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Court of Special Appeals of Maryland Holds That Insurer Did Not Violate Maryland Insurance Article When It Denied Coverage Under Homeowners Insurance Policy
People’s Insurance v. State Farm
In People’s Insurance v. State Farm, the Court of Special Appeals of Maryland was asked to determine whether the Circuit Court for Baltimore City erred in finding that an insurer did not violate the Insurance Article when it denied a claim for coverage of damage to personal property under a homeowners insurance policy. Writing for the intermediate appellate court, and deferring to the final decision of the Maryland Insurance Administration (“the MIA”), Judge Deborah S. Eyler affirmed the circuit court’s decision in favor of the insurer.
During a blizzard in the winter of 2010, Moira and Gregory Taylor’s carport in West River, Anne Arundel County, collapsed under the weight of ice and snow. They filed a claim under their homeowners insurance policy (“the Policy”) with State Farm Fire and Casualty Insurance (“State Farm”). State Farm denied the claim on the ground that the carport was not a “building” and that the Policy only covered losses due to collapse of buildings. In the Policy, the word “building” was used narrowly, to mean a structure that contains or encloses property. Specifically, the Policy stated at “SECTION I – LOSSES INSURED,” “COVERAGE B - PERSONAL PROPERTY” that it did not cover losses to personal property “contained in a building caused by rain, snow, sleet, sand or dust” unless the damage to the personal property resulted from “the direct force of wind or hail damag[ing] the building causing an opening in a roof or wall.”
The Taylors filed a complaint with the MIA, alleging that State Farm had violated Section 27-303 of Maryland Code, Insurance Article, which prohibits unfair claim settlement practices. Id. at §§ 27-303(2) and (9). The People’s Insurance Counsel Division (“PICD”) intervened on behalf of the Taylors.
Following a hearing before the Associate Deputy Commissioner of the MIA, the Insurance Commissioner (“the Commissioner”) issued a final decision ruling that State Farm had not violated Section 27-303 of Maryland Code, Insurance Article. PICD filed a petition for judicial review of that decision in the Circuit Court for Baltimore City. PICD contended that State Farm “did not have a legal basis to deny the Taylors’ claim,” because State Farm’s chosen definition of the word “building” was unsupported by case law, dictionary definitions, and State Farm’s own past practice, making it a prohibited ad hoc determination in violation of Insurance Article, Section 27-303(2) and (9). Accordingly, PICD maintained, the MIA’s decision that State Farm’s denial of the Taylors’ claim for loss to the carport was not arbitrary, capricious, or made with a lack of good faith, was legally incorrect. State Farm responded that the MIA’s decision that it (State Farm) adjusted the Taylors’ claim in good faith and that it did not deny their claim for loss to the carport for an arbitrary or capricious reason was entitled to deference as a finding on a mixed question of law and fact. State Farm asserted, however, that, even if viewed as a pure question of law, the Policy language was plain and unambiguous and was properly construed by State Farm as not affording coverage for the loss to the carport. Therefore, having denied the Taylors’ claim in accordance with the plain language of the Policy, State Farm contended that it could not have been found to have denied the claim for an arbitrary or capricious reason or not in good faith.
The circuit court affirmed the final decision of the MIA. On appeal, the PICD presented one (1) question for review by the Court of Special Appeals: “Was the MIA’s decision finding that State Farm did not violate the Insurance Article when it denied the Taylors’ claim legally correct and supported by substantial evidence in the record?” For the reasons that follow, the intermediate appellate court answered that question in the affirmative and affirmed the judgment of the circuit court.
The intermediate appellate court began its analysis by examining the text of Insurance Article, Section 27-303 entitled, “Unfair claim settlement practices,” which prohibits insurers from, among other things, “refus[ing] to pay a claim for an arbitrary or capricious reason based on all available information” and “fail[ing] to act in good faith . . . in settling a first party claim under a policy of property and casualty insurance.” MD. CODE. ANN., INS. § 27-303(2) & (9). An insurer acts arbitrarily or capriciously when it refuses to pay a claim “‘subject to individual judgment or discretion’” or “‘based on an unpredictable whim.’” Berkshire Life Ins. Co. v. MIA, 142 Md. App. 628, 671 (2002) (quoting with approval from a decision of the MIA). An insurer does not act in good faith if it fails to make “an informed judgment based on honesty and diligence supported by evidence the insurer knew or should have known at the time the insurer made a decision on a claim.” MD. CODE. ANN., INS. § 27-1001(a). If the Commissioner rules that an insurer violated Insurance Article, Section 27-303, a penalty of up to $2,500 for each violation maybe imposed and restitution may be ordered for each claimant suffering damages as a result of any violation. MD. CODE. ANN., INS. § 27-305.
Here, the Court of Appeals articulated that the MIA’s decision turned on whether State Farm adopted an unreasonably narrow, ad hoc interpretation of the Policy, in particular of the operative word “building” in the Policy, or denied the claim without engaging in any honest and diligent effort to reach an informed judgment as to whether the loss was covered. The MIA determined for several reasons that the Taylors failed to show that State Farm had done either. According to the court, the Taylors did not present any evidence that the definition of “building” used by State Farm in adjusting their claim was inconsistent with the definition of “building” it had used in adjusting other claims. Moreover, PICD’s own expert witness testified that the definition of “building” used by State Farm was consistent with that used by Allstate, the only insurer doing business in Maryland that included a definition including the word “building” in its homeowners insurance policies.
The intermediate appellate court also stated that whether State Farm refused to pay the Taylors’ claim for an arbitrary or capricious reason or failed to act in good faith in denying the claim were mixed questions of law and fact in that they called upon the MIA to make first-level factual findings and then determine the ultimate legal significance of those findings. Thus, in administrative agency cases, mixed questions of law and fact are subject to judicial review for substantial evidence. See Charles County Dep’t of Social Servs. v. Vann, 382 Md. 286, 296 (2004). As a function of agency deference, and because the record contained substantial evidence to support the MIA’s decision that State Farm did not adjust the Taylors’ claim arbitrarily or without good faith and hence did not engage in the alleged unfair claim settlement practice, the Court of Special Appeals affirmed the decision of the MIA. In fact, the court stated that it “agree[d] with State Farm’s interpretation of its Policy language, as did the MIA,” and also would affirm on that basis.
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