Travelers Indemnity Co. v. Merling

ELDRIDGE, Judge. This case concerns the rights of an independent insurance agent, whose agency was lawfully terminated by the insurer, with respect to insurance policies which the agent had originally produced but which were renewed by the insurer after the termination of the agency. The plaintiff Bernard W. Merling is an independent insurance agent, and, as such he may place his clients with one of several insurance companies, depending upon the best interests of those clients. Merling had entered into an agency agreement with the defendant insurance companies, who are the Travelers Indemnity Company, the Charter Oak Fire Insurance Company, and the Phoenix Insurance Com ³³³ pany (hereinafter collectively referred to as “Travelers”). 1 The agency agreement authorized Merling to solicit, bind and issue Travelers’ insurance policies for certain types of risks.

In exchange for selling Travelers’ insurance policies, Merling was entitled to receive as commissions a percentage of the premiums paid on all policies originated or renewed through Merling. The agency agreement also provided for termination of the agency relationship upon 120 days notice by either party. On September 19, 1986, Travelers notified Merling by letter that he was to be terminated effective January 30, 1987. A subsequent letter extended this date to February 20, 1987.

The reason for his termination, as stated in the original letter, was Merling’s inability to produce any quantity of certain types of business. Although Merling complained to Maryland’s Insurance Commissioner, the Commissioner concluded that his termination was lawful under the Insurance Code, Maryland Code (1957, 1991 Repl.Vol.), Art. 48A, § 234B. Merling did not seek judicial review of the Commissioner’s decision pursuant to Art. 48A, §§ 40 and 234C. Merling has not, and indeed could not, collaterally challenge that administrative determination by the Insurance Commissioner in the present action.

Travelers’ termination letter advised Merling that, “in line with contract provisions [of the agency agreement] we will offer to renew all existing business which meets our current underwriting standards for one year after the effective date of this termination.” Travelers, in accordance with that agreement, paid Merling the renewal commissions for the one year from February 20, 1987, to February 20, 1988. During that one year period, Merling was able to place some of his clients with other insurance companies, either directly or through another agent. Nevertheless, ³³⁴ many of Merling’s clients chose to remain with Travelers. 2 Merling wrote a letter to these clients stating that Travelers “has discontinued its business relationship with” Merling, that Merling had originally placed the clients with Travelers as it was in their best interests, and that it was in their best interests to stay with Travelers. After February 20, 1988, Travelers notified Merling’s clients directly that the business relationship between Travelers and Merling had ended.

The letter also stated that, as required by law, their policies would continue to be renewed. The letter, however, informed the insureds that Merling was “in the best position to handle your insurance needs, including placing your insurance with another company.” The letter further stated that “[w]e urge you to contact your insurance agent for counseling ... or if you wish to continue insuring with The Travelers, a bill will be sent to you shortly.” Those insureds deciding to remain with Travelers had their policies recoded to a house account, with no agent listed on the policy. The policies were renewed directly through Travelers. No renewal commissions on these policies were paid to Merling or to any other agent after February 20, 1988.

On December 13, 1988, Merling instituted in the Circuit Court for Baltimore City the present action against Travelers, alleging that Travelers had committed various torts with regard to Merling’s property rights and contract rights. The complaint initially set forth in detail the facts as summarized above. Théreafter, count one of the complaint, labeled “Conversion,” asserted that the defendants had converted Merling’s “personal property by appropriating to their own exclusive use and ownership the expira ³³⁵ tions entrusted to them by Plaintiff.” 3 Count three, labeled “Intentional Interference With Property Rights,” asserted that Merling “was the sole and exclusive owner of his work product, called ‘expirations,’ ” and that the “[defendants interfered with and deprived Plaintiff of his property right to his expirations.” The substance of both count one and count three was the same, namely that Merling’s expirations were “converted” or “interfered with” by Travelers’ action in sending renewal policies and premium invoices to Merling’s former clients in such a manner that the business was not renewed through Merling and was renewed as house accounts. 4 The second count of Merling’s complaint asserted that Travelers had intentionally interfered with the contractual or economic relations between Merling and his clients, and the fourth count alleged that Travelers had violated the federal Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (“RICO”). Merling sought both compensatory and punitive damages.

