Title: American Liberty v. Cooper

State: maryland

Issuer: Maryland Supreme Court

Document:

American Liberty Financial Services v. Melvin Edward Cooper
No. 62, Sept. Term, 2000
Premium finance company — must give notice of intent to cancel policy for non-payment of repayment installment
and may not cause policy to be canceled as of a date prior to expiration of notice period.
Circuit Court for Wicomico County
Case No. C971421
IN THE COURT OF APPEALS OF MARYLAND
No. 62
September Term, 2000
______________________________________
AMERICAN LIBERTY FINANCIAL
SERVICES, INC.
v.
MELVIN EDWARD COOPER
______________________________________
Bell, C.J.
Eldridge
Raker
Wilner
Cathell
Harrell
Rodowsky, Lawrence F. (retired,
 specially assigned),
   JJ.
______________________________________
Opinion by Wilner, J.
______________________________________
Filed: March 2, 2001
 As part of the ongoing code revision process, the provisions of Article 48A were recodified in
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the Insurance Article, effective October 1, 1997.  No substantive changes were made to the law dealing
with premium finance companies.  Because Article 48A no longer exists, we shall refer, whenever possible,
to the sections of the Insurance Article, notwithstanding that the contract at issue is governed by the former
provisions of Article 48A.
We deal here with the construction of those parts of former Maryland Code, Art. 48A, § 486G,
currently codified as Insurance Article, §§ 23-402 and 23-403,  which require a premium finance company
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to give to its customer at least 10 days written notice of its intention to cancel the insurance policy it has
financed.  The question is whether the statute precludes the company from setting as the effective date of
the cancellation a date prior to the end of the notice period.  The Circuit Court for Wicomico County
answered that question in the affirmative.  We agree and shall therefore affirm.
BACKGROUND
Premium finance companies play an important role in the implementation of Maryland’s compulsory
motor vehicle insurance law.  In order to provide a fund for the payment of legitimate claims made by
persons injured through the operation of motor vehicles, Maryland Code, § 17-104 of the Transportation
Article, requires the owner of every motor vehicle to maintain in effect certain financial security.  With an
exception not relevant here, that security must be in the form of a motor vehicle liability insurance policy
containing at least the minimum coverages specified in § 17-103 of that Article.  If that required security
lapses or is terminated, the registration of the vehicle is automatically suspended as of the date of lapse or
termination (§ 17-106), and, upon notice by the Motor Vehicle Administration, the owner must, within 48
hours, surrender all evidence of the registration.  If the owner fails to do so, the Administration may suspend
his or her driver’s license.  Lapse or termination may also result in a civil penalty of $150 for the first 30
 The interest charged on the loan at issue was at the rate of 26.16% per annum.
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days of non-coverage and $7 per day thereafter, up to a maximum of $2,500.  See § 17-106.  Any person
who drives a vehicle, knowing or having reason to know that the registration of the vehicle has been
suspended pursuant to § 17-106, is guilty of a misdemeanor and, for a first offense, is subject to
imprisonment for one year and a fine of $1,000.  See §§ 17-107(a) and 27-101(h).
To the extent that insurance companies have insisted on receiving in advance the full amount of the
premiums due on the policy, a problem is created for both fleet and individual owners who cannot afford
such an outlay.  It is a special problem for persons insured by the Maryland Automobile Insurance Fund
(MAIF), which is precluded by law from accepting installment payments or otherwise financing premiums.
See Insurance Article, § 20-507(f). To meet that need, premium finance companies were formed.  Their
business is to lend money to persons for the purpose of purchasing liability insurance; they pay the premium
to the insurance company and are then reimbursed through a down payment and monthly installments made
by the insured.  They make their profit from the higher-than-average interest charged on the loan,  but their
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real protection in the event of a  default lies in their ability to cancel the policy if the insured fails to make
the installment payments when due and to receive back from the insurance company, as an assignee or on
behalf of the insured, the unearned premiums as of the date of cancellation.  To that extent, the loan is fully
secured.
Until 1964, premium finance companies were largely unregulated in Maryland, and, as we pointed
out in Gov’t Employees Ins. v. Taylor, 270 Md. 11, 17, 310 A.2d 49, 52 (1973), the result was not only
the exaction of usurious interest and excessive service charges but the danger that flowed from the premium
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finance company’s right, under its contract, to cancel the insurance policy without notice to the insured
when a repayment installment was not made.  The effect of that, we observed, was to leave the insured
unaware that he or she was without coverage and also to jeopardize the protection that the required
security law afforded to innocent victims of the formerly-insured’s negligence.
