Harleysville v. Zelinski
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In the Circu it Court for C ecil Coun ty Case No. 07-C-01-000139MT IN THE COURT OF APPEALS OF MARYLAND No. 81 September Term, 2005 ______________________________________ HARLEYSVILLE MUTUAL INSURANCE COMPANY v. WALTER ZELINSKI, ET AL. ______________________________________ Bell, C.J. Wilner Cathell Harrell Battaglia Greene Eldridg e, John C. (Retired, Specially Assigned), JJ. ______________________________________ Opinion by Wilner, J. ______________________________________ Filed: June 1, 2006 We granted certiorari in this case to consider two issues of imp ortance . The first is whether an insurer m ay lawfully cancel or n on-renew , or threaten to cance l or non -renew , a commercial automobile liability insurance policy unless the insured agrees to the exclusion of one or more named individuals from the policy w hether, in other words, a named driver exclusion endors emen t is valid in the con text of a comm ercial, as oppose d to a fam ily, policy. The second is w hether a declaratory judgment that there is no co verage for a particular claim, entered in an action between the insurance company and its insured, binds a person w ho (1) has f iled a claim against the in sured, but (2 ) was not a party to that action. Each of the two issues has several sub-parts. Because we shall an swer the f irst question in the affirmative, it will not be necessary for us to address either the second issue or some of the sub -parts of the first. BACKGROUND On Decem ber 18, 200 0, Ange la Zelinski and her you ng son, D ylan, were serio usly injured when their car w as struck, head-on, by a truck neg ligently driven by Robert Townsend, III (Robert III). The truck was owned by Mac s Septic Service, an unincorporated entity owned and ope rated by Robert III s parents, Robert Townsend, Jr. and Louise Townsend. Robert, Jr. had given his son, who worked in the business, permission to use the truck that d ay. The truck was one of several vehicles insured under two insurance policies issued by petitioner, Harleysville Mutual Insurance Company a comme rcial automo bile liability policy with a liability limit of $500,000, and an umbrella policy providing an additional $1,000,000 of coverage. Both policies became effective June 19, 2000, and ran for a year. The basic policy listed seven persons as o perators of the insured v ehicles, including Robe rt III. A special endorsement, titled Maryland Chan ges C ancella tion and Nonr enew al, permitted Harleysville to cancel the policy prior to its expiratio n, up on 45 days notice, [i]f your driver s license, or that of one or more but not all drivers who live with you or customar ily use a covered auto , has been suspended or revoked during the policy period . 1 The endorsem ent continued, how ever: [B]efore canceling this policy w e will offe r to continue this policy with a provision excluding coverage for each driver whose license has been suspended or revoked during the policy period. If such an offer is accepted, we will issue an endors emen t to that ef fect. The umbrella policy provided coverage for ultimate net loss in excess of the applicable underlying limit but, in an Auto Liability Limitation, provided that the umbrella insurance d id not apply to liab ility for bodily or personal injury or property damage arising out of the operation or use of an auto u nless the liability is covered by valid and collectible underlying insurance as listed in the Schedule of Underlying Insurance, for the full limit shown . . . . The Schedule of Underlying Insurance listed o nly the basic 1 The term auto appears in quotation marks because it is a defined term in the policy. -2- commercial automobile policy issued by Harleysville. At some point, after the policy had been in force for about three months, Harleysville discovered that Robe rt III s license had been suspended.2 Acting pursuant to the endorsement in the policy, Harleysville offered Robert, Jr. the option of either having the policy cancelled or accepting an endorsement that excluded from the policy any claims arising from acc idents which occur while any auto is being operated by [Robert III]. On September 1, 2000, Robert, Jr. elected to accept the endorsement. Robert III thereafter obtained for himself the minimally required insurance $40,000 aggregate from the Maryland Automobile Insu rance Fund (M AIF). He was insured, to that extent, by MAIF at the time of th e accident. The Zelinskis must have made a claim promptly after the accident. On January 29, 2001, Harleysville