Travelers filed a motion to dismiss, and Merling filed a motion for summary judgment with regard to liability. The circuit court granted Merling’s motion for summary judgment on the first three counts, concluding that Merling was “entitled to his commissions ad infinitum ... [a]s long as that customer continues the business with that company____” The circuit court conditioned Merling’s entitlement to damages upon Merling’s continued servicing of those policies. The circuit court granted Travelers’ motion to dismiss with respect to the RICO count and the request for punitive damages. ³³⁶ A separate trial was then held before a different judge on Merling’s damages. At the conclusion of the trial on damages, the circuit court entered judgment against Travelers in the amount of $59,892.02 plus interest.

Both parties appealed to the Court of Special Appeals, and, prior to oral argument in the Court of Special Appeals, both sides petitioned this Court for a writ of certiorari. We granted both petitions. I. In the circuit court and in this Court, Merling argued that common law principles gave him exclusive ownership of his expirations. He contended that Travelers’ use of those expirations to contact his insureds tortiously violated his property rights and amounted to a conversion of his property.

In this Court, Merling insists that “[t]he claims below were not predicated upon a right to renewal commissions based on contract. Rather, the claims below were in tort, for the conversion of an independent agent’s expirations, for intentional interference with his contractual relations with his clients (the insureds), and for the intentional interference with his property rights.” 5 (Merling’s brief, pp. 1-2). Consequently, as Merling’s counsel conceded at oral argument, the case primarily turns on the nature of Merling’s expirations as a property right. ³³⁷ The term “expirations” has a definite meaning and, as stated in V.L. Phillips & Co. v. Pennsylvania Threshermen, Etc., 199 F.2d 244, 246 (4th Cir.1952), cert, denied, 345 U.S. 906 , 73 S.Ct. 645 , 97 L.Ed. 1342 (1953), includes “the records of an insurance agency by which the agent has available a copy of the policy issued to the insured or records containing the date of the insurance policy, the name of the insured, the date of its expiration, the amount of insurance premiums, property covered and terms of insurance.” See also, e.g., Fred Miller Co. v. Empire Fire & Marine Insurance Co., 503 F.2d 751 , 752 n. 1 (8th Cir.1974); Woodruff v. Auto Owners Ins. Co., 300 Mich. 54, 59-60 , 1 N.W.2d 450, 453 (1942); Kerr & Elliott v. Green Mountain Mut.

Fire Ins. Co., Ill Vt. 502, 510, 18 A.2d 164,168 (1941); Shrewsbery v. National Grange Mut. Ins., 183 W.Va. 322 , 395 S.E.2d 745, 749 (1990); Blume v. Curson, 447 S.W.2d 727, 730 (Tex.App.1969); Garrett v. American Family Mutual Insurance Co., 520 S.W.2d 102 , 108 n. 1 (Mo.App. 1974); Matter of Estate of Corning, 108 A.D.2d 96, 99 , 488 N.Y.S.2d 477, 480 (1985); Calley v. United States, 220 F.Supp. Ill, 113-114 (S.D.W.Va.1963). This bundle of information is recognized in the insurance field as a “valuable asset in the nature of good will.” V.L. Phillips & Co. v. Pennsylvania Threshermen, Etc., supra, 199 F.2d at 246 .

See also Fred Miller Co. v. Empire Fire & Marine Insurance Co., supra, 503 F.2d at 752 n. 1; Shrewsbery v. National Grange Mut. Ins., supra, 395 S.E.2d at 750 ; Calley v. United States, supra, 220 F.Supp. at 114. It provides the insurance agency with the opportunity to contact the insured prior to termination of a policy and either renew the policy or secure another policy with a different insurance company. The custom and usage in the insurance trade recognizes this asset as a property right belonging to the agent.

See Fred Miller Co. v. Empire Fire & Marine Insurance Co., supra, 503 F.2d at 754-755 ; Spier v. Home Insurance Company, 404 F.2d 896, 898 (7th Cir.1968); V.L. Phillips & Co. v. Pennsylvania Thresher- ³³⁸ men, Etc., supra, 199 F.2d at 246 ; Woodruff v. Auto Owners Ins. Co., supra, 300 Mich, at 59-60 , 1 N.W.2d at 453 ; Kerr & Elliott v. Green Mountain Mut. Fire Ins. Co., supra, 111 Vt. at 510 , 18 A.2d at 168 ; Shrewsbery v. National Grange Mut.