In 1964, the General Assembly added §§ 486A through 486G to Article 48A of the Code, through
which, among other things, it (1) required that premium finance companies register with the Insurance
Commissioner, (2) limited the fees, interest, and late charges that those companies could charge, (3)
required that not less than 10 days written notice be mailed to the insured of the company’s intent to cancel
the policy unless the defaulted installment payment is received within that period, and (4) provided a
procedure for the company to cancel the policy after expiration of the 10-day period and receive from the
insurer the gross unearned premiums.   See 1964 Md. Laws, ch. 141.  With certain modifications, that is
the law now codified in title 23 of the Insurance Article.
 This case arose from a premium finance agreement entered into on January 30, 1997, between
Melvin Cooper and American Liberty Financial Services, Inc. (ALFS) to finance the $2,565 premium that
Cooper owed to MAIF for the policy year January 30, 1997 through January 30, 1998.  Under that
agreement, ALFS paid the $2,565 to MAIF, Cooper made a down payment of $285 to ALFS, and he
agreed to make 10 monthly payments of $256.22 each, commencing February 20, 1997.  The amount
payable by Cooper included a $20 service fee and $262.20 in interest, the maximum amounts allowable
under the statute.  See Insurance Article, §§ 23-303 through 23-305.  Cooper also agreed to pay a
delinquency charge, for any installment in default for more than five days, in an amount equal to 5% of the
 Insurance Article, § 23-306 allows a delinquency charge of the lesser of 5% of the installment
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or $5.  Section 23-307 allows a cancellation charge in an amount equal to the difference between the
delinquency charge imposed under § 23-306 and $10.
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installment payment, and a cancellation charge in the maximum amount allowed by law.3
The relevant statute in effect at the time, § 486G of Article 48A (current §§ 23-402 and 23-403
of the Insurance Article) provided, in relevant part, that:
(a) The insurance contract may not be canceled by a premium finance company unless the
cancellation “is effectuated in accordance with this section.”
(b) “Not less than ten (10) days’ written notice shall be mailed to the insured of the intent of the
premium finance company to cancel the insurance contract . . . unless the defaulted installment payment is
received within said ten (10) day period.” 
(c) “After expiration of such ten (10) day period, the premium finance company may thereafter
cancel by submitting to the insurer a notice of cancellation, specifying the effective date of such cancellation,
and the premium finance company shall mail a copy of the cancellation notice to the insured at his last
known address” (emphasis added); and
(d) “If the insurer receives a copy of the cancellation notice issued under subsection (c) . . . within
30 days after the effective date of cancellation specified in the notice, the insurance contract shall be
cancelled effective on the date the notice is received by the insurer.”
In conformance with those provisions, the premium finance agreement contained a power of
attorney authorizing ALFS to cancel the policy in the event of “a default in payment of more than 5 days
of any installment in full” but further provided, in relevant part, that:
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“In exercising its power of cancellation, the Company shall observe the
following:
(A) Not less than ten (10) days written notice of intent to cancel
policy(ies) unless the default is cured within such ten (10) day period.
(B) If the default is not cured within the ten (10) day period A.L.F.S. in
the name of the insured(s) may request the cancellation of insurance
policy(ies) by mailing a notice of cancellation to the insurer.  A copy of
cancellation notice to be mailed to the insured at his last known address.”
Cooper was almost in constant default under the agreement.  He made his first installment, due
February 20, 1997, on time, but was late with respect to each payment thereafter.  ALFS developed two
different forms of notice in the event of a default — a late notice, captioned “Notice of Intent to Cancel,”
that informed the insured that an installment payment was past due, and a “Notice of Cancellation.”  The
late notice had a place for two dates  — the date the notice was mailed and the due date of the installment.
It stated prominently that, in order to avoid cancellation, payment must be received within 15 days from
the date the notice was mailed.  It stated further that the payment, including late charges, must be received
in the ALFS office “prior to cancellation” and that “this is notice of intent to cancel the above policy(ies).”
