Schinnerer v. Maryland Insurance Administration

RAYMOND G. THIEME, JR., Judge, Retired, Specially Assigned. William R. Schinnerer and W.R. Schinnerer Companies,, appellants, seek to set aside a two-year suspension, by the Maryland Insurance Commissioner, of their certificates of qualification to act as an insurance agent. The Maryland Insurance Administration (“the MIA”), appel-lee, determined that appellants had violated the Insurance Article in connection with (i) an application to renew a certificate of qualification and (ii) certain transactions with the Hartford Insurance Group Companies (“Hartford”). The MIA recommended that appellants’ certificates of qualifications be revoked.

The Insurance Commissioner (“the Commissioner”) affirmed the violation findings but rejected the recommended sanction and reduced it to a two-year suspension. The Circuit Court for Montgomery County affirmed the Commissioner’s order, and appellants filed this appeal. ISSUES Appellants argue, in essence, that: I. The Commissioner erroneously based his violation findings on a determination that appellants had a fiduciary duty toward Hartford, in that the determination was neither legally correct nor supported by substantial evidence, II. The Commissioner’s determination that appellants misappropriated, converted, or unlawfully withheld funds belonging to Hartford was neither legally correct nor supported by substantial evidence, III.

The Commissioner’s determination that appellants failed or refused to pay over premium funds on demand was ⁴⁷⁹ neither legally correct nor supported by substantial evidence, IV. The Commissioner’s determination that appellants misrepresented or concealed a material fact on their 1997 renewal application was not supported by substantial evidence and was arbitrary and capricious, and V. The Commissioner’s determination that appellants engaged in dishonest practices or otherwise showed a lack of trustworthiness or competence to act as insurance agents was not supported by substantial evidence. We find no merit in any of these arguments and affirm the judgment of the trial court. PACTS William R. Schinnerer became an insurance agent in 1965.

In the early 1970’s, he started his own business, which eventually evolved into W.R. Schinnerer Companies. No consumer complaints have ever been lodged against Mr. Schinnerer or his business. Hartford was one of many insurance companies for which W.R. Schinnerer Companies sold insurance. W.R. Schinnerer Companies and Hartford were parties to an “Agency Agreement” — Mr. Schinnerer signed the agreement as “Agency Principal.” In accordance with the agreement, appellants were authorized, as agents for Hartford, (1) To solicit insurance for the classes of business which the Company writes in the Agent’s territory and to bind, issue and deliver policies therefor which the Company may from time to time authorize to be issued and delivered.

(3) To collect, receive and receipt for premiums on such policies .... The Agency Agreement provided: The Agent will submit to the Company by the tenth of each month an account of all premiums on all business ⁴⁸⁰ except direct billed business, placed during the previous month or not previously reported.... ... [T]he balances due the Company ... shall be paid within the number of days specified in ... the declarations after the end of the month for which the account was submitted. The declarations, in turn, specified that the “Number of Days for Payment of Balances” was 45. This system of payment was known as the “Account Current System.” By way of example, the system required appellants to report to Hartford by February 10 all policies sold in January.

Appellants then had until March 15 to collect the premiums for those policies and remit them to Hartford. Since 1979, Hartford has permitted appellants to commingle premiums they collected for Hartford, before they become due, with other funds. Permission was granted by way of a letter, which stated: Consent is hereby given to commingle funds in your hands which are payable to us with other monies which you own or hold .... If such funds are deposited in an appropriate interest bearing account, you are authorized to withdraw such interest for your own use.

As part of this consent, however, we shall require that all funds payable to us will at all times be ascertainable from an examination of your books and records. This consent in no way alters the terms of our agency contract or your obligations under that contract to pay all monies due ... In early February of 1996, William R. Schinnerer notified Hartford that W.R. Schinnerer Companies would be unable to pay by February 15 what it owed for the policies sold for Hartford in December of 1995. Mr. Schinnerer indicated that $188,000 in premiums had been collected, but that the agency ⁴⁸¹ no longer had the money.

A similar problem arose in March of 1996. Mr. Schinnerer informed Hartford that the agency would not be able to timely remit $287,000 in premiums that it had collected for policies sold in January. We glean from the record no explanation as to where the money went. Hartford agreed to transfer the debt out of the Account Current System and into the Special Collections Department, and a new payment schedule was negotiated for the amounts due.

