Nationwide Mutual Insurance v. Insurance Commissioner

PER CURIAM. At issue here is the legality of a program which the appellants, the Nationwide group of insurance companies, instituted in 1979 in an effort to curb rising automobile accident claim losses. The appellants are Nationwide Mutual Insurance Company, Nationwide Mutual Fire Insurance Company, Nationwide General Insurance Company, and Colonial Insurance Company of California (hereinafter collectively referred to as Nationwide). On February 1, 1979, Nationwide instituted a program for its Maryland agents known as the Automobile Loss Improvement Program (ALIP).

The program was designed to reduce automobile underwriting losses and thereby keep insurance rates down and put the company in a more competitive position in the automobile insurance market. In 1985, John T. Derwart, a Nationwide agent affected by the program, filed a complaint with the Maryland Insurance Division challenging the legality of ALIP. Derwart alleged ⁷³¹ that the program discriminated against him, in violation of Md.Ann. Code Art. 48A, § 234B(d). Following 13 days of hearing, Assistant Insurance Commissioner Thomas P. Raimondi concluded that ALIP “is arbitrary, capricious, unfair and discriminatory and in violation of Maryland Article 48A, § 234B(d) which violation constitutes an unfair trade practice within the scope of § 215(a).” The Insurance Commissioner found that “agents who write in high premium urban areas are adversely affected by ALIP, to the detriment of themselves and their policyholders.” The Insurance Commissioner ordered Nationwide to “cease and desist the use of its Automobile Loss Improvement Program to the extent the Program effects a restriction of binding authority based on the Program’s formula.” The Insurance Commissioner also ordered that “prior to implementing any changes in this Program [ALIP] or any other Program of this nature, [Nationwide] shall submit that Program to the Insurance Commissioner for prior approval” and ordered that Nationwide “accept the risks or accept the business of the Complainant, John T. Derwart, without the binding restriction as implemented under” ALIP.

Nationwide filed an appeal to the Circuit Court for Baltimore City pursuant to Art. 48A, § 40(1). After a four-day hearing, at which additional evidence was presented, Judge Joseph H.H. Kaplan issued a Memorandum Opinion and Order affirming the order of the Insurance Commissioner. Nationwide has noted this appeal to the Court of Special Appeals. All the contentions Nationwide raises on this appeal were raised before Judge Kaplan.

In his well-reasoned Memorandum Opinion and Order, Judge Kaplan fully considered and disposed of Nationwide’s contentions. Judge Kaplan concluded that “the Insurance Commissioner’s finding was supported by substantial and competent evidence.” After a careful review of the entire record, we concur completely with Judge Kaplan in his opinion. Any discussion by us of Nationwide’s contentions would only paraphrase the very thorough and articulate explanation which Judge Kaplan ⁷³² gave for his decision and would deny him the credit he rightly deserves for an excellent opinion. We, therefore, affirm Judge Kaplan’s decision and adopt his Memorandum Opinion and Order as the opinion of this Court.

MEMORANDUM OPINION AND ORDER Nationwide Mutual Insurance Company (“Nationwide”) appeals a decision by the Insurance Commissioner which determined that Nationwide’s Automobile Loss Improvement Program (“ALIP”) was discriminatory within the meaning of Section 234B(d) of Article 48A of the Annotated Code of Maryland because ALIP adversely affects agents and policyholders in high premium urban areas. The material facts are not in dispute. In 1979 Nationwide found that it was losing policies in the personal automobile insurance market in Maryland because heavy losses had caused the company to raise its rates. In an effort to reduce the losses and become more competitive in the Maryland market, Nationwide instituted ALIP.

The purpose of the program, according to Nationwide, was to improve the quality of input for unprofitable agent portfolios and to work with the existing portfolios to improve their profitability. ALIP applied to all Nationwide agents, including independent contractors (who are under exclusive contracts with Nationwide), business agents, and newly employed agents of the company. Although the program originally consisted of one level, ALIP has continuously evolved and is now comprised of three separate levels. Level I consists of all agents with a three-year loss ratio over 65% (loss ratio is calculated by dividing the losses and loss adjustment expense by the earned premium).

When an agent is placed on Level I the underwriter and the district sales manager work with the agent to increase his premiums and reduce his losses. Level II is an extension of Level I. Portfolios are placed on Level II if they have a three-year loss ratio over 65% and have $200,000 or more of losses in a ⁷³³ three-year period. Losses are calculated by taking the most recent three-year loss ratio, subtracting 65%, and multiplying the result by the three-year earned premium. Portfolios exempted from Level II are those with a loss ratio of 65% or below for any three of the previous six-month periods and those where a single large loss adversely impacted several periods of an otherwise profitable portfolio.

As with Level I, the Level II agent is to work with the underwriter and the district sales manager to improve his portfolio. In addition, however, an agent placed on Level II has his binding authority restricted to married risks. Any other new business has to be first submitted to underwriting for approval or rejection of the risk. Level III consists of all Level II agents who have been on Level II for six or more continuous six-month periods.

When an agent is placed on Level III, Nationwide removes completely his authority to write binding personal automobile insurance. John T. Derwart, the complainant below, is a Nationwide agent with independent contractor status. Derwart has signed at least three different independent agent agreements with Nationwide, the most recent being in June, 1983. Derwart has been working for the company since 1974.