The “Notice of Cancellation” was routinely sent four or five days after the late notice — before the
expiration of the 15-day period.  It contained, at the top, one box for “Date Mailed” and another for
“Effective Date of Cancellation.”  This notice stated that, to avoid cancellation, payment had to be received
11 days from the date mailed.  It gave notice that the policy(ies) “is/are cancelled for non-payment of an
installment, in accordance with the conditions and terms of the Premium Service Agreement” and that the
cancellation “is effective on the above captioned date.”
When the payment due March 20 was not made, ALFS, on March 26, sent a Notice of Intent to
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Cancel, giving Cooper 15 days within which to make the payment.  Cooper made the payment by April
3.  When he failed to make the April 20 payment, ALFS, on April 25, sent another 15-day Notice of Intent
to Cancel, which would have allowed Cooper to make the payment by May 10.  On May 1, ALFS sent
a Notice of Cancellation, advising that, if the payment was not made within 11 days, the policy would be
canceled effective April 23. Cooper made the April payment on May 9.  He failed, however, to make the
payment due May 20, resulting in a 15-day Notice of Intent to Cancel mailed on May 28 and an 11-day
Notice of Cancellation mailed on June 2.  The June 2 notice warned that, if payment was not received
within the 11 days, the policy would be canceled as of May 23.  Cooper cured that default on June 5 but,
consistent with his practice, failed to make the June 20 payment.
The default in the June payment is what triggered this case.  On June 26, ALFS mailed a 15-day
Notice of Intent to Cancel.  On its face, that gave Cooper until  July 11 to make the payment and avoid
cancellation.  On June 30, ALFS sent a Notice of Cancellation, confirming that, unless the payment due
June 20 was received by July 11, the policy would be canceled effective June 23, 1997, a date prior to
both the June 26 and the June 30 notices.  On June 27, while he still was insured and had the ability to cure
his default, Cooper was driving his car along Route 50 in Salisbury when he was shot in the neck by the
occupant of another vehicle, causing him to lose control of his car, crash, and sustain serious injuries.  He
was transported to the University of Maryland Shock Trauma Center, where he remained under intensive
care for several weeks.  Cooper was discharged from the Shock Trauma Center on July 16 and admitted,
as an in-patient, to a rehabilitation facility.  On June 30, 1997, a claim on Cooper’s behalf was reported
to MAIF.
On July 23, 1997 — 30 days after the cancellation date specified in the Notice of Cancellation —
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ALFS electronically issued a Notice of Cancellation to MAIF.  The notice specified June 23 as the
effective date of cancellation.  The next day, MAIF sent a written notice to Cooper, advising that the policy
had been canceled effective June 23, 1997, and remitted the unearned premium of $1,493 to ALFS.
ALFS retained that premium to cover the remaining balance owed by Cooper under the Premium Finance
Agreement.
In October, 1997, Cooper filed an action in the Circuit Court for Wicomico County against both
ALFS and MAIF, seeking a declaratory judgment that, apart from any contractual provisions, the policy
could not be lawfully canceled prior to the expiration of the 10-day period prescribed by § 486G, which
would have been July 6, 1997, and that the policy was therefore improperly canceled.  He asked that the
policy be reinstated and that the parties responsible for improperly causing the policy to be canceled be
held accountable to him in damages.  MAIF cross-claimed against ALFS, asserting that it acted properly
in canceling the policy and that, if there was any impropriety in regard to cancellation, the impropriety was
on the part of ALFS.  It urged that, if Cooper obtained a judgment for damages against MAIF, MAIF was
entitled to contribution from ALFS.
The basic facts, consisting largely of the premium finance agreement and the various notices that
were sent, were undisputed and were placed into evidence by stipulation.  That evidence was
supplemented by an affidavit from Alan Bowling, ALFS’s president, explaining ALFS’s notice policy.
Bowling asserted that, at the inception of coverage and from month-to-month thereafter, the insurance is
prepaid for only a short period of time and that, based on the down payment made and MAIF’s
cancellation rate, if Cooper failed to make an installment payment, “ALFS would have to cancel the policy
as of the 23rd of the month in order to receive back from MAIF the balance of the money owed to it by
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Mr. Cooper.”  He added that it was ALFS’s practice to wait until almost the 30th day following the
effective date of cancellation set forth in the Notice of Cancellation before formally canceling the policy
because experience indicated that, although many people fail to pay the delinquent instalment within the 15
days specified in the Notice of Intent to Cancel, many of them make the payment within a few days
thereafter.  ALFS’s policy, he said, avoided the additional paperwork that would be required if the policy
was canceled and then reinstated upon receipt of the delinquent payment.  The thrust of his point was that
it served everyone’s interest to make the effective date of cancellation retroactive but not to implement the
cancellation until approximately 30 days after the effective cancellation date.