Appellants executed two promissory notes for the amounts due and made timely payments until January of 2000, when the notes were paid in full. Despite the new agreement, counsel for Hartford reported the matters to the Maryland Insurance Administration. By letter dated March 19,1996, counsel stated: On behalf of ITT Hartford, I .am submitting the following report, in accordance with Section 233B of the Maryland Insurance Code. 1 Please be advised that W.R. Schinnerer Companies, Inc. (the “Agency”), has failed to pay its accounts current due to ITT Hartford on February 15, 1996 and March 15, 1996. The Agency has advised ITT Hartford that it has collected premium money sufficient to pay these balances but that it is without the necessary funds to pay its accounts current on a timely basis.

ITT Hartford and the Agency have negotiated repayment terms for the balances, which aggregate $475,000. By letter dated April 10,1996, counsel for the MIA responded: This Division has received your referral concerning the above named agency. However, since an agreement was reached between Schinnerer and ITT Hartford covering the aggregate amount of unremitted premiums, this is now a ⁴⁸² matter involving the “extension of credit” which takes it out of the criminal sphere. As such, we will enter this information on our databases for information purposes only.

In June of 1996, appellants submitted to the MIA an application for renewal of the certificate of qualification held by W.R. Schinnerer Companies. Mr. Schinnerer signed the application as the “Licensee/Firm Representative.” In the section that preceded the signature, the applicant was asked to check boxes indicating “yes” or “no” in response to a list of questions. One of the questions asked: “Are you presently indebted to any insurer, agent, or broker, or has any demand been made upon you for overdue premiums?” The applicants answered “no.” Appellants timely paid the premiums they collected, in accordance with the Account Current System, until March of 1998. Early that month, Mr. Schinnerer informed Hartford that he would be unable to remit by March 15 the premiums collected for policies sold in January of 1998.

The record reflects that the agency was then in the process of moving to new offices. It had applied for a loan to pay for renovations, but the loan had not been approved. The monies collected for premiums were used to fund the renovations. Counsel for Hartford promptly reported the delinquency to the MIA.

In a letter dated March 26, 1998, counsel wrote: On behalf of The Hartford, I am submitting the following report, in accordance with Section 233B of the Maryland Insurance Code. Please be advised that W.R. Schinnerer Companies, Inc. (the “Agency”), has failed to pay, in full, its account current' due to The Hartford on March 15, 1998. The Agency has advised The Hartford that it has collected premium money sufficient to pay these balances but that it is without the necessary funds to pay the account current on a timely basis. The Hartford and the Agency are in the process of negotiating a plan for the repayment of this debt, which is approximately $314,000. ⁴⁸³ Negotiations to resolve the matter lasted several months.

Ultimately, Hartford agreed to transfer the debt out of the Account Current System and into the Special Collections Department, as it had done in 1996. In September of 1998, the agency executed a promissory note to Hartford for $807,201. While the negotiations were underway, the MIA launched an investigation. The investigators concluded that appellants had violated the Insurance Article by: failing to disclose the indebtedness to Hartford on the June 1996 application for renewal of W.R. Schinnerer Companies’ certificate of qualification; misappropriating, converting, or unlawfully withholding money belonging to Hartford; committing fraudulent or dishonest practices in the insurance business; failing or refusing to pay over on demand money belonging to Hartford; and otherwise showing a lack of trustworthiness or competence to act as an insurance producer. 2 In March of 1999, the Commissioner issued an administrative order revoking appellants’ certificates of qualification to act as an insurance agent.

Appellants requested a contested case hearing, and a hearing was held before an administrative law judge in January of 2000. The administrative law judge agreed that appellants had violated the Insurance Article. She recommended that the Commissioner revoke the certificates of qualification. 3 Appellants filed exceptions to the administrative law judge’s recommendation. The Commissioner thereafter reviewed the recommendation and determined that the revocation sanction was too severe in light of appellants’ “lengthy and unblemished past record.” The Commissioner thus issued a “Final Order” affirming the administrative law judge’s findings of fact and conclusions of law but rejecting the revocation recom ⁴⁸⁴ mendation and instead suspending the certificates of qualification for a period of two years.

Appellants appealed to the Circuit Court for Montgomery County 4 , which affirmed the Commissioner’s decision. They then filed the instant appeal. The revocation of the certificates of qualification has been suspended pending this Court’s decision. STANDARD OF REVIEW Section 2-215(h) of the Insurance Article provides that, in reviewing a decision of the Insurance Commissioner, [t]he court to which an appeal is taken may: (1) affirm the decision of the Commissioner; (2) remand the case for further proceedings; or (3) reverse or modify the decision of the Commissioner if substantial rights of the petitioners may have been prejudiced because administrative findings, inference, conclusions, or decisions: (i) violate constitutional provisions; (ii) exceed the statutory authority or jurisdiction of the Commissioner; (iii) are made by unlawful procedure; (iv) are affected by other error of law; (v) are unsupported by competent, material, and substantial evidence in view of the entire record, as submitted; or (vi) are arbitrary or capricious.

