Southern Maryland Electric Cooperative, Inc. v. Travelers Insurance

Wilner, J., delivered the opinion of the Court. In October, 1961, appellant (SMECO) purchased a group life insurance policy, for the benefit of its employees, from appellee (Travelers). Effective September 30, 1979, SMECO discontinued the policy, replacing it with insurance from another company. The Travelers policy provided for both term insurance, paid for by SMECO, and "paid-up” insurance, paid for by the insured employees.

At some point, a dispute arose as to whether, upon termination of the group policy, the SMECO employees were entitled to discontinue their "paid-up” insurance and receive from Travelers the respective accumulated cash surrender values thereof, or whether such entitlement arose only upon termination of their employment with SMECO. SMECO, presumably on behalf of its employees, asserted the former; Travelers maintained the latter. ¹⁴² The dispute involved the validity and interpretation of the insurance contract in the light of certain statutory provisions. There are, of course, a number of avenues by which that dispute could have been judicially resolved, but SMECO chose none of them. Instead, it filed a complaint with the State Insurance Commissioner, invoking his authority under Md. Code art. 48A, § 55(2)(iv) to revoke or suspend an insurer’s certificate of authority if the insurer "[wjithout just cause unreasonably refuses or delays payment to claimants of the amount due them.” After a hearing on the matter, a hearing examiner for and on behalf of the Commissioner concluded that, although apparently authorized by the insurance contract, Traveler’s position was contrary to law — in particular art. 48A, §§ 414, 417, 418, and 435.

He therefore declared that its refusal to pay the cash surrender values to the requesting employees constituted a violation of § 55 (2) (iv), and, "in lieu of a statutory penalty” under § 55A of art. 48A, 1 ordered Travelers to permit the SMECO employees to "cash surrender their policies.” Travelers filed a timely appeal to the Baltimore City Court which, on August 25, 1981, reversed the Commissioner on two grounds. The court first found that the dispute involved "a legitimate legal issue as to the meaning of an insurance policy,” and that § 55, from which the Commissioner derived his jurisdiction in the matter, was an inappropriate basis or mechanism for resolving that issue. Second, it said, "even if he did have jurisdiction here, I think he has misconstrued the policy.” SMECO is now the appellant, arguing that whatever interpretation may be given to the language of the insurance contract, the obligation to permit the employees to terminate their "paid-up” insurance and receive the cash surrender value is required (1) by statute, (2) by common law, and (3) by equity. 2 We disagree and shall affirm. We ¹⁴³ believe that the Commissioner misconstrued the contract and the substantive statutory requirements, and, at least for that reason, he exceeded his authority under §§55 and 55A.

(1) The Insurance Contract The policy in question is labeled and denoted throughout as a "group policy.” It was issued to SMECO, as an employer, and insured the lives of SMECO’s employees for the benefit of those persons designated by the respective employees. The employees did not receive the policy itself, or even a copy of it; they received only a "Certificate of Insurance,” referring to the "Group Life Policy” and attesting to their being insured under it. The policy afforded an aggregate amount of life insurance (i.e., death benefit) for each SMECO employee equivalent to approximately double his annual salary, up to a maximum of $20,000. That level of insurance was to be provided by a combination of "paid-up” and term insurance.

Each participating employee could purchase "paid-up” — i.e., ordinary or whole — life insurance by contributing $1.00 per month per $1,000 of total insurance. The amount of "paid-up” insurance that he received for that contribution was set forth in a table included in the policy, and was dependent upon his age. The difference between the amount of "paid-up” insurance so purchased by the employee and the aggregate amount to which he was entitled under the policy was supplied by term insurance paid for by SMECO. The "group paid-up life insurance” purchased by the employees accrued a cash surrender value, also set forth in a table and based upon the age of the employee.

The policy anticipated the possibility that it might one day be discontinued and that from time to time the covered employees might retire or otherwise leave SMECO’s employ; and it contained a number of provisions dealing with those ¹⁴⁴ eventualities. In the section dealing with the "group term life insurance,” the policy provided (with certain exceptions and subject to certain conditions) that if an employee’s term insurance was terminated through discontinuance of or amendment to the policy or by reason of his leaving SMECO’s employ, he could convert that term insurance to an individual insurance policy. With respect to the "paid-up” insurance, three provisions are particularly pertinent. The section dealing with discontinuance of the policy provided that such discontinuance "shall not affect the Paid-up Life Insurance, if any, previously purchased for any Employee hereunder and in force at the date of such discontinuance.” The policy also made clear, however, that "[ajfter the Term Life Insurance on his life shall have terminated” (as well as under four other conditions), the employee may not purchase any more paid-up insurance.

Finally, the policy contained a section setting forth the circumstances under which an employee could surrender his "paid-up” insurance and demand a cash payment in lieu thereof. That section provided, in relevant part: "Upon receipt by the Company of the written election of a former Employee, made (a) after discontinuance of premium payments for his Term Life Insurance, except in the case of a Retired Employee, and (b) after termination of his employment with the Employer, and (c) not earlier than One year from the date last worked in the event that he shall have been continuously disabled from the date of termination of employment, to receive, in lieu of the Paid-up Life Insurance in force on his life, the cash value of such Insurance, the Company will pay such cash value to him. If the amount of Paid-up Life Insurance in force on the life of an Employee is less than One Hundred Fifty Dollars — and either his Term Life Insurance ¹⁴⁵ and his employment shall have terminated, or his Term Life Insurance shall have terminated and this policy shall have been discontinued — the Company may, at its option without election by the Employee, but without any obligation so to do, cancel his Paid-up Life Insurance and pay to the former Employee the cash value of such Insurance....” (Emphasis supplied.) These various provisions, read in pari materia with each other, establish two important things with respect to the "paid-up” insurance. They first establish that, unlike the term insurance, the "paid-up” insurance actually in force at the time was not affected by a discontinuance of the master policy.

Although the employee was precluded from adding to his "paid-up” insurance following such discontinuance, what he had at the time remained in full force and effect. It was not terminated and there was no requirement that it be converted into another policy. All of this is also reflected in the Agreement providing for the discontinuance of the policy signed by SMECO and Travelers on September 28, 1979. The second point made clear from these provisions emanates from the first.

Because there was no automatic termination of the "paid-up” insurance, the policy set forth the conditions under which that insurance may be "surrendered” and the cash surrender value demanded. Discontinuance of the master policy is not one of those stated conditions, however; and it does not appear that the omission was inadvertent. Cancellation of the "paid-up” insurance and payment of the cash surrender value upon termination of the master policy was provided for, but only where the amount of "paid-up” insurance involved was less than $150; and even then the option to cancel was given to Travelers, not to SMECO or its employees. It seems clear to us from these provisions that, in terms of the contract itself, there is no obligation on the part of Travelers to accept surrender of the "paid-up” portion of the insurance and pay out the cash surrender values merely because the master policy has been discontinued.

The ¹⁴⁶ employees may surrender that insurance upon termination of their employment with SMECO; but until then, it remains in effect. (2) Statutory Requirements The State Insurance Code, art. 48A, is divided into forty subtitles. Subtitle 23, captioned "Life Insurance and Annuities,” consists of sections 386-416. It applies, according to § 386, "to contracts of