Motor Vehicle Security Fund v. All Coverage Underwriters, Inc.

Moore, J., delivered the opinion of the Court. We are here presented with the conflicting claims of the Motor Vehicle Security Fund, State of Maryland (The Fund) and All Coverage Underwriters, Inc., a Florida Corporation (All Coverage) to the remaining assets in liquidation of the Olympic Insurance Company of America (Olympic). These assets are in the magnitude of $620,000. The claim of the Fund is in the sum of $432,865.63 and that of All Coverage is for $568,187.00. 1 Olympic was established in 1958 as a domestic mutual insurance company, authorized to provide all types of indemnity insurance, except life insurance, and to reinsure any and all insured risks.

The venture did not prosper. In March 1964 the company was examined by the State Insurance Department and was found to have a deficit in excess of $160,000. Beginning the following month and through December 1964, All Coverage advanced sums aggregating $460,000 in seven separate transactions, in each ⁵⁸⁹ of which Olympic issued a Guaranty Certificate for repayment of principal together with interest at 6%, out of surplus of Olympic. 2 All Coverage provided new directors and new management. Its objective was, to be sure, the eventual return of Olympic to financial health.

This did not occur. In September 1965 then Insurance Commissioner, Francis B. Burch, by a consent order in the Circuit Court for Baltimore City, was appointed as Rehabilitator of Olympic under Code, Art. 48A, and particularly §§ 141 and 145. Prior to the appointment of the Rehabilitator — more particularly effective June 1, 1965 — the General Assembly of Maryland created the Fund by adding § 482A to Art. 48A. We are told that the Legislature’s action was “partially in response to the public outcry which accompanied Olympic’s problems.” 3 The purpose of the law was to afford protection to claimants in motor vehicle accident cases where the insurer of the tortfeasor had become insolvent or otherwise unable to meet its insurance obligations.

To be administered separately by the insurance commissioner, the Fund was made up of payments required to be contributed quarterly by solvent motor vehicle liability insurance companies in the amount of ‘A of 1% of net premiums on policies written in the State of Maryland. It was authorized to pay “allowed claims” which could not exceed liability limits. As originally enacted, the Fund had no statutory right of subrogation. 4 Upon the application of Mr. Burch as Rehabilitator, the court on June 15, 1966 entered an Assessment Order pursuant to the provisions of Art. 48A, § 260, upon the policyholders of Olympic. The amount of the assessment was equal to one annual policy premium on each policy held by the policyholders during a designated period of time.

Dur ⁵⁹⁰ ing the period October 1, 1968 through July 31, 1972, assessments were collected in the gross amount of $476,429.46. During the above inclusive period, on September 6, 1968, upon a Petition for Liquidation presented by Newton I. Steers, Jr., the then Insurance Commissioner (by Francis B. Burch his predecessor who had succeeded to the Office of Attorney General), it was specifically requested that Mr. Steers be appointed as Liquidating Receiver of Olympic pursuant to § 137 of Art. 48A. A Consent Order was entered by the court the same day, as was an Order for notice to creditors directing that all claims against Olympic be filed with the Receiver on or before August 30, 1969 or else be forever barred. Some 277 claims were filed, based upon Olympic’s automobile liability insurance policies.

During the period November 4, 1970 through June 30, 1972, the Fund paid out of its own resources the total sum of $432,865.63 to some 264 of the aforesaid 277 claimants. All Coverage filed its claims against Olympic on August 26, 1969. On September 3, 1971, the Administrator of the Fund made a claim of the Receiver for the sum of $411,316.91 which had been prepaid to claimants as of June 30, 1971. At that time, the Administrator asserted the Fund’s claim in that amount against the assets of Olympic in receivership based upon the following: “Subrogation of Motor Vehicle Security Fund in place and stead of claimants prepaid pursuant to Section 482A, Article 48A, Maryland Code, by said Fund as per attached statement, which is incorporated by reference herein.” A petition for authority to refer the entire matter to a court auditor was filed and granted on December 15, 1971.

John P. O’Farrell, one of the standing auditors of the court, was designated. The petition for referral recited that approximately 90% of all automobile claims had been paid in full by the Fund and the only claimants still unpaid from the ⁵⁹¹ receiver were those whose claims involved cases other than automobile and property damage. It was also stated that: “The only claims that are presently unresolved, with the exception of less than 5 relatively inconsequential claimant claims, are the subrogated claim of the Motor Vehicle Security Fund and the claim of All Coverage Underwriters, Inc. for monies due them under their guarantee notes. The only other major question unresolved is the amount of court costs that must be paid to the Circuit Court of Baltimore City.” The auditor’s report and account, with supporting exhibits, was filed with the court on October 10, 1972.

