Smith v. Underwriters at Lloyd's of London

RODOWSKY, Judge. This case involves surplus line property insurance. In that context, “ ‘[s]urplus line’ insurance means the full amount or policy of insurance required to protect the interest of the insured which cannot be obtained ... from insurers authorized to do business in this State.” Md.Code (1957, 1991 Repl.Vol.), Art. 48A, § 184(a). 1 Section 240A(a)(3) requires that an “insurer,” giving notice of intention to cancel or not to renew a policy of property insurance “issued in this State,” is obliged to see that the notice “is sent to the insured not less than 45 days prior to the date of the proposed cancellation or expiration of the policy, as the case may be.” At issue here is whether the insurer on a surplus line policy covering property in Maryland is obliged to give the forty-five day notice required by § 240A(a)(3). As explained below, we shall hold that the surplus line carrier is not so obliged.

Appellant, Harry Smith (Smith), owns the premises 2509-13 Druid Hill Avenue in Baltimore City which he had ⁶⁰² acquired in 1974. Smith conducted an auto body shop business out of the improvements on those premises. Smith’s insurance broker, Mayer & Steinberg, Inc. (M & S), had arranged for fire insurance through All Risks, Ltd. (All Risks), a Maryland licensed surplus line broker. All Risks, in turn, had placed that coverage with a syndicate, described in the policy as “certain Underwriters at LLOYD’S, LONDON,” headed by John Michael Poland (Poland), a resident of England.

The coverage was renewed annually. It is the policy for the period April 2, 1984, to April 2, 1985 (the Policy) with which we are concerned here. All Risks caused the premises to be inspected in July 1984, resulting in requests that Smith make certain repairs. Absent receipt of any advice from Smith that the repairs had been made, All Risks, acting for Poland, mailed notice to Smith on November 14, 1984, that the Policy was can-celled effective November 24,1984. 2 Smith’s premises were heavily damaged by fire on February 10, 1985.

Smith brought this action in the Circuit Court for Baltimore City joining, inter alia, M & S and Poland. 3 The theory of Smith’s case against Poland was that § 240A(a)(3) required Poland, acting through All Risks, to give forty-five days notice of cancellation, which had not been done. 4 The ⁶⁰³ circuit court granted Poland’s motion for summary judgment on the ground that subtitle 15 of Art. 48A, containing § 240A, “is inapplicable to surplus carriers.” The circuit court certified the judgment dismissing Poland from the ease as a final judgment. Maryland Rule 2-602. Aggrieved by that judgment, Smith and M & S, which remains a defendant in the action, noted appeals to the Court of Special Appeals, where they filed separate briefs. Thereafter, but before consideration of the matter by the intermediate appellate court, this Court granted Poland’s petition for the writ of certiorari in order to consider this important question under the insurance laws.

The Insurance Commissioner of Maryland has filed an amicus curiae brief with this Court in support of the position advocated by Poland. The problem here is one of statutory construction. Before presenting the contentions of the parties, it will be helpful to define terms as they will be used hereafter. “The ‘insurance business’ includes the transaction of all matters pertaining to a contract of insurance, both prior to and subsequent to the effectuation of such a contract, and all matters arising out of such a contract or any claim thereunder.” § 8(a). “ ‘Insurance’ is a contract whereby one undertakes to indemnify another or pay or provide a specified or determinable amount or benefit upon determinable contingencies.” § 2. An “ ‘[ijnsurer’ includes every person engaged as indemnitor, surety, or contractor in the business of entering into contracts of insurance.” § 3.

Poland is an insurer, engaged in the insurance business. Under Art. 48A insurers are classified as to their place of legal origin. “A ‘domestic’ insurer is one formed under the laws of this State.” § 6(1). “A ‘foreign’ insurer is one formed under the laws of any jurisdiction other than this State.” § 6(2). “An ‘alien’ insurer is one formed under the laws of any country or jurisdiction other than the United ⁶⁰⁴ States of America, its states, districts, territories, and commonwealths.” § 6(3). Insurers are also classified as “authorized” or “unauthorized.” “An ‘authorized’ insurer is one duly authorized, by subsisting certificate of authority issued by the [State Insurance] Commissioner [of Maryland], to engage in the insurance business in this State,” while “[a]n ‘unauthorized’ insurer is one not so authorized.” § 7(1) and (2). Poland is an alien, unauthorized insurer.

