Opinion ID: 2159033
Heading Depth: 1
Heading Rank: 3

Heading: Existing Maryland Case Law

Text: The appellate courts in Maryland have addressed the issue raised here in four cases, each involving a different factual circumstance that dictated the outcome. In Twelve Knotts the first of the cases the Court of Special Appeals had before it a complaint by a real estate holding company against two insurance companies and a broker (Commercial Lines). When its current fire, general liability, and workers' compensation insurance policies were about to expire, Twelve Knotts issued a general request for proposals to replace that insurance. The request specified that policies be quoted on a three-year basis with premiums payable in annual installments but did not require that the premium be fixed or capped for the three-year period. Commercial Lines submitted a written proposal for the various lines of insurance. The proposal for fire insurance showed an annual premium payable in monthly installments. Although the written proposal submitted by Commercial Lines said nothing about a three-year guarantee of the premium, its president informed Twelve Knotts' executive director that the quoted premium was good for three years. The company opted for the Commercial Lines proposal, in part because it was 35% less expensive than the competing proposals and in part because, even though not included in the company's request for proposals, the rate was to be guaranteed for three years. The binder for the property insurance forwarded by Commercial Lines showed the premium as quoted but said nothing about its being guaranteed. In ordering the permanent policy a month later, Commercial Lines noted that there was to be a three-year guarantee and that the premium was to be paid in monthly installments. The policy that was issued was not consistent with that request, however, but provided, instead, that, unless the full three-year premium was paid in advance, the premiums for the second and third years would be in accordance with the insurer's then applicable schedule. In forwarding the policy to the company two months after receiving it from the insurer, the broker said nothing about the requirement for advance paymenta condition that, by then, could not have been met in any event. At the end of the first year, the insurer insisted on a much higher premium for renewal, which ultimately led to a multi-count action alleging fraud, negligent misrepresentation, and breach of contract. The Circuit Court entered judgment for the defendants, and the Court of Special Appeals affirmed. With respect to the fraud and misrepresentation claims, the Court of Special Appeals concluded that there was no evidence to support themnone of the defendants had misrepresented or attempted to conceal what was contained in the policy. The relevance of the case lies in the court's discussion of the breach of contract and negligence claimsboth of which were founded on the assertion that the policy did not conform to the proposal that was made by Commercial Lines and accepted by the company or to the terms of Commercial Lines' request of the insurer. The insured was promised and expected a policy whose premiums were both guaranteed for three years and could be paid in installments, and it got, instead, a policy whose premiums were guaranteed for three years only if paid in advance. The court noted that the non-conformance was apparent from the policy, however, and adopted what it regarded as the majority rule that, when an insured accepts a policy, he or she accepts all of its lawful terms, and, if the policy differs from the application, the insured has a duty to notify the insurer and either negotiate the matter or reject the policy. In the particular case, it observed that the insured was a sophisticated business entity with previous experience in purchasing insurance, that the offending provision was clear and unambiguous, and that it had an opportunity when the policy was delivered to discover the discrepancy and reject the policy on the ground of non-conformance. There was no indication in Twelve Knotts that the insured relied on any particular expertise of the broker to produce a policy with certain specific terms. It engaged in competitive bidding to replace various lines of general business insurance with which it was familiar and adopted the Commercial Lines proposal because it offered the best terms, both in terms of price and the three-year guarantee of the annual premium. The one discrepancy, as noted, concerned the stability of the premium, and that discrepancy was readily apparent from the policy. It was not necessary for the insured, who had a professional employee charged with procurement of the insurance, to have to read the entire policy or attempt to fathom complex or technical provisions in it to become aware that, unless the full three-year premium was paid in advance, the premiums could change at the end of the first and second years. If the guarantee was truly material, the insured could have rejected the policy. The court had before it a quite different situation in Johnson & Higgins v. Hale, 121 Md.App. 426, 710 A.2d 318 (1998). The insured, Hale, was a trucking company that decided to expand its business to include marine transport. Having no experience in that line of business, Hale retained Johnson & Higgins, self-reputed to be one of the most knowledgeable brokers in the country, and relied upon that broker to obtain proper coverage for the maritime operation. Each of the policies obtained by the broker contained an exclusion for cargo requiring refrigeration unless (1) the space and other conditions were surveyed by a competent surveyor prior to the voyage and found fit, and (2) accepted for transportation under a form of contract approved in writing by the insurer. At some point, Hale chartered a ship to carry certain refrigerated cargo, and after recognizing the practical difficulty Hale would have in complying with the conditions in the exclusion with respect to a chartered vessel, the broker persuaded the insurer to delete that exemption with respect to the chartered ship. It failed to have the clause deleted with respect to the more routine tug and barge method of transport, however. Later, Hale informed the