The auditor found that as between the claim of All Coverage and that of the Fund, the claim of All Coverage should be honored in its entirety prior to any payment to the Fund. The report stated in part: “Since the Motor Vehicle Security Fund did not have a contract right of subrogation, but rather, if any, a statutory right of subrogation which statutory right arose after the vested rights of All Coverage, if the Auditor were to allow the right of Motor Vehicle Security Fund under Subsection (g) over and above the right of All Coverage to the funds in the hands of the Receiver, that act would be unconstitutional since it would base its allowance on a statute which would impair the obligation of an existing contract. The Fund, under Subsection (g), does not have a legal right of subrogation and, therefore, shall be paid after the payment of All Coverage Underwriters, Inc. under its Guaranty Certificates.” On October 17, 1972, the then Administrator of the Fund, Ernest J. Meredith, acting for Thomas J. Hatem, the then Insurance Commissioner, filed exceptions to the report and a supporting memorandum. On August 24, 1973, the lower court adopted an order ⁵⁹² whereby the exceptions were overruled and the account was ratified and affirmed.

The court found that the auditor’s report and account was “prima facie correct” and that the exceptions filed by the Fund did not show that the auditor “was clearly erroneous or that he misapplied the law to his findings of fact.” The order also contained the following paragraph: “That after a review of the record and the file, and after hearing argument from all interested parties, and upon a re-review by the Court Auditor of all of the issues presented in the Fund’s Exceptions at the request of the complainant and this Court, the Court agrees with the Auditor’s findings of fact, which it finds conclusive on the issues raised in the Exceptions. . . .” The specific findings of fact affirmed by the court were the following: 1. The Fund’s claim was untimely because it was not filed by August 30, 1969, the last date specified by the court order for the filing of claims and because the Fund had even failed to file a contingent claim as authorized by Code, Article 48A, Section 160. 2. Olympic was insolvent prior to the effective date of the Motor Vehicle Liability Security Fund Act and thus Olympic was not even subject to the provisions of the Act “even though a single payment was made to the Fund.” 3. That All Coverage had a vested contractual right which could not constitutionally be divested by a subsequent legislative act effective July 1, 1970 which gave the Fund a right of subrogation.

Appealing from that order, the Fund contends principally that upon three alternative and independent bases it is a subrogee with a prior right over All Coverage. They are: 1. The subrogation provisions added to the Fund ⁵⁹³ Act by Code, Article 48A, Section 482A (g), effective July 1, 1970 (Laws 1970, ch. 619). 2. The written agreements of release and assignment between the Fund and each claimant prepaid by the Fund. 3.

Having made the payments to persons whose claims were properly allowed, the Fund is entitled to subrogation on equitable grounds. For the reasons hereinafter stated we conclude that the findings below with respect to the insolvency of Olympic prior to the effective date of the Act were not clearly erroneous. However, we also hold that the Fund is entitled to subrogation under equitable principles and that the court below erred in making no finding as to whether or not the Fund possessed contractual rights of subrogation or assignment under the releases obtained from the respective automobile accident claimants. I First we approach the Fund’s contention that it is subrogated to the rights of those claimants who filed timely claims with the Receiver, and have been prepaid by the Fund, by operation of the provisions of Md. Code, Art. 48A, § 482A, enacted as Chap. 912 of the 1965 Laws of Maryland, effective June 1, 1965, as amended by Laws 1970, ch. 619.

Section 482A (b) created the Fund “for the purpose of securing the benefits under policies on account of claims from motor vehicle accidents,” and specified that: “Such fund shall be used in the payment of allowed claims of injured parties and policyholders under said insurance policies, remaining unpaid, in whole or in part, by reason of the insolvency or inability of the insurer to meet its insurance obligations where the insurer has made payments to the fund as required by subsection (c).” Subsection (c) (2) of § 482A provided in pertinent part: “For the privilege of issuing policies insuring ⁵⁹⁴ against legal liability arising out of the ownership, operation or maintenance of motor vehicles which are principally garaged in this state, and in addition to all other requirements of law, every insurer shall pay into the Fund on or before November 15, 1965, V4 of 1% of its net direct premiums ... as shown by the return hereinbefore required for the three months ending September 30, 1965____” Subsection (a) (4) defined “Insurer” to mean, in part, “any insurer other than an insolvent insurer. . . .” It is immediately apparent that the threshold question to be determined is whether upon the creation of the Fund, viz., June 1, 1965, Olympic was a solvent insurer. If it was insolvent, it was not required to make payments to the Fund and the Fund was accordingly not obligated to pay unpaid claims under policies issued by Olympic. The Fund vigorously contends that Olympic was solvent on June 1, while appellees contend with equal force that it was not. Article 48A, § 132 (1), “Impairment” or “Insolvency,” states: “The capital of a stock insurer or the surplus of a mutual or reciprocal insurer, shall be deemed to be impaired and the insurer shall be deemed to be insolvent, when such insurer is not possessed of assets at least equal to all liabilities and required reserves together with its total issued and outstanding capital stock and minimum surplus if a stock insurer, or the minimum surplus if a mutual or reciprocal insurer, required by this article to be maintained for the kind of insurance business it is then authorized to transact.” The record discloses that in March, 1964, Olympic was examined by the State Insurance Department and was found to be insolvent.