In the major revision of the Insurance Code enacted by Chapter 553 of the Acts of 1963, the General Assembly for the first time added a “Surplus Lines” subtitle, subtitle 13, currently §§ 183 through 199, and an “Unauthorized Insurers” subtitle, subtitle 14, currently §§ 201 through 211A. 5 Surplus lines insurance, by definition, is that which cannot be obtained from authorized insurers, so that surplus lines insurers are always unauthorized insurers. § 184(a) and (b). If surplus line insurance is procured through a broker, that broker must be licensed as a surplus lines broker in Maryland. § 184(b)(1). The surplus lines broker must file an affidavit with the Commissioner demonstrating that the insurance is eligible as a surplus line. § 185. A surplus lines broker may not “place surplus line insurance with an unauthorized insurer which has not been approved by the Commissioner as a surplus line insurer,” or “when that broker knows, or reasonably should have known, that the insurer was in an unsafe or insolvent financial condition.” § 190(a) and (d).

It is the surplus lines broker who “shall promptly deliver to the insured evidence of the insurance.” § 191(a). The insurance contract or confirmation must state, conspicuously and in boldface on the first page, the following: “ ‘This insurance is issued by a nonadmitted insurer not under the jurisdiction of the Maryland Insur ⁶⁰⁵ anee Commissioner.’ ” § 186. 6 Section 193 imposes a recordkeeping obligation on the surplus lines broker who is to report premium receipts and pay the surplus line tax computed thereon. §§ 193 through 195. The Commissioner may revoke or suspend a surplus lines broker’s certificate for various violations. § 196. Surplus lines insurers are expected to appoint the Commissioner as agent for accepting service of process in this State. § 197.

The device for achieving compliance, similar to that utilized in § 190, is a prohibition against a surplus line broker’s placing a risk with a surplus line insurer who has not so appointed the Commissioner. § 197. Within the above-described scheme is § 187, on which Smith and M & S place heavy emphasis. That section reads: “(a) Insurance contracts procured as surplus line coverages from unauthorized insurers in accordance with this subtitle shall be fully valid and enforceable as to all parties, and shall be given acceptance and recognition in all matters and respects to the same effect as like contracts issued by authorized insurers. “(b) No insurance contract entered into in violation of this subtitle shall preclude the insured from enforcing his rights thereunder in accordance with the terms and provisions of said contract.” This section has never been amended by the General Assembly or construed by a Maryland appellate court in a reported opinion since its enactment in 1963. Subtitle 14, “Unauthorized Insurers,” as enacted in the 1963 revision, consisted of two parts, a prohibition against representing an unauthorized insurer and the former Unauthorized Insurers Process Act.

The prohibition continues to date as § 201(a), reading in relevant part: “No person shall in this State directly or indirectly act as agent for, or otherwise represent or aid on behalf of ⁶⁰⁶ another, any insurer not then authorized to transact insurance business in this State, in the solicitation, negotiation or effectuation of insurance ... inspection of risks, fixing of rates, investigation or adjustment of losses, collection of premiums, or in any other manner in the transaction of insurance business with respect to subjects of insurance resident, located or to be performed in this State. “This section shall not apply to: “(2) Surplus lines insurance, and other transactions as to which certificate of authority is not required of an insurer as stated in § 43.” The prohibition in § 201 complements one found in Title 3, “Insurers: Authorization and General Requirements,” where § 42 prohibits engaging “in the insurance business in this State except as authorized by a subsisting certificate of authority----” § 42(1). Section 43 provides certain exceptions from the prohibition of § 42, including “[transactions pursuant to surplus lines coverages lawfully written pursuant to Subtitle 13 of this article.” § 43(3). The Unauthorized Insurers Process Act of the 1963 revision was repealed and reenacted by Chapter 487 of the Acts of 1968. Today the provisions of subtitle 14 that follow § 201, namely, §§ 202 through 211A, deal with substituted service on unauthorized insurers, through the Commissioner and through the Secretary of State, and those provisions deal with the collection of premium tax on policies that might have been written by unauthorized insurers.

As a result of the 1968 amendment, an exclusion from the former Unauthorized Insurers Process Act for surplus lines insurers has been enlarged to the entire subtitle. Section 211A states that “[t]he provisions of this subtitle [14] shall not apply to ... [insurance effectuated in accordance with the Surplus Line Insurance Law, Subtitle 13.” § 211A(d). In the 1963 revision of the Insurance Code the Unfair Trade Practices subtitle, subtitle 15, contained no provision requiring a minimum period of notice for cancellation or ⁶⁰⁷ non-renewal for any type of coverage. The provision at issue here, requiring a minimum period for notice of cancellation or non-renewal of property insurance was enacted by Chapter 436 of the Acts of 1971.