Ins., supra, 395 S.E.2d at 750 ; Calley v. United States, supra, 220 F.Supp. at 114; Hedlund v. Farmers Mutual Automobile Insurance Company, 139 F.Supp. 535, 537 (D.Minn.1956). The cases refer to this custom and usage in the insurance trade as the “American Agency System.” See, e.g., Fred Miller Co. v. Empire Fire & Marine Insurance Co., supra, 503 F.2d at 754-755 ; Spier v. Home Insurance Company, supra, 404 F.2d at 898 ; Woodruff v. Auto Owners Ins. Co., supra, 300 Mich, at 59-60 , 1 N.W.2d at 453 ; Hedlund v. Farmers Mutual Automobile Insurance Company, supra, 139 F.Supp. at 537 . Under American common law principles, i.e., under the American Agency System, if an insurance company terminated an agent, the company was prohibited from interfering with the agent’s property right in the expirations.

This meant that the company could not use the expirations to directly solicit the insureds or to refer them to other agents who represented the company. V.L. Phillips & Co. v. Pennsylvania Threshermen, Etc., supra, 199 F.2d at 248 (“The [company] had no right to solicit directly from the insured nor could it do so indirectly by appointing plaintiffs’ former agents and thereby acquire through them the expirations and use them to the prejudice of plaintiffs”); Woodruff v. Auto Owners Ins. Co., supra, 300 Mich, at 60 , 1 N.W.2d at 453 (“the so-called clientele ... of an insurance agent may be preserved to him as far as possible upon the termination of his agency”). See also Calley v. United States, supra, 220 F.Supp. at 114.

The result was that, upon termination of the agent, a majority of the policies which originated from that agent were not renewed. 6 ³³⁹ Even though the American Agency System gave the agent a property right in his expirations, several courts concluded that the insurance company was permitted, if not required, to contact the insureds directly after an agent’s termination. See Spier v. Home Insurance Company, supra, 404 F.2d at 899 (it was the company’s duty to inform its insureds of the termination, and the American Agency System did not change that duty); Hedlund v. Farmers Mutual Automobile Insurance Co., supra, 139 F.Supp. at 537 (letter to the insureds was sent without malice and had no ulterior purpose other than to provide the insureds with important information); Woodruff v. Auto Owners Ins. Co., supra, 300 Mich, at 60 , 1 N.W.2d at 453 (American Agency System “does not cut off all right of the insurer to contact persons to whom its policies have been issued through the discontinued agency”). The above-cited cases indicate that even under common law principles, the agent’s right to his expirations was not absolute.

Moreover, Maryland, like many other states, has legislatively changed the common law American Agency System. By Ch. 417 of the Acts of 1970, the General Assembly added §§ 234A, 234B and 234G to the Insurance Code, Art. 48A. Section 234A was enacted to prohibit insurance companies from engaging in numerous underwriting practices deemed arbitrary or discriminatory, including the practice of what is called “redlining,” whereby insurers would refuse to renew or write policies based on the geographic area in which the insureds or applicants lived. Section 234A, inter alia, required insurers to renew existing policies unless the insurers could demonstrate certain economic or business reasons for the refusal to renew.

Section 234B ³⁴⁰ protected insurance agents from arbitrary or discriminatory termination by insurers. Section 234C granted to the Insurance Commissioner the power to order an insurance company either to accept the risk of an insured or the business from an agent if the Commissioner finds a violation of either § 234A or § 234B. Sections 234A, 234B, and 234C, as originally enacted in 1970, still did not completely prevent the nonrenewal of insurance policies for reasons unrelated to legitimate underwriting considerations. Under the American Agency System, the insurance companies could not use the expirations of a terminated agent to renew the policies of insureds.

Therefore, when an agent in a particular geographic area was terminated for a legitimate reason, the effect was that the insurance policies of that agent’s clients were not renewed. By Ch. 73 of the Acts of 1972, the General Assembly amended § 234B so that a compromise was reached between the agent’s right to his expirations following termination and the State’s interest in protecting the insureds from cancellations or nonrenewals. As amended in 1972, the statute guarantees that the policies produced by the agent will be renewed through the agent for one year following the agent’s termination. 7 The statute also per ³⁴¹ mits the agency agreement to set forth a longer period. 8 Thus, the agent is