Liberty Mutual Insurance v. Ben Lewis Plumbing, Heating & Air Conditioning, Inc.

RICHARD T. ROMBO, Judge, Specially Assigned. In the Circuit Court for Montgomery County, Liberty Mutual Insurance Company (Liberty), the appellant, sued Ben Lewis Plumbing, Heating & Air Conditioning, Inc., (Lewis), appellee, for premiums allegedly due on various insurance policies. The policies Lewis had purchased from Liberty included automobile, umbrella excess liability, commercial lines, inland marine and contractor’s equipment, and worker’s compensation. The premiums that Liberty alleged to be due were for the entire packet of policies for the period July 1, 1984 through September 1, 1989, although the dispute between the parties centers on the 1986 worker’s compensation policy.

THE FACTS The testimony presented before the trial court and jury disclosed that the terms of the 1984 and 1985 policies 1 provided for Liberty to conduct an audit and issue adjustments based on Lewis’s claims experience for the prior year. At the ⁴⁷⁰ end of policy years 1984/1985, Lewis was credited with payments on the policies because of low losses. Under the terms of the policies for those years, no further adjustments could be made after the original re-determination. According to Lewis, the provision for one adjustment only was an important feature of the policy.

Lewis requested bids for its 1986 worker’s compensation insurance. The request for bids was prepared and distributed by Lewis’s employee, Sally Fink. Ms. Fink testified that a Liberty representative, Ms. Holly Goodrich, delivered a proposal to her, which included the 1986 worker’s compensation policy. At that meeting, Ms. Fink asked whether Liberty’s proposal was for the same coverage provided in the prior years.

Ms. Goodrich assured her that it was. Ms. Fink testified that she was not told that, under the terms of the 1986 policy, the dividends paid after the first audit could be further adjusted on a second or third audit. Ms. Fink accepted Liberty’s offer based upon Ms. Goodrich’s representations. Finally, Ms. Fink testified that when she received the actual policy some two to five months after it took effect, she again contacted Ms. Goodrich, asked if there was anything she needed to know about the policy, and was told that there was not.

THE POLICY The policy delivered to Lewis contained the following Dividend Redetermination Endorsement: Upon any computation of dividends subsequent to the initial if the redetermined dividend is greater than the dividend previously computed the company shall immediately pay to the insured the additional dividend shown to be due whereas if the redetermined dividend is less than the dividend previously computed the insured shall immediately refund the amount by which the dividends previously computed exceed the redetermined dividend. On June 30,1986, Ms. Fink signed a separate one-page letter, entitled “All States Workers’ Compensation Retention Divi ⁴⁷¹ dend Plan Confirmation Letter With Redetermination.” This letter contained the same paragraph set out above verbatim (albeit with punctuation). Liberty kept one running account balance for all of Lewis’s policies, which included charges, payments, and credits such as policy dividends. Pursuant to the first audit of the 1986 worker’s compensation policy, Liberty credited Lewis with $94,000.00 in dividends.

Over the next few years, as further redeterminations were made, Liberty made negative adjustments to these dividends. The adjustments amounted to the entire $94,000.00. Lewis claimed that not until July of 1989 did it realize that these adjustments had been made. THE HISTORY OF THE CASE In February of 1993, Liberty filed a one count complaint for breach of contract.

Within a few weeks, Lewis filed an answer containing thirteen numbered defenses. Many legal defenses were grouped under one number, so that the total defenses filed by the defendant were well over twenty. The Answer included the statement: “Defendant generally denies liability pursuant to Rule 2-323(d) as to plaintiffs Complaint.” There are no facts contained in the Answer; all of the defenses are listed by their legal titles. Nowhere in the answer is the defense of negligent misrepresentation asserted.

The sixth paragraph does list fraud as one of the defenses. Thereafter, Lewis filed a counterclaim against Liberty. Count One contained a demand for reimbursement of payments that Lewis had made to an employee for worker’s compensation and that had not been reimbursed by Liberty. Count Two alleged that Liberty was in breach of its contract because it had made second and third redeterminations of premiums due, and had made “retroactive” adjustments.

In this count, Lewis demanded $94,080.00 as well as an accounting. Count Three also requested an accounting of all dividend adjustments in order to determine how Liberty had arrived at the amount it had sued for in its complaint. The counterclaim did not assert either fraud or negligent misrepresentation as a basis for the breach of contract. ⁴⁷² Liberty answered the counterclaim and filed a motion for summary judgment. In its answer in opposition to that motion, Lewis for the first time tentatively suggested that there was negligent misrepresentation.

The answer avers that although Liberty may have made false representations, “... it is not necessary that Ben Lewis Plumbing show that false representations were intentionally made ...” The trial judge, deeming that there were issues of fact to be resolved, denied the plaintiffs motion for summary judgment. The case came on for trial before a jury. At the conclusion of the testimony, Liberty requested the trial judge to instruct the jury that there was a duty on Lewis to read the policy. That request was declined.