It is an outgrowth of earlier provisions, also codified in subtitle 15 as § 240A, which regulated cancellation and non-renewal of motor vehicle policies. Currently § 240A(a) provides in relevant part as follows: “(a)(1) Whenever an insurer gives notice of its intention to cancel or not to renew a policy of insurance other than life, health, motor vehicle liability insurance issued to any resident of a household in Maryland as set forth in § 240AA ... or before it cancels any such policy of insurance for a reason other than for nonpayment of premium, the insurer shall notify the insured of his possible right to replace such insurance through the Maryland property insurance availability plan, or any other plan, if there be such, and he may be eligible therefor. “(2) .... “(3) The insurer shall see that written notice of intention to cancel for a reason other than nonpayment of premium or notice of intention not to renew a policy issued in this State is sent to the insured not less than 45 days prior to the date of the proposed cancellation or expiration of the policy, as the case may be. Notice given the insured by an insurance broker or agent on behalf of the insurer shall be deemed to have been given by the insurer for the purposes of this subsection; provided, however, that no such notices shall be required where the agent or broker has replaced the insurance.” Smith and M & S, the appellants, argue that Poland is an insurer as defined in § 3, that his activity in issuing a policy to Smith and receiving premiums for insuring a risk in Maryland is the business of insurance as defined in § 8, and that no provision in subtitle 15, “Unfair Trade Practices,” excepts or excludes from its imposition of requirements on insurers those insurers who write surplus lines business in Maryland. Pointing to the express exceptions for surplus ⁶⁰⁸ lines found in §§ 43, 201 and 211A, the appellants submit that the General Assembly makes specific exception for surplus lines business when that is the legislative intent.

Appellants cite Admiral Ins. Co. v. John Stromberg & Assocs., 77 Md.App. 726 , 551 A.2d 923 , cert, denied, 315 Md. 691 , 556 A.2d 673 (1989), where the Court of Special Appeals applied § 240A to a policy of surplus line property insurance placed by All Risks with an unauthorized, foreign insurer. 7 Finally, appellants contend that, because § 240A undeniably applies to policies written on Maryland risks by authorized insurers, § 187(a) produces the same result for surplus lines insurers whose contracts “shall be given acceptance and recognition in all matters and respects to the same effect as like contracts issued by authorized insurers.” Poland’s position is twofold. He first advances a geographical jurisdiction argument, submitting that the Policy was not issued in Maryland. Next, he argues that no part of subtitle 15 applies to surplus lines insurers because the totality of regulation intended by the General Assembly to apply to surplus lines business is found exclusively in subtitle 13.

Both Poland and the Commissioner note the endorsement required by § 186 that advises the policyholder that the surplus line insurer is “ ‘not under the jurisdiction’ ” of the Commissioner. Both Poland and the Commissioner submit that, underlying the absence of regulation of surplus lines insurers, relative to that of authorized insurers, is the public policy of making available to Maryland residents coverages that would not otherwise be available. Poland and the Commissioner submit that, were requirements such as a forty-five day minimum notice period ⁶⁰⁹ applied to surplus lines, the unauthorized carriers would not make their policies available to the substandard risk market, so that the object of subtitle 13 would be defeated. We agree with portions of the arguments advanced by all of the parties.

It is not necessary, however, in this case to make a holding as broad as the parties would have us make it. We do not accept Poland’s geographical jurisdiction argument. By having All Risks cause the Policy issued by Poland to be delivered to Smith in Maryland on a Maryland risk for a premium ultimately to be paid to Poland by a Maryland resident, Poland’s contacts with Maryland are sufficient to permit Maryland to legislate concerning the terms and provisions of the Policy. The true legal issue in this case is whether the General Assembly has done so in § 240A. 8 The exception from the requirement for a certificate of authority, found in § 43(3), with respect to surplus lines “lawfully written pursuant to Subtitle 13,” and the similar exception for “[ijnsurance effectuated in accordance with ...

Subtitle 13,” found in § 211A(e), from the requirements of subtitle 14, dealing with unauthorized insurers, do indicate that the rules relating to surplus line carriers will be found in subtitle 13. But that indication does not neces ⁶¹⁰ sarily exclude regulation affecting surplus lines elsewhere in the Insurance Code, e.g., among Unfair Trade Practices. Similarly, the argument regarding the Commissioner’s jurisdiction fails to appreciate the significance of private enforcement of statutorily created rights. The Commissioner’s regulatory authority over insurers is ultimately enforced by the sanctions of revocation or suspension of the certificate of authority. § 55.

Although the regulation of authorized insurers, particularly as to the sanctions of suspension or revocation, is not applicable to unauthorized insurers, it does not follow that the General Assembly forever renounced, by adopting subtitle 13, any statutory regulation of policies issued by surplus line carriers on Maryland risks,