In 1975, Derwart began to work out of an office in the Dundalk area of Baltimore. When he moved to that location, Derwart inherited the business of a Nationwide agent who had retired. In addition to inheriting the business, Derwart inherited the retired agent’s loss ratio, which was 62.5%. Derwart’s loss ratio before the move was 39%.

In 1979 Nationwide placed Derwart in ALIP. Although he was removed briefly from ALIP in 1980, Derwart has since remained under the restrictions of the program. In 1981 Nationwide placed Derwart on Level II, whereby he had to get all new business except married risks approved by underwriting before he could bind. Fearing for his job, Derwart tried to qualify for removal from ALIP by making efforts to reduce his loss ratio. ⁷³⁴ His entire portfolio was underwritten twice with the help of Nationwide’s underwriter.

Although not required to do so on Level II, Derwart submitted his married applicants for prior approval. He sought assistance from his district sales manager. He increased deductibles and limitations of coverage. All to no avail.

In February, 1985, Derwart was notified that he was being placed on Level III. At that point, Derwart’s authority to write any automobile insurance was removed. Approximately 75% of Derwart’s income was derived from auto insurance. Needless to say, Derwart lost substantial business and income as a result of being placed on Level II and Level III.

Derwart was not the only Nationwide agent in the Baltimore Metropolitan Area to be fettered and frozen by the imposition of ALIP. A review of another such agent, Russell Bloom, accents the futility of Level III as a rehabilitative tool. Bloom is a Level III agent with a three-year loss ratio of 109%. The company worked closely with Bloom over a long period of time in an attempt to extricate him from the program.

A special underwriter met with Bloom to try to reduce Bloom’s loss ratio. Bloom submitted approximately 200 trial applications to underwriting that were rejected. His district sales manager met with Bloom after every six-month experience report to recommend improvement techniques. In addition, the district sales manager, noting at the time that Bloom’s three years on ALIP had resulted in only negligible improvement, initiated a separate program specially designed for Bloom whereby he met with Bloom twice a week to review and help underwrite policies.

These rescue attempts failed, however, and Bloom’s district sales manager ceased to make recommendations. As with other Level III agents, all Nationwide’s efforts and all of Nationwide's men could not put Bloom’s portfolio back together again. Although the intended purpose of ALIP was rehabilitative, Level III is clearly a dead end. The record is replete with instances of Nationwide ⁷³⁵ agents being placed on Level III, but void of any instance of an agent being removed from that level.

Derwart filed a complaint with the Insurance Commissioner, alleging that ALIP violated Article 48A, § 234B(d) of the Annotated Code of Maryland, which prohibits insurance companies from discriminating against agents. A formal hearing on the matter took place before Assistant Insurance Commissioner Thomas P. Raimondi. After some thirteen days of testimony, Raimondi concluded that ALIP was “arbitrary, capricious, unfair and discriminatory and in violation of Maryland Article 48A, § 234B(d) which violation constitutes an unfair trade practice within the scope of § 215(a).” May 13, 1985, Memorandum and Order, p. 15. The Assistant Commissioner ordered Nationwide: 1) to cease and desist the use of its Automobile Loss Improvement Program to the extent the Program effects a restriction of binding authority based on the Program’s formula; 2) to submit any changes in the Program to the Insurance Commissioner before implementation; and, 3) to accept the risks or accept the business of Derwart without the binding restrictions as implemented under ALIP.

Nationwide timely appealed Raimondi’s order. The case was heard on the record along with any additional evidence presented. In an effort to protect the public in the vital area of insurance, the General Assembly, beginning in 1970, enacted a series of statutes limiting the freedom of insurance companies to contract. Section 234B was one such statute.

Sections 234B, 234A and 234C of Article 48A were originally enacted by the legislature in 1970 “to establish standards of fairness in insurance underwriting and treatment of agents or brokers, and to confer authority on the Insurance Commissioner to remedy failure to observe such standards.” Preamble, Ch. 417 of the Laws of Maryland, 1970, p. 987. Section 234B(d) provides: ⁷³⁶ Notwithstanding any other provisions of this section, no insurer may cancel or amend a written agreement with an agent, or broker, or refuse to accept business from such agent or broker if the cancellation or amendment is arbitrary, capricious, unfair, discriminatory, or based in whole or part upon the race, creed, color, sex, religion, national origin, place or residency of the agent or broker, his applicants or policyholders. Section 215(a) grants the Commissioner the authority to issue cease and desist orders for violations of the subtitle. The primary issue in this case is whether Nationwide’s Auto Loss Improvement Program is arbitrary, capricious, unfair and discriminatory under Section 234B(d).

The Insurance Commissioner decided that it was. Nationwide contests that decision, arguing, inter alia, that ALIP is actuarily sound, that it is not discriminatory under Section 234B(d), and that policyholder harm must be proven before Section 234(d) is activated. Before addressing these arguments, it is necessary to discuss the applicable standard of review for appeals from the Insurance Commissioner. Article 48A, § 40 governs judicial review of appeals from the Insurance Commission.

Section 40(5) provides that the Commissioner’s Order may be reversed or modified by the Court: [I]f the substantial rights of the petitioners may have been prejudiced because the administrative findings, inferences, conclusions, or decisions are: (i) In violation of constitutional provisions; or (ii) In excess of the statutory authority or jurisdiction of the