filed suit against M ac s Septic S ervice, Ro bert, Jr., and R obert III in the U. S. District Court, seeking a declaratory judgment that Harleysville had no duty to defend or indemnify those defendants against any claims or for any sums which they may incur and pay by reason of injuries sustained by any member of the Zelinski family as a result of the December 18, 2000 accident. The Zelinskis became aware of the action, informed Harleysville that they had an interest in it, and, through counsel, attended depositions taken 2 During the short time he had been driving, Robert III managed to collect 18 points on his driving record, most of which arose from a conviction for driving under the influence and a con viction for e xceeding the speed lim it by more than 30 MP H. His parents were aware of his driving record. Whether his license was still suspended at the time of the accident is not clear. -3- in the case, but they were not made pa rties by either Ha rleysville or the de fendants a nd did not see k to inter vene. In September, 2002, the court granted Harleysville s motion for summary judgment and entered an order declaring that Harleysville was relieved of any duty to defend or indemnify Defe ndants for any c laims ar ising ou t of the D ecemb er 18, 20 00 acc ident. Relying on Maryland Code, § 27-606(a)(2) of the Insurance Article, the court held that Maryland law allows an insurance company to exclude coverage for a named driver whose driving record cou ld have justif ied the cancellation or non-renewal of the policy and that Harleysville had effe ctively exclud ed cov erage f or Rob ert III. See Harleysville Ins. Co. v. Mac s Septic Service, 225 F. Supp.2d 595 (D.Md. 2002). It does not appear that any appeal was take n from tha t judgmen t. While the declaratory judgment action was pen ding in Fe deral court, K eith Zelinsk i, as Angela s guardian and Dylan s father and next friend, sued Ro bert, Jr., Louise, and Robert III in the Circu it Court for C ecil County to recover for the injuries and losses sustained as a result of the a cciden t. MAIF petitioned to in tervene an d offered to tender the $ 40,000 lim it of its policy in settleme nt of all pending claims. It does not appear that the court ever took any action on that p etition. On N ovembe r 20, 2002 , a jury returned a verdict find ing that Robert III was negligent, that he was acting with in the scope of his employment at the time of the accident, and that Robert, Jr. and Louise were the owners of Mac s Septic Service. After appropriate modifications to the verdict, judgments were entered against all three -4- defenda nts in the amount of $1,070,206 in favor of Angela and $647,282 in favor of Dylan, a total of $1,717,488. This action commenced in March, 2003, when Keith, on behalf of his wife and son, caused to be issued by the Circuit Court for Cecil County a writ of garnishment against Harleysville, alleging that it held property of the judgment debtors, Robert, Jr., Louise, and Robert III. After a brief round-trip detour to the U.S. District Court, Harleysville filed an answer and a motion to dismiss the writ, arguing that, by virtue of the named driver exclusion endorsement validated in the Federal court action, it had no duty to indemnify the judgment debtors and therefore held none of their property. In Novem ber, 2003, the Circuit Co urt entered an order granting the amended motion to dismiss and quashing the writ of garnish ment. Zelinski appealed, raising two issues: whether the Circuit Court erred in concluding that t he w rit of garn ishm ent w as ba rred by res judicata or collateral esto ppel, based on the judgment entered in th e Federal d eclaratory judg ment action , and wh ether it erred as well in determining that the named driver exclusion endorsement was authorized under Maryland law. The Court of Special A ppeals ans wered b oth question s in the affirmative and theref ore vacated the Circuit Court order and remanded for further procee dings. Zelinski v. Townsend, 163 Md. App. 211, 878 A.2d 623 (2 005). We disagree w ith the interme diate appella te court s conclusion regarding the validity of the named driver exclusion endorsement and, on that ground , shall reverse th at court s judg ment. -5- DISCUSSION Insurance policies are contracts and, in M aryland, are treated and construed just like other contracts. As we pointed out in Mesmer v. M.A.I.F., 353 Md. 241, 252, 725 A.2d 1053, 1058 (1999), [e]xcept as modified by statutes or regulations, the legal principles ap plicable to contracts generally are also applicable to insurance