts committed by an Employee, acting alone or in collusion with others.” The specimen policy also stated that “[pjayment of loss under Insuring Agreement I ... shall not reduce the Company’s liability for other losses under the applicable Insuring Agreement whenever sustained” and that the company’s “total liability [] under Insuring Agreement I for all loss caused by any Employee or in which such Employee is concerned or implicated ... is limited to the applicable amount of insurance specified in the Table of Limits of Liability or endorsement amendatory thereto.” In furtherance of this proposal, a senior vice-president of Willis met with IBT officials to discuss the matter. Without ever questioning the policy limit, IBT accepted the National Union offer. In early April, 1996, when the policy was up for renewal, Willis and IBT had another meeting, and the decision was made to renew.

On or about April 5, 1996, Willis sent a binder to IBT. In an accompanying “Fidelity Bond Fact Sheet,” it stated the limit of liability as “$500,000 per loss” and characterized the coverage as direct loss of money, securities, or other property due to the dishonest or fraudulent act “of one or more ‘Employees’ acting alone or in collusion with others.” A covering letter informed IBT that, other than a different policy number, there were no changes from the existing policy. Willis’s motion for summary judgment was based, in part, on the assertion that it had done nothing to misrepresent or conceal any relevant facts from IBT, that the policy and submissions made clear that the policy limit was on a “per loss” basis, and that, under the doctrine applied in Twelve Knotts , IBT had a duty to read the policy and was negligent in not doing so. Had it read the policy,- Willis claimed, IBT would have known that the limit was on a “per loss” basis.

At one point, it suggested that the statute did not actually require a “per person” limit, and one of its officials, Stephen Leggett, ⁷³¹ testified in deposition that, until shortly before the deposition, he believed that the policy was in compliance with the statute and that, because of that mistaken belief, he did not advise IBT that the policy was not in compliance. IBT argued, and produced affidavit evidence to establish, that it had chosen Willis as its broker because of Willis’s asserted expertise, that it had informed Willis of the LMRDA requirements, and that it had relied on Willis to assure that the policy conformed to those requirements. An expert witness for IBT, in deposition testimony, faulted Willis for not making clear to IBT that the proposed National Union policy did not comply with LMRDA. He opined that the information regarding the limit of liability was ambiguous and that providing the actual policy language would not suffice because insureds “[do] not necessarily understand all those things, and I think it’s an obligation for the agent to point those things out.” At a hearing on the motion, the court found the case indistinguishable from Twelve Knotts and, on that basis, granted the motion and directed the entry of judgment for Willis.

DISCUSSION Existing Maryland Case Law The appellate courts in Maryland have addressed the issue raised here in four cases, each involving a different factual circumstance that dictated the outcome. In Twelve Knotts— the first of the cases — the Court of Special Appeals had before it a complaint by a real estate holding company against two insurance companies and a broker (Commercial Lines). When its current fire, general liability, and workers’ compensation insurance policies were about to expire, Twelve Knotts issued a general request for proposals to replace that insurance. The request specified that policies be quoted on a three-year basis with premiums payable in annual installments but did not require that the premium be fixed or capped for the three-year period.

Commercial Lines submitted a written proposal for the various lines of insurance. The proposal for fire ⁷³² insurance showed an annual premium payable in monthly installments. Although the written proposal submitted by Commercial Lines said nothing about a three-year guarantee of the premium, its president informed Twelve Knotts’ executive director that the quoted premium was good for three years. The company opted for the Commercial Lines proposal, in part because it was 35% less expensive than the competing proposals and in part because, even though not included in the company’s request for proposals, the rate was to be guaranteed for three years.

The binder for the property insurance forwarded by Commercial Lines showed the premium as quoted but said nothing about its being guaranteed. In ordering the permanent policy a month later, Commercial Lines noted that there was to be a three-year guarantee and that the premium was to be paid in monthly installments. The policy that was issued was not consistent with that request, however, but provided, instead, that, unless the full three-year premium was paid in advance, the premiums for the second and third years would be in accordance with the insurer’s then applicable schedule. In forwarding the policy to the company two months after receiving it from the insurer, the broker said nothing about the requirement for advance payment — a condition that, by then, could not have been met in any event.

At the end of the first year, the insurer insisted on a much higher premium for renewal, which ultimately led to a multi-count action alleging fraud, negligent misrepresentation, and breach of contract. The Circuit Court entered judgment for the defendants, and the Court of Special Appeals affirmed. With respect to the fraud and misrepresentation claims, the Court of Special Appeals concluded that there was no evidence to support them — none of the defendants had misrepresented or attempted to conceal what was contained in the policy. The relevance of the case lies in the court’s discussion of the breach of contract and negligence claims — both of which were founded on the assertion that the policy did not conform to the proposal that was made by Commercial Lines and accepted by the company or to the terms of Commercial Lines’ request of ⁷³³ the insurer.

The insured was promised and expected a policy whose premiums were both guaranteed for three years and could be paid in installments, and it got, instead, a policy whose premiums were guaranteed for three years only if paid in advance. The court noted that the non-conformance was apparent from the policy, however, and adopted what it regarded as the majority rule that, when an insured accepts a policy, he or she accepts all of its lawful terms, and, if the policy differs from the application, the insured has a duty to notify the insurer and either negotiate the matter or reject the policy. In the particular case, it observed that the insured was a sophisticated business entity with previous experience in purchasing insurance, that the offending provision was clear and unambiguous, and that it had an opportunity when the policy was delivered to discover the discrepancy and reject the policy on the ground of non-conformance. There was no indication in Twelve Knotts that the insured relied on any particular expertise of the broker to produce a policy with certain specific terms.

It engaged in competitive bidding to replace various lines of general business insurance with which it was familiar and adopted the Commercial Lines proposal because it offered the best terms, both in terms of price and the three-year guarantee of the annual premium. The one discrepancy, as noted, concerned the stability of the premium, and that discrepancy was readily apparent from the policy. It was not necessary for the insured, who had a professional employee charged with procurement of the insurance, to have to read the entire policy or attempt to fathom complex or technical provisions in it to become aware that, unless the full three-year premium was paid in advance, the premiums could change at the end of the first and second years. If the guarantee was truly material, the insured could have rejected the policy.

The court had before it a quite different situation in Johnson & Higgins v. Hale, 121 Md.App. 426 , 710 A.2d 318 (1998). The insured, Hale, was a trucking company that decided to expand its business to include marine transport. Having no experience in that line of business, Hale retained Johnson & ⁷³⁴ Higgins, self-reputed to be one of the most knowledgeable brokers in the country, and relied upon that broker to obtain proper coverage for the maritime operation. Each of the policies obtained by the broker contained an exclusion for cargo requiring refrigeration unless (1) the space and other conditions were surveyed by a competent surveyor prior to the voyage and found fit, and (2) accepted for transportation under a form of contract approved in writing by the insurer.

At some point, Hale chartered a ship to carry certain refrigerated cargo, and