Lowitt & Harry Cohen Insurance Agency, Inc. v. Pearsall Chemical Corp.

Prescott, C. J., delivered the opinion of the Court. After judgments were entered against appellant, Harry Cohen Insurance Agency, Inc. (Cohen, also sometimes referred to as the appellant), on the ground that it had failed in fulfilling its duty owed to appellee as appellee’s insurance broker, and the appellant Lowitt, as sub-broker, on the basis of wilful misrepresentation and fraudulent misconduct, they separately appealed. Appellant Cohen makes two contentions: (1) it claims that the evidence was insufficient to sustain the judgment entered ²⁴⁸ against it; and (2) that the insurance policy involved, even had it been effective, would not have afforded the coverage claimed. Harry Cohen, the president of Cohen, had been an insurance broker and an agent for insurance companies for a number of years.

(It is noted at the outset that appellee makes no charge against Cohen of fraudulent misrepresentation or misconduct on its part, but specifically bases its (appellee’s) claim against Cohen on the ground of negligence.) Appellee and its predecessors engaged in the business of manufacturing chemicals, and, for some years, appellee’s insurance requirements had been handled by Cohen, in which it placed confidence and upon whom it relied for advice and guidance in matters pertaining to insurance. In 1959, appellee’s public liability policy was about to expire. Cohen advised it that this policy could only be placed in a foreign company at a higher premium rate or surcharge, to which it agreed. Thereafter, Chemical received a certificate which is extensively referred to in the testimony as a “cover note.” A cover note is a document commonly used when insurance is placed with foreign companies and contains representations that the broker “has procured insurance” as therein specified from the insurers named therein.

It is for all practical purposes a “binder” or certificate representing that insurance has been procured and that a policy by the insurer will follow at a later date. K. C. v. Eureka, 185 P. 2d 832 (Cal.). In the cover note involved in this case which Cohen delivered to Chemical in fulfillment of its agreement to procure a public liability policy, it was certified that insurance had been “procured * * * as herein specified from UNDERWRITERS at LONDON, ENGLAND, SUBJECT HOWEVER, in all respects to the terms, conditions and provisions of Underwriters at London policy heretofore or hereafter isstied by the said Underwriters * * *” to which was affixed policy provisions usually found in insurance policies, and which bore the label of Cohen. The cover note was signed by General and Excess Underwriters, Inc. (General), another insurance broker from whom Cohen had obtained it.

In the upper right hand corner of the first page of the cover ²⁴⁹ note appeared a rubber stamp naming four insurance companies and opposite each company a percentage figure was set out, but no language was used obligating any of these insurers-under the terms of the policy nor was Cohen able to explain the absence of such obligations, except to- state that it was a. requirement of the Maryland Insurance Department. However,, this was denied by Mr. Melgard an official of that department. Chemical “felt confident” that this document was in fact an insurance policy which was issued by Lloyd’s of London, covering the risks against which Cohen contracted to insure Chemical. Subsequent evidence disclosed that neither Lloyd’s nor any of the insurers named in the rubber stamp had authorized the issuance of the policy on their behalf, except possibly Dorchester Insurance Co., Ltd., a company of questionable financial worth of which Lowitt was president and in which he and General had financial interests.

Dorchester’s financial difficulties-shortly after the issuance of this cover note resulted in its liquidation in Jamaica. Cohen testified that he knew Lowitt “was one of the owners of it [Dorchester].” While this cover note or policy was in force, Chemical engaged the services of Burns Detective Agency to- trace and investigate a mysterious loss of raw materials from its plant. Burns assigned one of its men, a certain Coleman, to conduct the investigation. While so employed by Burns as a detective' on the insured’s premises, Coleman struck his head on an exposed valve stem, on September 12, 1960, but he continued to' work for several days thereafter, and off and on for about three or four weeks after the incident.

