Maryland Automobile Insurance Fund v. Lumbermen's Mutual Casualty Co.

ADKINS, Judge. In Queens, New York, in August 1998, a 1993 Lexus owned by Natecha Tyme, and operated at the time by Devon Guthrie, collided with a vehicle driven by Kenneth McBride. At the time of the accident, McBride’s vehicle was insured by Lum ⁶⁹³ bermen’s Mutual Casualty Co. (“Lumbermen’s”), appellee. Tyme’s vehicle, on the other hand, was insured by the Maryland Automobile Liability Insurance Fund (“MAIF”), appellant.

After the accident, McBride submitted a claim to MAIF for losses sustained during the accident. Through an investigation commencing before the accident, and extending thereafter, substantial questions were raised about Tyme’s status as a Maryland resident. Accordingly, MAIF issued a letter on January 5, 1999, notifying Tyme that her policy “ha[d] been voided back to the inception date,” pursuant to Md.Code (1997, 2002 Repl.Vol.), section 20-502(e) of the Insurance Article (“IN”). Because of the voiding of the policy, McBride was unable to recover from MAIF, so he sought compensation from Lumbermen’s under his uninsured motorist coverage with that company.

Thereafter, Lumbermen’s filed a complaint in the Circuit Court for Anne Arundel County, asking the court to “enter a declaratory judgment finding a valid policy of insurance with MAIF insuring the Tyme vehicle.” MAIF appeals from entry of such a declaratory judgment in favor of Lumbermen’s, raising the following issue: Can a MAIF policy be voided ab initio more than 60 days after its issuance, when the applicant intentionally misrepresented her residence status in order to meet the statutory eligibility requirements set forth in IN section 20-502? We answer this question in the affirmative, and hold that the legislature has declared any policy obtained through intentional misrepresentation void ab initio, regardless of when the misrepresentation is discovered by MAIF. Therefore, we reverse the judgment of the circuit court. FACTS AND LEGAL PROCEEDINGS Tyme first secured insurance with MAIF on November 6, 1996.

On her application, Tyme listed her address as “8001 Crabtree Place, Gaithersburg, MD.” She also listed home and work telephone numbers with Maryland area codes. Tyme further represented that she was a “home attendant” at ⁶⁹⁴ “Potomac Home Care.” At the bottom of the application, Tyme certified in the “applicant eligibility statement” that she was a Maryland resident or was “otherwise eligible” for insurance with MAIF. The vehicle insured under the 1996 policy was a 1994 Toyota 4 Runner. The 1996 policy was subsequently terminated in 1997 for alleged non-payment of premiums.

Soon thereafter, Tyme filled out another application for insurance with MAIF, and a second policy was bound on August 26, 1997. Tyme repeated the information given on her 1996 application. The 1997 policy also insured the 1994 Toyota 4 Runner. A second vehicle, the 1993 Lexus involved in the accident that lies at the heart of this case, was added to the 1997 policy on May 27, 1998.

Both the 1996 and 1997 policies were bound by Charles L. Baum, a MAIF producer. In its answer to Lumbermen’s complaint seeking a declaratory judgment as to the validity of Tyme’s MAIF policy, MAIF asserted that “the policy issued to Natecha Tyme was voided ab initio.” Both parties moved for summary judgment. 1 After the September 25 hearing on the motions, the circuit court granted Lumbermen’s motion, concluding that the voiding of Tyme’s policy had been “ineffective insofar as liability claims asserted against Tyme by third parties are concerned,” and that MAIF “d[id] have liability insurance coverage for the vehicle owned by Natecha Tyme ... for the motor vehicle accident” at issue. 2 MAIF appealed. DISCUSSION In 1972, the legislature passed amendments to the motor vehicle law, for the first time mandating motor vehicle insurance. ⁶⁹⁵ 3 See Van Horn v. Atlantic Mut. Ins.

Co., 334 Md. 669, 680 , 641 A.2d 195 (1994). “The provisions for compulsory insurance on every Maryland automobile were made feasible by the creation of MAIF as an insurer of last resort.” Id. at 684 , 641 A.2d 195 ; see also Nat’l Grange Mut. Ins. Co. v. Pinkney, 284 Md. 694, 703-4 , 399 A.2d 877 (1979)(purpose of MAIF is to provide automobile insurance coverage to individuals who may not otherwise be able to obtain insurance). This case concerns whether a MAIF policy is rendered void ab initio if,*at any time after policy issuance, MAIF discovers that the policy was obtained through intentional misrepresentation by the policyholder in his or her policy application.