On cross-motions for summary judgment, the court, on October 27, 1999, entered a declaratory
judgment that (1) MAIF was entitled to rely on the cancellation notice sent by ALFS and was under no
obligation to investigate to see that proper notices were given to Cooper, and that it therefore was entitled
to summary judgment in its favor, but (2) § 486G required that the 10-day notice of intent to cancel be
prospective and that, accordingly, ALFS did not comply with the requirements of § 486G in canceling the
policy.  In light of that second conclusion, the court granted Cooper’s motion for summary judgment against
ALFS as to liability.  It was later stipulated that, had the policy not been canceled, Cooper would have
been entitled to uninsured motorist coverage of $20,000 and personal injury protection benefits of $2,500,
for a total of $22,500.  The court then entered judgment in favor of Cooper against ALFS in the amount
of $22,500 and costs.  ALFS appealed the judgment against it, arguing that § 486G did not prohibit
retroactive cancellation for non-payment and that it therefore acted properly in canceling Cooper’s policy
effective June 23.  The judgment in favor of MAIF was not appealed either by Cooper or ALFS.  We
granted certiorari prior to any significant proceedings in the Court of Special Appeals to consider the issue
 See Ga. Code Ann. § 33-22-13(c)(1) (2000); La. Rev. Stat. Ann. § 9:3550(G)(3)(b) (West
4
1997); N.Y. Banking Law § 576(d) (Consol. 1982); N.J. Stat. Ann. § 17:16D-13(c) (West 1984); Vt.
Stat. Ann. tit. 8, § 7009(c) (1999).
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raised by ALFS.
DISCUSSION
The parties agree that the issue is one of statutory construction.  ALFS looks to the literal language
of the statutes in § 486G(b) and (c) [current §§ 23-402 and 23-403] — one requiring that “[n]ot less than
ten (10) days’ written notice” be mailed to the insured and the other providing that “[a]fter expiration of
such ten (10) day period” the company may “thereafter” cancel the policy by submitting to the insurer a
notice of cancellation “specifying the effective date of such cancellation” — and notes that nothing in either
statute precludes the effective date of cancellation being a date prior to the expiration of the 10-day period.
The statutes, it contends, merely require that the company wait until the end of the period before effecting
the cancellation, and thus their only effect “is to delay the operative effect of the cancellation until the waiting
period has expired without payment of the delinquent installment.”  The law, it says, allows the premium
finance company to specify the date of cancellation, without restriction, and thus allows it to specify a date
prior to the end of the notice period.  If the Legislature desired to require that the effective date of the
cancellation await the end of the notice period, it could have made that clear, as have legislatures in other
States.4
ALFS urges that its position is fully consistent with Maryland public policy.  It notes that, although
the law has long required insurers, as a general rule, to give advance written notice of their intent to cancel
 Although, at the time the contract at issue was made, the law did not require motor vehicle liability
5
insurers to give advance notice of an intent to cancel a policy because of non-payment of premiums, as the
result of an amendment to § 27-605 enacted in 2000, the law now does require such notice.  Section 27-
605(c) now states that, at least 10 days before the date a motor vehicle liability insurer proposes to cancel
a policy for non-payment of premiums, it shall cause to be sent to the insured, by certificate of mailing, a
written notice of intention to cancel.  The current public policy, therefore, is to mandate advance notice.