Coleman’s work schedule was of an irregular nature and sometime later he “stopped work”' for reasons which were never given to Chemical. On November 28, 1960, Burns assigned a new man to Chemical’s plant,, and according to witnesses produced by the appellants, no notice was ever given to Chemical of any claim by Coleman, or by anyone on his behalf, against Chemical. Sometime in May or June of 1962, a third party action under the Workmen’s Compensation Act was filed by Coleman, his employer and insurer against Chemical to recover substantial damages resulting from the injury, it being alleged therein that Coleman had been permanently disabled from a mental distur ²⁵⁰ bance attributed to the head injury, and the insurer had settled the compensation claim for a sum in excess of $20,000, for which it sought subrogation. On the day on which service of the narr and writ was made by the sheriff on Chemical’s resident agent in Maryland, Samuel J. Friedman, who was also its attorney, the latter, at the request of Chemical communicated with Cohen to confirm the insurance coverage and arrange for the delivery of the suit papers to the insurers for defense of the action.

Cohen informed Freidman that Chemical was insured by Lloyd’s of London against accidents of this nature and to forward all the papers to him in order that he could send them to the proper parties for the defense of the suit. On June 22, 1962, the same day on which the papers were served on Friedman by the sheriff, he sent the writ and narr to Cohen with a covering letter confirming Cohen’s statement that Chemical was insured by Lloyd’s of London. On June 27, Cohen wrote to Friedman returning the suit papers with a letter from General to Cohen stating that the policy had been placed with Dorchester, which was being liquidated and since the damages claimed were in excess of the limits of the cover note, Chemical would have to participate in the defense of the action “to a larger degree than the insurer.” Friedman communicated with General upon receipt of the letter and was informed that only Dorchester remained liable since the other three companies had cancelled the policy, but “due to an error on our (General’s) part” notice of cancellation “was not sent out.” Friedman then informed Cohen, General and Lowitt that, in his opinion, the failure of the companies to notify Chemical of the cancellation did not relieve them of responsibility under the policy. As a result of these discussions, Cohen informed Friedman that all the insurers would ‘“assume liability under the terms of this policy.” Accordingly, the narr and writ were again sent to General by Friedman by his letter dated June 28, confirming this latest understanding, a copy of which letter was sent to Cohen.

Thereafter, General called Friedman and advised him that all the insurers, except Dorchester, had recanted and refused to defend the action and accept any liability under the policy by reasons of the cancellation. Because of its error in failing to notify ²⁵¹ Chemical, General offered to contribute towards any settlement of the Coleman suit and sent Friedman a check for $250 on account for counsel fees for the defense of the suit. In view of these developments, Friedman began an investigation of the entire situation surrounding the issuance of the policy, as a result of which it was ascertained: (1) that there was no such entity as “Underwriters at London, England”; (2) that Dorchester was not an English company, but a Jamaican one; (3) that Lowitt was president of and a stockholder in both General and Dorchester; (4) that General never had authority to issue the cover note involved in this case; and (5) that the officers and stockholders of both General and Dorchester were the same persons. Upon learning these facts, Chemical filed a complaint with the Insurance Commissioner of Maryland, who informed them that other complaints had been filed against General and that joint hearings would be held in the near future.

At these hearings, Lowitt freely admitted that the use of the rubber stamp naming the four insurance companies was a “subterfuge.” He also admitted that “at no time did it (General) have authority to issue certificates * * *” such as were issued in this case and that it had “no authority from any London company” to bind them. (Emphasis ours.) Lowitt further testified that the usual practice of brokers in issuing cover notes was to “submit details of the risk to our London broker and he comes back and says we have placed this risk with such and such companies and we would issue our cover note accordingly.” However, General did not have such confirmation before it issued the cover note in this case to Chemical in which it was stated that the risk had been placed. The practice of confirming the risk before issuing the cover note was also testified to by Mr. Salladin, appellant’s own witness. As to this relation with foreign companies, Lowitt admitted that “We never had binding authority we were not permitted to have.