policies. That includes the principle that any clause in an insurance policy that is contrary to the public policy of this State, as set forth in any statute, is invalid and unenforceable. Stearman v. State Farm, 381 Md. 436, 441, 849 A.2d 539, 542 (2004 ). The policy in question the contract entered into between Harleysville, as insurer, and the Townsends and Mac s Septic Service, as insureds is clear. The named driver exclusion endorsement agreed to by Robert, Jr. unambiguously excludes coverage for any claim arising out of an accident caus ed by Robert III. If we w ere dealing just w ith a construction of the policy, therefore, it would be beyond dispute that Harleysville has no duty to indemnify any of the in sureds agains t the judg ments e ntered in the tort a ction. The question is whether that endo rsement is contrary to, and therefore not permitted by, Maryland la w. As w e pointed o ut in Lewis v. A llstate, 368 Md. 44, 47, 792 A.2d 272, 273 (2002) and earlier cases cited there, the General Assembly has enacted comprehensive statutes regulating motor vehicle insurance statutes that mandate such insurance (purchased or approved self-insurance) for every mo tor vehicle required to be registered in Maryland, that require policies to contain certain cov erages in specified minim um amoun ts, that require -6- insurers to offer to th eir insureds certain other kinds o f coverages, and that p rohibit insurers from engaging in certain practices. The Zelinskis contend that, although a named driver exclusion endorsement is permitted in family and personal automobile insurance policies, it is not perm itted in commercial motor vehicle insurance and that the endorsement added to the policy in question here is therefore void and unenforceable. They thus ask that w e apply what we said in Salamon v. Progressive, 379 Md. 301, 315, 841 A.2d 858, 867 (2004), that we shall not uphold any exclusion, not authorized by the General Assembly, that excuses or redu ces ben efits be low the statutory m inimum s. So far as we know, it w as always pe rmissible for an au tomobile insuran ce co mpa ny, in the absenc e of a statute to the contrary, to decline to offer or renew coverage to a person who did not m eet th e com pany s leg itima te un derw riting crite ria, e spec ially a person who, because of a poor driving record, constituted a particularly bad risk. Prior to 1972, it was not legally compulsory for drivers and moto r vehicle owners to have liability insurance, and the only constraints in Maryland on an insurer s ability to cancel or refuse to underwrite or renew a policy of motor vehicle insurance, for a reason other than non-payment of premium, were that (1) by virtue of laws enacted in 1970 and 1971, an insurer was prohibited from refusing to underwrite or renew a particular insurance risk for any reason based on the race, creed, color, or sex of an applican t or policy holder or for any other arbitrary, capricious, or unfairly discriminatory reason, and (2) the insurer had to give 45 days advance notice of cancellation or non-renewal, inform the policy holder of his or her right to replace the -7- insurance through the assigned risk plan then in effect, and, upon request, advise the insured of the actual re asons for the c ancella tion or n on-ren ewal. See Maryland Code (1957 , 1972 R epl. Vo l.) Art. 48 A, §§ 2 34A a nd 240 A thro ugh 24 0C. Section 243 of then-A rt. 48A required mo tor vehicle insurers to participate in an automob ile insurance plan, known as the assigned risk plan, under which persons, including corporations, who were unable to obtain motor vehicle insurance through ordinary metho ds, were eligible for insurance through that plan. Although the statute required that premiums charged f or insuranc e under the plan not be excessive , inadequa te or unfairly discrim inatory, the premium s charged were, in fa ct, significantly higher than those charged for comparable policies issued directly by insurers. During the late 1960's and early 1970's, even after the 1970 and 1971 legislation precluding arbitrary rejections, cancellations, and non-renewals, there were widespread complaints from Maryland motorists that those kinds of rejections were still occurring and that as many as 1 00,000 M aryland moto rists had been forced either to obtain insurance through the higher-cost assigned risk plan or to be uninsured. Responding to those complaints, Governor Mandel, in January, 1971, directed the Secretary of Licensing and Regulatio n to condu ct a thorough study of the overall automobile insurance problem. The