In 1994, the Court of Appeals answered this question as it pertained to private insurers and their policies. Before the adoption of the 1972 amendments, insurers enjoyed a common law right to void ab initio a motor vehicle insurance policy for fraud in the application — i.e., when the applicant had made a material misrepresentation in the policy application. See Van Horn, 334 Md. at 679 , 641 A.2d 195 . In deciding whether this common law right had been abrogated by the 1972 amendments, the Court considered the main public policy objective of the amendments.

According to the Court, “[t]hat objective was to ensure, as far as practicable, that there would be continuous insurance policy coverage, or approved self-insurance, applicable to injuries incurred in automobile accidents.” Id. at 680 , 641 A.2d 195 (citing Pennsylvania Nat’l Mut. Cas. Ins. Co. v. Gartelman, 288 Md. 151, 154 , 416 A.2d 734 (1980)).

It noted that, while the 1972 amendments added statutory provisions instituting mandatory motor vehicle insurance, and creating MAIF to carry out that mandate, it also repealed the former Maryland Automobile Insurance Plan for Assigned Risks (“the Plan”). This assigned risk plan was designed to aid drivers in obtaining policies from private insurers in preMAIF times. See id. at 683 , 641 A.2d 195 . One of the provisions of the Plan stated that an otherwise eligible appli ⁶⁹⁶ cant could not be refused coverage, or have his or her coverage cancelled for underwriting reasons, unless the applicant had made a “material misrepresentation in procuring the insurance,” in which case the insurer could void the policy from the date of its inception.

In other words, the former statute expressly recognized an insurer’s common law right to void ab initio a policy for fraud. The Court found significant the fact that the legislature did not include a comparable provision preserving this right of rescission in its 1972 amendments. See id. at 684 , 641 A.2d 195 . In holding that a private insurer’s common law right to void ab initio a fraudulent policy indeed was abrogated by the adoption of the 1972 amendments, the Court of Appeals forcefully stated that “Recognition of a common law contract right to void a motor vehicle insurance policy ab initio is utterly inconsistent with” the legislative purpose of the compulsory insurance provisions of the amended statute.

See id. It also found the recognition of such a right of retroactive termination inconsistent with the amended statute’s policy termination procedures, “which permit only prospective cancellation, require that the insurance policy stay in force if the cancellation is protested, and contemplate the availability of an insurance policy from MAIF if the cancellation goes into effect, thereby guaranteeing continuous motor vehicle insurance coverage.” Id. at 685 , 641 A.2d 195 . The Court noted that its conclusion was consistent with that of other compulsory motor vehicle insurance jurisdictions that had addressed the issue. See id. at 687 , 641 A.2d 195 .

The Court of Appeals’ decision relied heavily on the existence of MAIF as an insurer of last resort, an entity that was “waiting in the wings” to insure an individual should his or her private insurance be terminated. 4 ⁶⁹⁷ Although the Court of Appeals’ decision in Van Horn answered the question at issue in this case as to private insurers and their policies, no court yet has addressed whether MAIF policies are void ab initio because of a misrepresentation in the policy application. Thus, we tread in new territory in resolving this appeal. MAIF asserts that the circuit court erred in concluding that the policy remained effective as it pertained to third party claims. Lumbermen’s argues that the court acted properly in imposing liability.

Before we outline the parties’ arguments in any more detail, we shall set forth the background material relevant to our analysis. I. Relevant Authorities A. 1973 Attorney General’s Opinion The first relevant authority interpreting the statute at issue was a 1973 opinion of the Maryland Attorney General (“1973 Opinion”). See 58 Md. Op. Att’y Gen. 427 (1973).

At the time of the 1973 Opinion, the MAIF statute featured the following cancellation provision, which is retained in the current statute as IN section 20-509(e): (e) Cancellation of coverage — Grounds.—(1) On review of an application, the Fund may cancel coverage and refuse to issue a policy if the Fund finds that: (i) the applicant is not qualified for insurance issued by the Fund; 5 ⁶⁹⁸ (ii) the applicant has not paid the appropriate premium; or (iii) the Fund is authorized to reject the application under § 20-516 of this subtitle. (2) Cancellation of coverage may occur not later than 60 days after coverage is effective. In the 1973 Opinion, the Attorney General opined that, despite the statute’s 60-day “cancellation” provision, “where an insured has intentionally misrepresented his eligibility to the agent or broker, or the insured has colluded with the agent or broker in fraudulent misrepresentation of eligibility then the coverage is voidable (ab initio) at the option of MAIF, and any claims arising under the policy may be disclaimed.” See id. at 430. It is important to recognize, however, that the 1973 Opinion preceded the Court of Appeals’ decision in Van Horn by roughly two decades.