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or non-renew a policy, there has always been an exception when the cause of cancellation is non-payment
of premiums.  Section 27-605 prohibits a motor vehicle liability insurer, other than MAIF, from canceling
or failing to renew a policy “for a reason other than nonpayment of premium” unless it sends a 45-day
written notice of its intent to cancel or non-renew and otherwise complies with the requirements of § 27-
605.  See also § 27-601(c), applying the same rule, with the same exception, to other kinds of insurers.
ALFS draws from this that, when the cancellation is for non-payment of premiums, no advance notice of
intent to cancel is required.  Ergo, it asserts, if there is no requirement of advance notice at all, for insurance
companies, it cannot be against public policy for the notice required under § 486G (§§ 23-402, 23-403)
to provide for retroactive cancellation to the date when the installment was due and not paid.  Any other
construction, it warns, would afford a defaulting insured free insurance for the period between the default
and the effective cancellation, which cannot have been the legislative intent.5
Not surprisingly, Cooper has a very different view, of both the statutory meaning and the public
policy.  Section 486G(c) stated that “[a]fter expiration of such ten (10) day period” the company may
“thereafter” cancel the policy.  Effecting a cancellation as of a date  prior even to the sending of the notice,
he urges, cannot be regarded as complying with the statute.  If, upon receipt of the notice, he had desired
to replace the insurance, he would have been unable to do so.  He could not, on or after June 26, have
obtained a policy that would have been effective on June 23.  The effect of the retroactive date of
 That recognition is also implicit from the fact that, in creating MAIF in 1972, the General
6
Assembly expressly prohibited MAIF from directly financing premiums or accepting them on an installment
basis and required that any financing of premiums for MAIF policies be done through registered premium
finance companies.  See 1972 Md. Laws, ch. 73, enacting § 243C(c) to Article 48A (current Insurance
Article, § 20-507(f)).  Such a prohibition would have been unnecessary if it were not the practice in the
(continued...)
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cancellation would necessarily be to leave him uninsured for some period of time.  ALFS responds that,
had Cooper lived up to his obligation under the contract, there would have been no cancellation in any
event — that Cooper could have avoided cancellation by simply paying the required installment.
ALFS’s argument is flawed in a number of respects.  The recent amendment to § 27-605, requiring
advance notice of an intent to cancel a motor vehicle liability policy for non-payment of premiums,
necessarily destroys the parallelism that the company seeks to create — that the Legislature never intended
to require advance notice when cancellation is due to non-payment of premiums.  Indeed, with that
amendment, adoption of ALFS’s position would mean that premium finance companies would have greater
leeway to cancel a policy than the insurance company itself, and we can find no evidence that the
Legislature ever intended that to be the case.
Putting that amendment aside, however, as it was not in effect when this contract was made, the
analysis remains flawed for another, converse, reason.  Prior to the amendment to § 27-605, the law clearly
exempted insurance companies writing motor vehicle liability insurance from the requirement of advance
notice of intent to cancel when the cancellation was based on non-payment of premiums.  The fact that such
an exemption was expressed indicates a recognition by the General Assembly that insurance companies
themselves had been accepting premiums in installments, for otherwise the exemption for cancellation (as
opposed to non-renewal) would have been unnecessary.   The premium finance law, however, from the
6
(...continued)
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industry for private insurers to accept premium installments or otherwise finance premiums directly.  See
also 1995 Md. Laws, ch. 475, enacting what is now § 27-216(b)(2)(v) of the Insurance Article, permitting
insurers to charge “reasonable installment fees as approved by the [Insurance] Commissioner.”
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beginning, specifically required such notice.  This indicates to us that, at least until 2000, the Legislature
intended to treat premium finance companies differently than insurance companies in this regard; rather than
expressly exempting the premium finance companies from the requirement of advance notice of intent to
cancel, as it had for insurance companies, it expressly mandated such notice.  No reasonable purpose
would be served by such a distinction if premium finance companies were able to make the cancellation
retroactive, to a date prior not only to the end of the notice period but even to the date of the notice itself.
The effect of a retroactive cancellation, as we have indicated, is to leave the customer uninsured
for a period of time, which is not only directly at odds with the mandate of compulsory insurance but would
leave the customer (1) subject to the civil penalties noted and, (2) if the customer were to have driven the
car during the period knowing or having reason to know that there was no insurance, to the prospect of
criminal penalties as well.  Worse, as this case well illustrates, it retrospectively removes insurance that, in
fact, was in effect when a claim-producing accident occurred.  When all of this is taken into account, we
have no doubt that, when the General Assembly provided that, upon the expiration of the 10-day period,
the premium finance company could “thereafter” cancel, it meant that the specified effective date of the
cancellation could not be earlier than the expiration of the notice period.  No other interpretation is
reasonable.  For these reasons, we shall affirm the judgment for $22,500 entered against ALFS.
JUDGMENT OF CIRCUIT COURT AFFIRMED, WITH COSTS.