As a result of the examination Olympic was notified that unless sums totaling $210,000 were deposited to its credit the company would be required to terminate its business and undergo liquidation proceedings. It appears ⁵⁹⁵ that the Insurance Commissioner was acting under Art. 48A, § 256 which provides in pertinent part: “If the minimum surplus to be maintained under the requirements of § 49 [“Surplus assets or funds required”] becomes impaired, or the assets of a mutual insurer are less than its liabilities and the minimum amount of surplus required to be maintained by it... , the Commissioner shall at once determine the amount of deficiency and serve notice upon the insurer to make good the deficiency within sixty days after service of such notice. “If the deficiency is not made good and proof thereof filed with the Commissioner within such sixty-day period, the insurer shall be deemed insolvent and the Commissioner shall institute delinquency proceedings against it under Subtitle 10 of this Article. . . .” As previously indicated, between April 2 and December 31, 1964 All Coverage Underwriters, Inc. advanced sums to the surplus of Olympic aggregating $463,000 in return for Guaranty Certificates. As part of the transaction new officers and directors were elected to Olympic’s management by All Coverage. On January 15, 1965 Olympic entered into a Quota Share Reinsurance Agreement with the General Reinsurance Corporation of New York whereby, in effect, General Reinsurance assumed the risk of 80% of Olympic’s business.

Specifically the agreement provided that Olympic would pay the reinsurer 80% of the unearned premium reserve applicable to its net retained liability with respect to all business of Olympic in force as of December 1, 1964 and the same percentage of its net premiums written subsequent thereto, less a reinsurance commission allowance of 42V2%. The reinsurance commission allowance, however, was expressly made provisional and subject to adjustment in accordance with a Commission Adjustment Formula which would have the effect of reducing the allowance ⁵⁹⁶ proportionally as Olympic’s losses by reason of settlement of claims exceeded its premiums earned. Olympic wrote $863,253 in automobile liability premiums during the period from January 1, 1965 through June 30, 1965. It further appears, and it is not disputed by the parties, that the company actually made a payment to the Fund for premiums written during July and part of August, 1965, although the amount does not appear in the record.

An examination of Olympic by the State Insurance Department in August, 1965 showed that the company was taking full credit for reinsurance commissions amounting to $342,297.53, notwithstanding their clearly provisional status. Indeed the commission adjustment formula had indicated that the entire amount of the reinsurance commissions would have to be returned to General Reinsurance if the ratio of losses incurred to premiums earned reached 97%, and the insurance examiner’s report of August 17 indicated that the loss ratio for the period between January 1 and June 30, 1965 was 110.96%. The Insurance Commissioner, therefore, again apparently acting pursuant to § 256, gave notice to Olympic on August 16, 1965 that the Insurance Department would allow no credit for the claimed reinsurance commissions and that with the disallowance of this item the company’s surplus was entirely wiped out, required reserves were seriously affected and Olympic was insolvent. The company was ordered by the Commissioner to post additional reserves for claims for unpaid losses in view of this discovery and of its loss experience of the past two years. 5 When a demanded contribution to surplus was not forthcoming by noon of August 18, 1965 the Commissioner suspended Olympic’s license to do business.