broker that it was no longer using the chartered ship but had reverted to tug and barge and, without expressly requesting that the exclusion be deleted, asked the broker to make the appropriate changes to the policy. Hale assumed that the coverage would remain the same as it had been for the chartered ship, and was never told to the contrary, but the broker failed to have the exclusion deleted. When Hale suffered a loss because of spoilage and the insurer, relying on the exclusion, declined to cover it because the two conditions for coverage of refrigerated cargo had not been met, Hale sued the broker for negligence and breach of contract. Relying on Twelve Knotts, the broker defended on the ground that, had Hale read the policy, it would have known that the exclusion was not deleted, and that, by not doing so, it was contributorily negligent as a matter of law. The lower court rejected that defense and allowed the case to go to a jury, which found for the insured. The Court of Special Appeals affirmed the judgment, finding that Hale placed a much greater degree of justifiable reliance upon [the broker] than that placed upon Commercial Lines by the limited partnership in Twelve Knotts. Johnson & Higgins, supra, 121 Md.App. at 441, 710 A.2d at 325. It concluded, therefore, that Hale was not negligent and that the breach of contract action was not barred, at least as a matter of law. Part of the evidence, which the appellate court found was properly admitted, was an expert opinion that, because of the complexity of a marine insurance policy, Hale, despite his general business experience, would have difficulty understanding the policy, and, in particular, the requirements of the refrigeration exclusion. In the appellate court's view, the jury could properly have concluded that the broker had a duty to advise Hale of the terms of the policy and, due to the practical difficulty in complying with its conditions, even in a barge operation, to have the exclusion clause deleted from the policy. In Ben Lewis Plumbing v. Liberty Mutual, 354 Md. 452, 731 A.2d 904 (1999), the dispute concerned a retrospective rating clause in a workers' compensation policy. Under that clause, the insured made a deposit in advance toward the premium, but the actual premium was determined by end-of-year adjustments based on the insured's claims experience during the year. The policy allowed up to three such adjustments, depending on whether there were open claims at the time of the first and second adjustments; if the premium was adjusted upward, the insured paid the difference, if it was lowered, the insurer refunded the difference. The disagreement arose from the fact that the insurer was a mutual company that declared dividends to its shareholder-insureds based on its profit/loss experience during the year. The policies in effect for the two years prior to the one in question provided that dividends payable to the insured were not subject to recalculation based on losses determined after the first readjustment. That provision was changed in the 1986-87 policy, to allow recalculation of the dividend based on a redetermination of the premium at any of the adjustments. After the end of that policy year, the insurer reduced the dividend as the result of losses determined in the second and third adjustments, and Lewis sued for negligent misrepresentation, based on an oral assertion by the insurer's employee that the new policy contained the same coverage as the previous policies. Relying on Twelve Knotts, the insurer defended on the ground that the change was noted in the policy, which Lewis had a duty to read. Though expressing neither agreement nor disagreement with the result reached by the Court of Special Appeals in Twelve Knotts, we found telling the fact that the binder for the 1986-87 year was accompanied by a separate confirmation letter that set forth in clear terms the new dividend redetermination endorsement, a letter that Lewis was asked to sign and that Lewis did sign and return to the insurer. Although we, at least tacitly, adopted the common law rule that insurers have a duty to make the insured aware of any changes inserted in a renewal policy and that, absent notice of such a change, the insured is entitled to assume that the coverage, conditions, and limitations are the same, we noted that, through the confirmation letter, sufficient notice of the change was given. [2] Accordingly, we held that there was legally insufficient evidence of justifiable reliance on the oral statement of the insurer's employee. The last case in which the issue of the insured's duty to read the policy was raised is CIGNA v. Zeitler, 126 Md.App. 444, 730 A.2d 248 (1999), involving a marine insurance policy on a pleasure boat. Until 1994, because the boat was available for charter, it was covered under a fleet policy purchased by the charter company that stored the boat for the owner, Zeitler. That policy covered the boat when cruising in the Caribbean. In the fall of 1994, however, the boat was deleted from the fleet coverage and insured separately, with the same company, CIGNA, as a pleasure craft. The new policy excluded coverage for the Caribbean after July 1the beginning of the hurricane season. Zeitler took the boat to the Caribbean in the fall of 1994 and left it there, on the island of St. Maarten. In September, 1995, a hurricane hit the island and destroyed the boat. When CIGNA denied coverage, Zeitler sued it and the broker who placed the insurance. Among other defenses, both CIGNA and the broker argued that the breach of contract and negligence claims were doomed by Zeitler's failure to read the new policy, which would have alerted him to the exclusion. The trial court denied defense motions and allowed the case to go to the jury, which found for Zeitler. Affirming the judgment, the Court of Special Appeals noted that there was a genuine dispute as to whether Zeitler had received the new policy prior to the loss, and, on that basis alone, the issue was properly one for the jury. It concluded, further, that there was sufficient evidence to establish that the new policy was, in effect, a renewal and that, as the new term was not pointed out by the broker, Zeitler could reasonably have assumed that the coverage was the same.