Governor expressed particular concern over increasingly frequent arbitrary cancellation of automob ile insurance policies, the soaring cost of this necessary protection, and the fact that the averag e driver is findin g it diffic ult to ob tain cov erage a t regular rates. -8- The Secretary conducted the study and made some dramatic recommendations. Although those recom mendatio ns were n ot accepted in precisely the form presented, based on the Secretary s findings, the Governor presented comprehensive legislation to the 1972 session of the General Assembly. The bill, ultimately enacted as 1972 Md. Laws, ch. 73, dealt with the proble m in fo ur princ ipal wa ys. First, it provided for compulsory purchased or self insurance; every owner of a motor vehicle required to be registered in Maryland was obliged to maintain certain minimum security with respect to the vehicle. That secu rity had to include at least $40,000 of liability insurance and $2,500 of no-fault personal injury protection for medic al expense s and wa ge losses. Se cond, it requ ired insurers to offer certa in other coverage s in policies sold in Ma ryland. Third, in p lace of the a ssigned risk plan, it created MAIF as an entity (1) to provide insurance to pe rsons wh o were u nable to ob tain insurance in the private market, and (2) to provide certain minimal compensation to persons injured by unidentified or uninsured m otorists. Fourth, the law further circumscribed arbitrary underw riting criteria and, most relevant to this case, sharply curtailed the right of insurers to cancel or non-renew policies, required more detailed notice of an intent to cancel or non-renew a policy, and authorized the Insurance Commissioner, upon protest by insureds, to disallo w und erwritin g decis ions tha t the Co mmiss ioner fo und w ere con trary to law . The named driver exclusion was a component of this fourth approach. It was primarily intended to avoid the prospect of an entire household being denied insurance having a policy cancelled or non-renewed because of the poor claims history or driving -9- record of one or more, but less than all, o f the pro spectiv e insure ds in the house hold. See Neale v. Wright, 322 Md. 8, 21, 585 A.2d 196, 202 (1991). Through the enactment of a new § 240C-1(a) to Art. 48A, the Act provided that, in any case in which an insurer was authorized to cancel, non-renew, or increase the premiums on an autom obile liability insurance policy under w hich more than one p erson wa s insured, be cause of th e claim experienc e or driving record of a t least one bu t less than all of the person s insured: the insurer shall in lieu of cancellation, non-renewal, or premium increase offer to continue or renew the insurance, but to exclude from coverage, by name, the person or persons whose claim experience or driving record would have justified the cance llation o r non-re newa l. (Emphasis add ed). Section 240C-1(b) added: With respect to any person excluded from coverage under this section, the policy may provide that the insurer shall not be liable for damages, losses, or claims arising out of this operation or use of the insured motor vehicle, whether or not such operation or use was with the express or implied permission of a perso n insure d unde r the po licy. Section 240C-1, as enacted in 1972, did not distinguish between personal or family policies and com mercial policies but required the offering of a named driver exclusion endorsement in lieu of cancelling or non-renewing any auto mob ile lia bility insur ance policy. The section did not apply that requ irement w ith resp ect to an ap plica tion for a n initial p olicy, however. Indeed, it said nothing about the decision to issue or not issue a new policy where one or more, but less than all, of the prospectiv e insureds c onstituted a le gitimately -10- unacc eptable risk. See Parsons v. Erie Ins. Group, 569 F. Supp. 572 (D. Md. 198 3). Likely in response to Parsons, that matter was dealt with in 1984 by 1984 Md. Laws, ch. 663. The General Assembly there re-enacted the 1972 v ersion of § 240C-1 , with minor style changes, but added that, in cases where an insurer cou ld legally refuse to issue a new policy of autom obile liability insurance because o f the claim experience o r driving record of one or more but less than all of the prospective insured s, the insurer may issue the policy but exclude from coverage, by name, the person or persons whose claim experience or driving record could have justified the refusal to issue. (Emphasis added). Again, no distinction was drawn between personal or family policies and commercial policies. As to cancellation or non-renewal of an existing policy, the offer of a named driver exclusion was mandatory, as to new policies, it was permissive; but those provisions applied to all autom obile liab ility insuran ce polic ies, inclu ding co mmer cial polic ies. The scope of the named driver exclu sion, in both cancellation/non-renewal and initial policy cas es, was enlarge d in 198 5. See 1985 Md. Laws, ch . 