On September 16, 1965, when the Commissioner filed a Petition seeking an Order appointing him as Rehabilitator of Olympic, he recounted the facts ⁵⁹⁷ essentially as heretofore set forth and listed two of the statutory grounds for such petition enumerated in Art. 48A, § 136, viz., that Olympic “(1) Is impaired or insolvent; (11) Is found, after examination by the Commissioner, to be in such condition that its further transaction of business will be hazardous to its policyholders, bondholders, or to creditors or to the public.” The Consent Order appointing the Insurance Commissioner as Rehabilitator of Olympic declared inter alia that Olympic denied “all particulars of impairment and insolvency alleged in the Petition for Rehabilitation, . . . the parties agreeing that the ground for rehabilitation is that Olympic has been found, after examination by the Insurance Commissioner, to be in such condition that its further transaction of business may be hazardous to its policyholders, bondholders, or to creditors, or to the public. . . .” The coup de grace to Olympic’s fortunes came on September 6, 1968 when the Petition for Liquidation was filed by the Insurance Commissioner under Art. 48A, § 137, alleging the statutory ground that the company “(4) Is in such condition that further efforts to rehabilitate the insurer, upon any of the grounds specified in § 136 of this subtitle, appear to be futile.” A corresponding Consent Order appointing the Insurance Commissioner as Receiver to liquidate the assets of Olympic was signed by the Circuit Court of Baltimore City on the same date. The Fund contends upon these facts that Olympic cannot be deemed to have been insolvent prior to mid-October, 1965, and that, therefore, the lower court was clearly erroneous in determining that the company “was insolvent . . . prior to July 1 [sic], 1965, which was the effective date of the Motor Vehicle Liability Security Fund Act. . . .” The Fund’s ⁵⁹⁸ argument, essentially, is that the twin determinations by the Insurance Commissioner, in March 1964, and again on August 16, 1965, of Olympic’s insolvency are put to nought by the more specific definition of insolvency in the very statute under which the Commissioner acted on each of these occasions. Section 132 (1), quoted supra, the Fund contends, is merely a general description of when an insurer is insolvent, while § 256, supra, which is concerned with deficiencies of mutual insurers in the particular situation where the deficiencies are demanded by the Commissioner to be made up by the insurer, “is obviously more specific” and “must govern and be treated as an exception to § 132 (1),” under the rule of construction that particular provisions prevail over more general ones where the two are inconsistent. Thus, the argument proceeds, while the Commissioner in March 1964, found Olympic to be insolvent, it would not in legal effect be considered insolvent until the expiration of sixty days after notification of the deficiency in its surplus and its corresponding failure to make up the deficiency, at which time — in the words of § 256 — “the insurer shall he deemed insolvent and the Commissioner shall institute delinquency proceedings against it. . . .” (Emphasis added.) But no such proceedings were instituted, presumably because of the infusion of capital by All Coverage; therefore, according to the Fund, Olympic was not, in 1964, insolvent.

In like manner, the Fund asserts, the Commissioner’s finding of insolvency on August 16, 1965, could acquire no legally operative effect until mid-October but there intervened the Consent Order of September 16 incident to which there was no judicial finding of insolvency because the parties had agreed that the ground for rehabilitation was solely the “hazard” represented by Olympic’s condition. Simultaneously, the management of Olympic was making a payment to the Fund, in evident support of its own conviction that it was still solvent. We are compelled to agree with appellees that the Fund has taken a somewhat tortuous path here in an attempt to demonstrate, as it must, clear error by the lower court in its ⁵⁹⁹ determination of insolvency. We think, on the contrary, that “insolvency” as used in § 256, as generally in the insurance code, admits of no such restrictive meaning as the Fund would impose on it.

As indicated, the procedures of § 256 are set in motion upon a finding that “the minimum surplus to be maintained . . . becomes impaired, or the assets of a mutual insurer are less than its liabilities and the minimum amount of surplus required to be maintained by it. . .” — that is to say, in precisely those circumstances constituting impairment of capital and insolvency of the insurer under § 132. Section 256 makes plain, however, that no consequences attach to this finding until sixty days after notification and the deficiency has not been made good, when the insurer “shall be deemed insolvent and the Commissioner shall institute delinquency proceedings against it. . . .” (Emphasis added.) Section 256 thus describes the procedure to be followed by the Commissioner upon a finding of impairment or insolvency (as well as how the ultimate proceeding of delinquency can be averted by the insurer); it engrafts no qualification on the general definition of insolvency contained in § 132. Insolvency vel non remains a determination to be made by the administrative agency based upon the — commonly recognized — definition of insolvency in § 132; once that determination has been made, and the deficiency is not made up, delinquency proceedings must be instituted. In the instant case, the Commissioner found in March 1964, and again in August 1965, that Olympic was insolvent.