We were not their agent, only brokers.” The purpose of these hearings was to consider the revocation of the brokers’ licenses of General and Lowitt, and as a result of the hearings both licenses were permanently revoked. Friedman kept Cohen fully informed of all developments and conversations with General and Lowitt. Mr. Cohen visited ²⁵² Friedman on one or two occasions, and, during one visit, he made the following revealing remarks: “Mr. Friedman, yon taught me something about insurance that I never knew before.” “These cover notes that I have been using for some time, I thought I was getting insurance from Lloyd’s of London. It turned out, it wasn’t Lloyd’s of London at all.” The evidence further discloses that Cohen on at least five occasions issued cover notes similar to the one involved herein, and when it reported the tax required to be paid on policies-issued by unauthorized companies, it named Lloyd’s of London as the insurer, when, in fact, Lloyd’s was not the insurer.

In six instances, when Cohen billed appellee for premiums due, the insurer was named as Lloyd’s of London although the insurer named in the cover notes was “Underwriters at London, England.” Harry Cohen, president of appellant Cohen, cannot be said to have been a very impressive witness. At one point in his testimony in an effort to show that Cohen had fulfilled its duty to the appellee by checking the type and financial stability of the companies in which it had placed appellee’s insurance, he stated that he had checked them in Best’s Insurance Guide and “several other publications.” However, when given a copy of Best’s he was unable to show any of the companies named in the cover note listed therein, and he could not remember any of the “other publications.” And, although he offered to “get them,” none was ever produced during a trial which lasted several days. In addition, when it was called to his attention that under Maryland law an insurance company which is not authorized to do business in Maryland cannot have an agent in Maryland for the issuance of a policy in Maryland, he stated the subject policy was signed by John Winslow “in Philadelphia.” “I think [he] was a resident of the State of Pennsylvania.” “I said I think. In New Jersey, wherever he may have been a resident.” Appellants produced a witness whom they qualified as an experienced broker in surplus lines of insurance.

However, when he reached the heart of our present inquiry on cross-examination, he stated that he would issue a cover note only upon receipt of a cable indicating that insurance had been placed, and ²⁵³ not before, as was done in the case at bar. In addition, he testified, “Sir, we [his company] would not issue a document saying ‘Underwriters of London, England,’ ” explaining that his documents showed his company’s capacity as a broker to procure insurance from a certain company or companies, whose participation “by percentage or by dollars amount” is shown, subject to the terms and conditions of a policy “heretofore or hereafter issued,” or “wording somewhat similar to that.” I Appellant Cohen’s first contention is two pronged, and we ■shall consider them in the reverse order in which they are presented by it. (a) It claims the evidence is insufficient to establish that General and/or Lowitt were agents of Cohen in connection with the procurement of the cover note, so as to charge Cohen with responsibility for their activities. The question, we think, presents no serious problem.

General was an insurance broker and it was necessarily Cohen’s agent, when Cohen obtained the cover note from it, without authority from Chemical to do so. Chemical employed the services of Cohen, and placed confidence and trust in it as an experienced and knowledgeable insurance broker. Cohen violated this trust and confidence, when it, without permission, employed a sub-agent (or a sub-broker). Groscup v. Downey, 105 Md. 273 ; Van Lill Co. v. Packing Company, 155 Md. 303 .

And this is the general rule elsewhere. 1 Mechem, Agency (2 ed.), §§ 305, 306, 307; 12 C.J.S., Brokers, § 22. And a broker, which employs, without authority, a sub-broker, is responsible to the broker’s principal for the defaults of the sub-broker. 3 Am. Jur. 2d, Agency, § 157; 12 C.J.S., Brokers, § 23; Restatement, Agency (2d), § 406; 61 A.L.R. 279 ; Cf. Travlos v. Commercial Union of America, 217 N. Y. S. 459; Walker etc. v. Black, 65 A. 799 (Pa.); Harris v. A. P. Nichols Inv.

Co., 25 S. W. 2d 484 (Mo.). The trial court was amply justified in finding that General was the agent of