698. Tha t Act prov ided that, under a named driver exclusion endorsement, coverage, other than personal injury protection and uninsured motorist pro tection not otherwise available, was ex cluded for all persons, including the excluded operator or user, the vehicle owner, family members residing in the househo ld of the excluded operator, user, or vehicle owner, and any other person.3 Subject 3 The relevant legislative history of that Act indicates that, when § 240C-1 was enacted in 1972, the industry, and apparently the Legislature, believed that, if and when the excluded person operated the vehicle, the vehicle became uninsured for all purposes, -11- to the contingent exceptions for personal injury protection and uninsured motorist benefits, there would be no coverage for anyone under the policy if the accident occurred while the vehicle was being driven by the excluded drive r. The statute that crea ted the dispu te now before us wa s enacte d in 198 9. See 1989 Md. Laws, ch. 367. The bill (HB 62) was a departmental one sponsored for the Insurance Commissioner by the Department of Licensing and Regulation, and it dealt with a number of insurance matters. Of importance here is the amendment made to then-§240C-1(a) the provision that required insurers to offer a named driver exclusion endorsement in lieu of cancelling or non-renewing an existing automobile liability insurance policy. The amendment limited that requirement to the case in which an insurer was authorized to cancel or non-renew or increase the premiums on an automobile liability insurance policy issued in this State to any resident of a household. It thus deleted that re quiremen t with respe ct to a com mercial a utom obile liab ility po licy. These various provisions are now codified, with only s tyle changes, in Maryland and that, as a result, anybody injured by the operation of that vehicle would have no redress against the insurance company and this included passengers or pedestrians. See Statemen t of sponso r of HB 1360 (19 85), Deleg ate John A stle; also Ho use Econ omic Matte rs Com mittee R eport o n HB 1360. T wo co urts had ruled o therwi se, how ever. See Parsons v. Erie Ins. Group, supra, 569 F. Su pp.2d 57 2; Miller v. Ellio tt (Cir. Ct. Balto. Co. No. 83 L 1344 (1984)) (fact that excluded driver was driving vehicle did not preclude liability under uninsured motorist or personal injury protection coverages). The first reader version of HB 1360 would have barred all coverage. As amended during the legislative process, however, personal injury protection and uninsured motorist coverage was not e xclu ded if tho se co vera ges w ere u navailab le un der a ny oth er au tomobile policy. -12- Code, § 27-606 of the Insurance Article. Zelinski views the 1989 statute, now part of § 27-606(a), as prohibiting a named driver excl usio n in c omm ercia l policies . Harleysv ille v iews it as simp ly repealing the requirement that it be offered in lieu of cancelling or non-renewing commercial policies, not as prohibiting the endorsement on a voluntary contractual basis. Harleysville has the better argument, for several reasons. The issue is one of statutory construction: did the 1989 enactment make the offer (and acceptance) of a nam ed driver ex clusion end orsemen t unlawfu l in a comm ercial autom obile insurance policy? The cardinal rule of statutory construction is to discern and implement the intent of the Legislature, gleaned first from the language of the statute. We can find nothing in the language of the 1989 law that would even suggest, much less make manifest, an intent to preclude the offer and acceptance of such an endorsement in a commercial policy. As noted earlier, we are unaware of any statute or any regulation of the Insurance Commissioner that ever made a n amed driv er exclusion endorsem ent unlaw ful. Its use may have been rare in an era prior to 1972, when (1) there was no compulsory insurance, and (2) the insurance companies were seemingly content to cancel and non-renew policies for a host of inappropriate reasons, leaving motorists to replace that insurance through the