The court prepared issues to submit to the jury, four of which dealt with liability and two with damages. The jury found that Lewis was (1) liable to Liberty for the premium, and therefore awarded Liberty $63,725.00; (2) that Liberty was liable to Lewis on Count two (the only remaining count) of the counterclaim, and therefore awarded Lewis $31,909.00; and (3) Lewis had proven negligent misrepresentation by a preponderance of the evidence. Post trial, on motion of Lewis, the court struck the verdict in favor of Liberty, because the jury had found that there was a negligent misrepresentation. In this court, Liberty complains that the trial judge erred in (1) permitting Lewis to proceed on an “unpleaded” counterclaim for negligent misrepresentation; (2) failing to grant Liberty’s motions to dismiss Lewis’s counterclaim on the basis of insufficient evidence; (3) submitting to the jury the “non-pleaded” negligent misrepresentation issue; (4) striking the jury verdict in favor of Liberty; and (5) refusing to instruct the jury that Lewis had a duty to read the policy.

We shall address each of these questions, but not necessarily in the order that they were argued by Liberty. THE COUNTERCLAIM As we have noted, only Count Two of the counterclaim was submitted to the jury. That count alleged that the breach ⁴⁷³ of contract occurred when Liberty redetermined the premiums on third and subsequent calculations. Liberty contends that under the holding of Twelve Knotts v. Fireman’s Insurance Company, 87 Md.App. 88, 104 , 589 A.2d 105 (1991) there can be no breach of contract and, therefore, this issue should not have been submitted to the jury.

In Twelve Knotts, supra, this Court quoted from Shepard v. Keystone Insurance Company, 743 F.Supp. 429, 432 (D.Md.1990), to the effect that: It is the obligation of the insured to read and understand the terms of his insurance policy, unless the policy is so constructed that a reasonable man would not attempt to read it ... If the terms of the policy are inconsistent with his desires, he is required to notify the insurer of the inconsistency and of his refusal to accept the condition. The Twelve Knotts Court then pointed out that, though there were no Maryland cases requiring the result that the District Court had reached, nonetheless, it appeared to be the general rule: [WJhen the insured accepts a policy, he accepts all of its stipulations, provided they are legal and not contrary to public policy. Where changes from the application appear in the delivered contract, under a more stringent doctrine, the insured has a duty to examine it promptly and notify the company immediately of his refusal to accept it.

If such policy is accepted or is retained an unreasonable length of time, the insured is presumed to have ratified any changes therein and to have agreed to all of its terms. Twelve Knotts, 87 Md.App. at 104 , 589 A.2d 105 (quoting 12, J. Appleman, Insurance Law and Practice, § 7155). The Court then concluded: We believe this to be a reasonable rule, and we therefore adopt it. Under that rule, it is clear that the breach of contract action must fail.

Appellant is a sophisticated business entity having had previous experience purchasing insurance. The offending policy provision is clear and unambiguous. [The insured] and the partners had an oppor ⁴⁷⁴ tunity when the policy was delivered to discover the provision and, if they chose, reject the policy on the ground of non-conformance. Unfortunately, they neglected to do so. By receiving the policy and remaining silent until the end of the policy year, appellant is deemed to have accepted the policy with the non-conforming provision in it.

Id. at 104-105, 589 A.2d 105 . Lewis urges that Twelve Knotts is not applicable because in that case the policy was delivered to the insured without any assurances having been made, while in this case, the insured asked if the policy was the same, and the insurer said it was. We perceive this to be a distinction without a difference. As in Twelve Knotts , the insured is a sophisticated business entity with previous experience in purchasing insurance.

It had an employee whose job it was to determine the types of insurance that were needed and put out requests for bids. Lewis had studied the policy and knew the particular coverage that it wanted, specifically that the insurer was limited to only one redetermination. Notwithstanding this, it failed to read the policy to determine whether it had indeed received that coverage. Finally, it did not even read the one-page letter forwarding the policy which contained on its face, in plain language, the fact that the insurer could re-determine the premiums.

Even without the hurdle of the holding in Twelve Knotts , Lewis’s counterclaim must fail. The specific breach alleged by Lewis in Count Two of the counterclaim was: The first calculation will be final if all cases are closed. All open cases of the first calculation will be increased by twenty-five percent (25%) to determine the dividend. All open cases of the second calculation will be increased by ten percent (10%) to determine the dividend.

The third calculation will be considered final, open cases will not be increased for this calculation. In addition, adverse lost development on the second and third adjustment will not reduce any dividend previously paid to Ben Lewis, Inc. ⁴⁷⁵ The policy delivered to Lewis does not contain this provision. Lewis claims, however, that it is part of the oral agreement entered into with Liberty Mutual. Given the existence of the written policy, the court should not have allowed Lewis to proceed on its counterclaim.

It is well-established in Maryland that absent a showing of fraud, duress or mistake, when two parties have a written contract that is clear and unambiguous, that contract is presumed to express the intent of the parties, and “parol evidence is not admissible ... to vary, alter or contradict the terms of that contract.” GMAC v. Daniels, 303 Md. 254, 261-62 , 492 A.2d 1306 (1985). Here, the written policy, as a whole, is clear and unambiguous, and expressly states that “the only agreements relating to this insurance are stated in this policy.” Further, in light of Lewis’s legal obligation to read the policy, there was clearly no fraud in the inducement of the contract. Thus, unless Lewis had a right to have its negligent misrepresentation claim submitted to the jury, judgment should have been entered in favor of Liberty on the second count of the counterclaim. THE NON-PLEADED DEFENSE As we have pointed out, the first mention of negligent misrepresentation by the appellee came in its answer to appellant’s motion for summary judgment.

In that response, the appellee alleged fraud or “at the least that Liberty Mutual made a false representation of a material fact.” The Court of Appeals recently explained to the bench and bar that even though Maryland had long since abandoned the