Md.Code (1997, 2001 Cum.Supp.), § 2-215(h) of the Ins. Art. As the Court of Appeals has summarized: Ordinarily, a final order of the Commissioner must be upheld on judicial review if it is legally correct and reasonably supported by the evidentiary record.... This standard of review is both narrow and expansive. It is narrow to the extent that reviewing courts, out of deference to agency ⁴⁸⁵ expertise, are required to affirm an agency’s findings of fact, as well as its application of law to those facts, if reasonably supported by the administrative record, viewed as a whole....

The standard is equally broad to the extent that reviewing courts are under no constraint to affirm an agency decision premised solely upon an erroneous conclusion of law.... Insurance Commissioner v. Engelman, 345 Md. 402, 411 , 692 A.2d 474 (1997) (citations omitted). DISCUSSION The Commissioner concluded that appellants violated subsections (2), (4), (6), (12), and (13) of § 10-126(a) of the Insurance Article. In pertinent part, the statute provides: (a) Grounds. — The Commissioner may ... revoke ... a license after notice and opportunity for a hearing ... if the ... holder of the license: (2) has intentionally misrepresented or concealed a material fact in the application for a license; (4) has misappropriated, converted, or unlawfully withheld money belonging to an insurer ...; (6) has committed fraudulent or dishonest practices in the insurance business; (12) has failed or refused to pay over on demand money that belongs to an insurer ...; (13) has otherwise shown a lack of trustworthiness or competence to act as an insurance producer!.] ⁴⁸⁶ Code (1997, 2001 Cum.Supp.), § 10-126 of the Ins.

Art. I. Appellants contend that the Commissioner’s decision was based at least in part on his belief that appellants owed a fiduciary duty to Hartford. They argue that this belief was erroneous as a matter of law and as a matter of fact. Appellants assert that their written agreement with Hartford, as well as MIA regulations, established that as a matter of law they were not required to hold, for Hartford’s benefit, the premiums they collected. Appellants further assert that the facts before the Commissioner established that, at least as to the funds in question, their relationship with Hartford was not a fiduciary relationship but that of a debtor and creditor.

This is so, they contend, because they negotiated an extension of credit from Hartford before the payments became due. The assertions are unfounded. As we have indicated, appellants and Hartford were parties to a written “Agency Agreement,” by which appellants were the agent and Hartford was the principal. An agency is “ ‘the fiduciary relation which results from the manifestation of consent by one person [the principal] to another [the agent] that the other shall act on his behalf and subject to his control and consent by the other so to act.’ ” Ins.

Co. of N. Am. v. Miller, 362 Md. 361, 373 , 765 A.2d 587 (2001) (citations omitted; emphasis added). See also Travel Comm., Inc. v. Pan Am. World Airways, Inc., 91 Md.App. 123, 161 , 603 A.2d 1301 (1992). The Court of Appeals has determined, moreover, that “[i]t is clear under the Code of Maryland Regulations (CO-MAR) that keeping funds ‘in trust’ is one of the duties of insurance agents.” Miller, 362 Md. at 377 , 765 A.2d 587 .

With the Agency Agreement, Hartford expressly authorized appellants to sell insurance policies and to collect premiums on the policies sold. It established the Account Current System for the remission of the collected premiums. Appellants contend that because Hartford permitted them to commingle ⁴⁸⁷ funds, and in light of the regulations promulgated by the Insurance Commissioner, they did not hold in trust for Hartford the premiums they collected. Nothing in the letter authorizing appellants to commingle funds supports this contention.

The 1979 letter from Hartford to appellants permits appellants to “commingle funds in your hands which are payable to us with other monies which you own or hold----” The letter contemplates that such funds will be held for Hartford until due. It states that, if the funds “are deposited in an appropriate interest bearing account, [appellants] are authorized to withdraw such interest for [their] own use.” The letter does not authorize appellants to put any portion of the principal to their own use. Indeed, it specifically requires that “all funds payable to us will at all times be ascertainable from an examination of your books and records.” The letter states that the authority to commingle funds “in no way alters the terms of our agency contract or your obligations under that contract to pay all monies due ... within the time limits set out in the contract.” Nor does any regulation promulgated by the Commissioner suggest that appellants are entitled to use the premiums before remitting the amount due to Hartford. To the contrary, the applicable regulations provide: .01 General Requirements.

B. Agents and brokers who do not make prompt remittance to principals and assureds of the funds shall deposit them in one or more appropriately identified accounts in a bank or banks