The second finding was based on the company’s loss record of the prior two years, in particular upon its Annual Statement for 1964 showing a loss from underwriting of $224,889.02 and a net loss from operations of $217,569.85, and upon the discovery that after January 1965, it had begun improperly taking full credit for provisional reinsurance commissions totalling $343,297.53, disallowance of which had the effect of wiping out its entire surplus. As proof of the gravity of its condition in the Commissioner’s view, the company was given but two days to post additional reserves ⁶⁰⁰ before its license to do business was suspended on August 18,1965. In the light of the Commissioner’s conclusion drawn from this retrospective view of Olympic’s condition, made barely six weeks after the creation of the Fund, the auditor found and the Circuit Court concurred that Olympic was insolvent at the time of the Fund’s creation. We cannot say this conclusion was clearly erroneous.

Unquestionably, in the court’s view the fact that a “spot examination” of Olympic’s finances made in August 1965, rather than shortly prior to the creation of the Fund, disclosed Olympic’s insolvency was without significance: an examination at the earlier date could have disclosed no real difference in the company’s condition. The inference compelled by the Commissioner’s determination was that Olympic was insolvent at least as early as June 1,1965. In opposing this conclusion the Fund notes that Olympic in fact made a payment to the Fund and, moreover, denied its insolvency in the Consent Order of September 16 providing for its rehabilitation. But the considerations ¡prompting Olympic to make payment to the Fund or the Commission to agree to delinquency proceedings on the “lesser” statutory ground that Olympic’s further transaction of business would be hazardous to its policyholders, etc. are speculative and cannot, in our view, undo the Commissioner’s factual determination in August of the company’s insolvency.

That determination was found persuasive by the lower court and, we conclude, properly so. Olympic was insolvent at the time of creation of the Fund. It was, therefore, not obligated to make payments to the Fund. And the Fund was not statutorily obligated to pay allowed claims remaining unpaid by reason of Olympic’s insolvency.

Consequently, the Fund’s claim of a statutory basis for its right of subrogation must fail. II The Fund argues, however, in view of the debatable — and certainly by Olympic, debated — issue of Olympic’s solvency vel non at the time in question, that “there was at least a ⁶⁰¹ colorable obligation under statute for the Fund to pay allowed claims against Olympic,” and moreover “there is nothing whatsoever to even suggest that the Fund in paying the claimants acted without honest belief that it was bound to do so or without good faith.” Citing Ragan v. Kelly, 180 Md. 324 , 24 A. 2d 289 (1942) the Fund thus argues that it is entitled to subrogation at least on equitable or legal, as opposed to statutory, grounds. Subrogation, of course, as an equitable doctrine does not owe its origin to statute and none is required in order that it be recognized. Maryland Trust Co. v. Poffenberger, 156 Md. 200 , 144 A. 249 (1929); Schaeffer v. Sterling, 176 Md. 553 , 6 A. 2d 254 (1939).

Legal subrogation was defined in Maryland Title v. Kosisky, 245 Md. 13 , 225 A. 2d 47 (1966) as follows: “Legal subrogation (as distinguished from conventional and statutory subrogation) arises by operation of law when there is a debt or obligation owed by one person which another person, who is neither a volunteer nor an intermeddler, pays or discharges under such circumstances as in equity entitled him to reimbursement to prevent unjust enrichment.” Hence whether one may be legally subrogated depends on whether he was a mere volunteer and, if not, whether he is on equitable principles entitled to subrogation as against other claimants. The Finance Company of America v. Heller, 247 Md. 714 , 234 A. 2d 611 (1967). In Ragan v. Kelly, supra, a sick and elderly man caused the name of his unmarried niece to appear with his on his bankbook. She used money from the account to pay her uncle’s hospital expenses, and later his funeral expenses.

His estate brought suit to require her to account for all sums spent. The Court of Appeals determined that the uncle had created a special trust for a specific purpose, payment of the expenses of his illness, a purpose that came to an end upon his death. Hence his niece had no legal obligation to pay his funeral expenses and “technically . . . should account to the administrator for money spent after Mr. Kelly’s death. . . .” ⁶⁰² But, the Court said, “it would be a great injustice to require her to do so.” “Those were debts against the estate, and properly payable by the administrator. But when she paid them, Miss Ragan was acting in perfect good faith, and we have not the slightest doubt but that she conscientiously believed it was her duty, in accordance with the duty imposed upon her when the arrangement with the bank was made for her to draw on Mr. Kelly’s account. . . .

Since she paid only just and reasonable bills, which the administrator would have been compelled to pay, and out of the very same fund, she should be subrogated to the rights of the undertaker and the doctor in the settlement of the estate. . ..” The Court declared: “Subrogation always will be granted when an equitable result will be