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MD. CODE ANN., INS. § 27-614 Does Not Apply To Binders
Ins. Comm’r for the State of Md. v. State Farm Fire & Cas. Co.
This case arose from a consumer complaint filed by Reverend D.C. Washington (“Mr. Washington”) with the Maryland Insurance Administration (“MIA”). Mr. Washington procured automobile insurance through State Farm & Fire Cas. Co. (“State Farm”) on August 6, 2007, for a premium of $1,401.46 for a six (6) month policy. Mr. Washington’s application was then submitted to State Farm’s underwriting department. A Comprehensive Loss Underwriting Exchange (“CLUE”) report was generated and verified that Mr. Washington was negligent or at fault for two (2) previous accidents, which he had disclosed to his State Farm agent. Although he was eligible for coverage, Mr. Washington’s agent had failed to consider the two (2) accidents, and, thus, quoted an inaccurate premium rate. State Farm’s underwriting guidelines provided that a 90 percent surcharge needed to be added to Mr. Washington’s base rate. State Farm, thereafter, issued a six (6) month policy with a premium of $2,512.62, and retroactively charged Mr. Washington for the additional premium.
Then, on August 30, 2007, State Farm determined that Mr. Washington may have only been responsible for one of the two (2) accidents, and his premium was adjusted accordingly. Moreover, Mr. Washington also procured renter’s insurance through State Farm during this time, which entitled him to an additional discount and adjustment of his premium. Thereafter, his monthly insurance payment was $267.20.
On October 24, 2007, Mr. Washington filed a complaint with MIA. He alleged that State Farm raised his premium without explanation or notice. On September 19, 2008, MIA concluded that State Farm failed to provide written notice of an increase in Mr. Washington’s premium at least forty-five (45) days before its effective date, and therefore, violated MD. CODE ANN., INS. § 27-614.
On October 15, 2008, State Farm challenged MIA’s determination and requested a hearing. The case was referred to the Office of Administration Hearings (“OAH”). On May 1, 2009, MIA filed a motion for summary decision, asserting that State Farm failed to issue a notice of premium increase to Mr. Washington. On May 7, 2009, a hearing was held and the ALJ noted that MIA had not timely filed its motion. In response, MIA requested that its motion be treated as a motion for judgment at the close of State Farm’s case. During the hearing, State Farm argued that it did not violate the insurance code because it could not cancel Mr. Washington’s insurance once it discovered the rating error. State Farm further explained that Mr. Washington was still eligible for coverage, albeit at an increased premium. State Farm argued next that a binder was a separate contract from a policy and ceased to exist when the policy was issued. In that regard, State Farm asserted that it was not required to follow the notice procedure of § 27-614, because the increase in premium was effective upon issuance of the policy.
On June 19, 2009, OAH concluded that Mr. Washington met State Farm’s underwriting standards; therefore, upon discovering the error, State Farm was obligated to adjust the premium to comply with its established rating plan. OAH also noted that there was no “increased premium” because § 27-614 does not treat the “binder” and “policy” as synonymous.
On July 21, 2009, MIA filed a Petition for Judicial Review in the Circuit Court for Baltimore City. The Circuit Court affirmed OAH’s decision. The court found that the terms “binder” and “policy” were not interchangeable. The court noted that there is a distinction to be considered with respect to those terms, and cited to Maryland case law that holds that a binder is a preliminary contract of insurance that gives temporary protection until the issuance of a formal policy. The court then concluded there was no violation of § 27-614 because it applied to policies and not binders. Mr. Washington noted an appeal to the Court of Special Appeals of Maryland, and presented the issue whether State Farm violated § 27-614 when it unilaterally increased his premium without providing him with the statutorily required forty-five (45) days written notice.
Section 27-614(c)(1) “requires that insurers send their policyholders forty-five (45) days notice of any ‘increase in the total premium for a policy’ of private passenger automobile liability insurance.” The Court of Special Appeals stated that it must determine whether the Legislature intended this section to apply to binders of insurance. In making its decision, the Court adhered to the well-known and oft-cited cannons of statutory interpretation. The court wrote that the plain language of the statute makes numerous references to insurance policies, but does not reference its application to insurance binders. Thus, the court opined that the omission of the word “binders” was purposeful. In doing so, the court examined the legislative history of § 27-614 and concluded that OAH’s decision was correct because “binders” and “policies” are distinct terms that are not interchangeable. Section 27-614, which only references policies, cannot be interpreted to apply to binders, and as such, was inapplicable to this case.
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