higher-cost assigned risk program. There is some indication in the legislative history to the 1972 law, however, that, even then, at least one company, Travelers Insurance Company, offered that endorsement in autom obile liab ility insuran ce polic ies. See Legislative Council Special -13- Com mittee o n No- Fault In suranc e, Min utes of Meet ing of J anuary 3 1, 1972 , at 2. The 1972 law did not purport to repeal any impediment to such an endorsement or to create the en dorseme nt anew o ut of wh ole cloth, but rather to ma ndate that it be offered in lieu of cancellation or non-renewal. If the offer of such an endorsement was not unlawful before being made mandatory in 1972, restricting the requirement of its offer to fa mily policies would certainly not make it unlawful with respect to commercial policies. Indeed, in 1984, the Legislature expressly authorized insurance companies to offer a named driver exclusion endorsement with respect to a new policy, and that a uthority is retained with respec t to both family an d com mercia l policies . It would surely not be logical to assume an intent on the part of the Legislature to expressly allow such an endorsement in lieu of declining to issue a new commercial policy but to forbid its use in lieu of cancelling or non-renewing an existing one. Wh at possible reason could there be for such a contradiction? Far more rational is to infer the more limited purpose expressed in the title to the 1989 Act clarifying that certain motor vehicle liability insurance policy exclusions must only be offered to certain insureds. (Emph asis added). 4 4 To ass ume a ny broad er intent could w ell create a Con stitutiona l imped iment. Article III, § 29 of the Maryland Constitution requires that every law embrace one subject described in its title. There is no indication in the title to the 1989 Act that a named driver exclusion endorsement, theretofore required to be offered in lieu of cancelling or nonrenewin g a comm ercial policy, wa s thencefo rth to be pro hibited and unlawfu l. If that is how the law is to be construed, it would enact a prohibition not even remotely described in its title. Whenever possible, we opt to construe a statute so that it is consistent with the Constitution and does not reach illogical results. -14- Fina lly, it is important to recall that the named driver exclusion endorsement, though obviously serving to exclude from coverage one or more prospective insureds who, because of their claim experience or driving reco rd, would be appropriately rejected in any event under reasonable underwriting criteria, actually helps to promote the overriding goal of compulsory insurance b y affording a n alternative to cancellation or non-renewal of the entire policy, which would then require all of the insureds, including those wh om the insu rer would be willing to insure, to seek replacement insuran ce. See Nea le v. Wright, supra, 322 Md. at 21, 585 A.2 d at 202 ( A llowing a d river to be specifically excluded avoids cancellation or non-renewal of policies and permits the o ther family me mbers to retain the req uired secur ity on the family car. Without the named driver exclusion p rovision, insu rance mig ht be difficu lt to obtain for many vehicles. ). That endorsement, even with respect to commercial policies, is thus unlike the exclusions or limitations that we hav e found in consistent w ith the man date of compulsory insurance and, for that reason , unauth orized a nd inva lid. See Nationwide Mutual Ins. Co. v. Miller, 305 Md. 614 , 620, 505 A.2d 1 338, 1341 (198 6). The Legislature clearly recognized the supportive value of the endorsement in 1972 and 1984, and there is no reas on to su ppose that, in 19 89, it ente rtained a drama tically diff erent vie w. For these reasons, we hold that the Court of Special Appeals erred in its determination that a named driver exclu sion endo rsement is n ot allowed in comm ercial autom obile liability policies and that the endorsement added to the policy in question here is void. The endorsement is not incons istent with or prohibited by Maryland law , and is therefore valid. -15- Because of our conclusion to that effect, it is unnecessary for us to address whether the Zelinskis are bound b y the similar judg ment of th e U.S. D istrict Court. JUDGMENT OF COURT OF SPECIAL APPEALS REVERSED; CASE REMANDED TO THAT COURT WITH INSTRUCTIONS TO AFFIRM JUDGMENT OF CIRCU IT COUR T FOR C ECIL CO UNTY ; COSTS IN THIS COURT AND IN COUR T OF SPECIAL APPEALS TO BE PAID BY R ESPONDENTS. -16-
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