B. 1983 Amendments: Addition of “Void Ab Initio ” Provision In 1983, the statute was amended in response to the recommendations of a special legislative task force, the Insurance Task Force of the House Economic Affairs Committee (“Task Force”). The 1983 amendments included the addition of section 20-502(e)(l), which expressly granted MAIF the ability to “void ab initio ” a policy under certain circumstances. The changes to the MAIF statute derived from the Task Force’s observation that many individuals would obtain insurance at the time that their vehicle tags were renewed, but cancel the policy shortly thereafter. The bill made it less attractive for an insured to cancel a MAIF policy by providing that a producer’s commission would be “fully ⁶⁹⁹ earned” when “a valid contract of insurance” was made with the Fund and the premium was paid.

This meant that the producer’s commission would be deducted from any amount refunded if a MAIF policy was cancelled, presumably reducing the incentive for an individual to drop insurance coverage. (Prior to this amendment, an insured who canceled a MAIF policy would receive a refund including part of the producer’s commission). However, under the amendment the producer would not earn a commission if the applicant did not pay the premium or was ineligible for a MAIF policy — in which cases the legislation termed the policy “void ab initio.” This presumably reduced any incentive for a producer to obtain commissions by ignoring eligibility requirements when placing policies. The Legislature believed that it was subjecting MAIF policyholders to the same conditions as policyholders of private insurers. 85 Md. Op.

Att’y Gen. No. 00-012, 2000 Md. AG LEXIS 13, ³⁷-38 (filed May 24, 2000) (citations and footnotes omitted). The words “ab initio ” were subsequently deleted from the provision in 1996. See 1996 Md. Laws Ch. 11.

This deletion, however, was not intended to result in any substantive alteration of the statute. The Revisor’s Note to section 20-502 in the 1997 Repl.Vol. of the Insurance Article explains the reason for this removal: In subsection (e) of this section, the former reference to void “ab initio” ... is deleted as unnecessary. The term “void” is commonly used by itself to describe an agreement that is void from the beginning or absolutely void. This is in contrast to the term “voidable,” which is used to describe an agreement that may be declared void at the election of a party.

Thus, the current version of section 20-502, outlining the eligibility requirements for policyholders, provides that, “[i]f a prospective insured fails to qualify under this section, any policy issued is void and a commission may not be paid by the Fund to a producer.” IN § 20-502(e)(emphasis added). ⁷⁰⁰ The 60-day “cancellation” provision in section 20-509, however, remained in the statute. C. MAIF’s Administrative Regulations MAIF has also adopted administrative regulations under the above mentioned statutes. Though section 20-502(e) provides that a MAIF policy “is void” “[i]f a prospective insured fails to qualify,” in its administrative regulations, MAIF has considerably narrowed the scope of this generalized statement. Under MAIF’s regulations, “[i]f MAIF subsequently determines that an applicant has made material misrepresentations as to the applicant’s eligibility before coverage was bound ... [a]ny policy or endorsement issued in reliance on the incorrect eligibility information is void[.]” COMAR 14.07.02.02.C(2)(emphasis added).

D. Recent Attempts To Harmonize The “Void” And “Cancellation” Provisions Of The Statute Some confusion arises when section 20-502(e)(l) is read in conjunction with section 20-509, proscribing the “[ajuthority of producers to bind coverage.” Since the 1983 addition of section 20-502(e), several authorities familiar with Maryland motor vehicle insurance law have attempted to clear up the confusion. These attempts have led to conflicting interpretations. The parties cite two authorities in particular, whose interpretations we outline below. 1. 1999: Janquitto’s Maryland Motor Vehicle Insurance Treatise Lumbermen’s urges us to consult the most recent edition of Maryland Motor Vehicle Insurance (2d ed.1999), a treatise written by Andrew Janquitto. According to Janquitto, ⁷⁰¹ notwithstanding the Attorney General’s position in 1973, today’s statutory scheme gives [MAIF] the right to rescind regardless of whether the representation as to eligibility was fraudulently or innocently made.

The sixty-day period, however, still guides. At common law, a party to a contract had to rescind within a reasonable time after discovering the misrepresentation. The sixty-day period in Section 20-509 ... is the legislature’s way of determining a reasonable time. Janquitto, supra, § 20.5(C) at 840.

In a preceding section entitled “Rescission of MAIF policies,” Janquitto opines: Section 20-509(e) sets forth MAIF’s right to “cancel” a policy within 60 days of the application under certain circumstances. When § 20-509(e) is read in connection with § 20-502(e), the former makes more sense if the right of termination is rescission, not cancellation. It is also unclear whether the decision in [Van Horn ] affects MAIF’s ability to rescind under § 20-509(e) after an accident. Presumably it does.

Janquitto, supra, § 18.10 at 814 n. 111. We will address the validity of Janquitto’s interpretation later in this opinion. 2. 2000: Maryland Attorney General’s Opinion MAIF points principally to a recent Opinion of the Attorney General, which supports its position (“2000 Opinion”). 6 See 2000 Md. AG LEXIS 13. That opinion answered a question posed by Maryland’s Insurance Commissioner regarding his authority to regulate MAIF under the Unfair Claims Settlement Practices Act. While its overall purpose ⁷⁰² was not directly to answer the question at hand, the 2000 Opinion featured an in-depth discussion and interpretation of the interplay between sections 20-502(e) and 20-509(e) of the Insurance Article.

In answering the question of whether the Commissioner has “authority to reverse or modify a MAIF decision to void a policy ab initio,” the Attorney General’s Opinion “review[ed] the source of MAIF’s authority to cancel a policy retroactively.” Id. at ³⁰-31. It acknowledged that, although MAIF’s •authority to rescind is derived from IN section 20-502(e), “[t]hat section establishes no time limit, conditions, or procedures for determining whether a policy is ‘void.’ Nor, on its face, does it require or authorize any action by MAIF to render a policy void.” Id. at ³¹. The Attorney General also discussed, in detail, the substance of the Task Force Report leading to the 1983 amendments to the MAIF statute. See infra, Part I.B. Later, the 2000 Opinion addressed the interplay between section 20-509 and section 20-502, in an attempt to “harmonize” the two provisions.

According to the Attorney General, [i]n creating the 60-day deadline in IN § 20 — 509(e)(2) for MAIF to cancel a policy bound by a producer, the Legislature clearly contemplated that some ineligible persons would retain MAIF insurance despite a lack of qualification, if their lack of qualification was not discovered within the 60-day review period. Presumably, the Legislature accepted that as the price for certainty in the binding of MAIF coverage. However, we think it unlikely that, in providing a limited period for MAIF to review the eligibility of an applicant, the Legislature intended to benefit an applicant who deliberately attempted to thwart that review. Indeed, the mandate in IN § 20-502(e) that ineligible persons be referred to the Insurance Fraud Division for investigation and prosecution suggests that the Legislature anticipated that the voiding of policies would be related to deliberate misrepresentation. ⁷⁰³ Thus, in our opinion, MAIF’s authority to rescind a policy because the applicant is not eligible for coverage by the Fund is ordinarily limited to the 60-day review period after coverage is initially bound.

However, MAIF still has authority to void a policy retroactively without regard to the 60-day period if the insured has intentionally misrepresented eligibility for MAIF coverage and thus defeated MAIF’s ability to make an expeditious determination about eligibility. Id. at ⁴³-44 (emphasis added). 7 The Attorney General outlined two ways in which the voiding of a MAIF policy is distinguishable from the voiding of a private insurance policy. First, the Attorney General reasoned, unlike the eligibility criteria used by private insurers, “MAIF’s eligibility criteria do not address the degree of risk MAIF is willing to accept.” Id. at ⁵²-53. Second, the rationale employed by the Court of Appeals in Van Horn did “not apply as readily” to MAIF, as an insurer of last resort.

See id. at ⁵⁸. In resolving the issue, the Attorney General ultimately proclaimed, “Until the Court of Appeals speaks definitively on this issue, we believe that MAIF’s right to rescind policies on the basis of deliberate misrepresentation as to eligibility survives Van Horn.” Id. at ⁵⁵.

II

The Circuit Court’s Reasoning In granting summary judgment in favor of Lumbermen’s, the circuit court reasoned: Under Van Horn , the Court of Appeals clearly indicated that the burden must fall on the original insurer as between innocent third parties. Section 20-509 provides a grace period