Alexander & Alexander Inc. v. B. Dixon Evander & Associates, Inc., 53

Citation650 A.2d 260,336 Md. 635
Decision Date01 September 1993
Docket NumberNo. 53,53
PartiesALEXANDER & ALEXANDER INC. and Mary D. Scheeler v. B. DIXON EVANDER & ASSOCIATES, INC. ,
CourtCourt of Appeals of Maryland

Nell B. Strachan (Benjamin R. Civiletti, Mitchell Y. Mirviss, Venable, Baetjer and Howard, all on brief), Baltimore, for petitioners.

Jim McCadden, Towson (Patrick A. O'Doherty, Amy J. Muffolett, all on brief), Baltimore, for respondent.

Argued before MURPHY, C.J., ELDRIDGE, RODOWSKY, CHASANOW, BELL and RAKER, JJ., and CHARLES E. ORTH, Jr. * , Judge (retired), Specially Assigned.

ELDRIDGE, Judge.

This case involves a challenge to awards of punitive damages against Alexander & Alexander, an insurance broker, and against Mary Scheeler, one of its vice presidents. A jury awarded the punitive damages under a count alleging tortious interference with a contractual arrangement concerning insurance commissions. The jury determined that the plaintiff, B. Dixon Evander & Associates, Inc., was entitled to $4,000,000.00 in punitive damages from Alexander & Alexander and $1,000,000.00 in punitive damages from Mary Scheeler. The issue before us is whether there was any basis for the awards of punitive damages.

I.

B. Dixon Evander is the founder, owner and principal officer of B. Dixon Evander & Associates, Inc., an insurance brokerage corporation. 1 The corporation specializes in procuring medical malpractice liability insurance for health care providers. In 1962, Evander was invited to submit a proposal for medical malpractice insurance for the University of Maryland Hospital and its staff. Evander obtained from the hospital the right to procure such insurance, and, between 1962 and 1985, Evander developed and managed a professional liability program for the hospital and its medical staff. 2

Initially, Evander had secured insurance for the hospital from St. Paul Fire & Marine Insurance Company. In 1975, St. Paul decided to withdraw from the state's medical malpractice market, and Evander procured policies for the hospital from the Mutual Fire, Marine & Inland Insurance Company ("Mutual Fire"). Evander negotiated the Mutual Fire policies through Mutual Fire's general underwriting manager and agent, Shand, Morahan & Company, Inc. ("Shand"). Shand was a wholly-owned subsidiary of Alexander & Alexander, an insurance brokerage firm.

The Mutual Fire policies were "claims made" policies. Thus, a claim would be covered only if it were made within the policy period. Because of some unusual features of medical malpractice claims, such as the relative frequency of latent injury, the termination of a claims made policy left the insured exposed for many years to liability for events that had occurred within the policy period. This potential exposure concerned the hospital, as the hospital's financial planning was undermined by uncertainty about the number and extent of the malpractice claims which it might receive. Because of this concern, the initial Mutual Fire policies contained an Optional Extension Provision ("OEP") allowing the claims reporting period to be extended beyond the policy period in return for the payment of an additional premium. As rewritten in 1981, the OEP authorized the hospital to extend the claims reporting period indefinitely by making a single payment of 155% of the premium for the policies' final year. The OEP included the requirement that the hospital exercise the option, and pay the additional premium, within 30 days after terminating the policies. The OEP was included in each annual renewal of the policies.

Evander's relationship with the hospital continued amicably until 1984. In 1984 the hospital underwent an organizational change, becoming part of a corporate entity separate from the University of Maryland. One consequence of that change was the establishment of a committee, led by Dr. Susan S. Swift, to assess and review the hospital's insurance needs. The committee sent out "requests for proposals" to a number of insurance brokers, including Evander and Alexander & Alexander ("Alexander"). The requests for proposals asked detailed questions about the brokers' organizations and about their experience and ability in the field of professional liability insurance. After reviewing the proposals of the six brokers who responded, the committee, on behalf of the hospital, chose Alexander to succeed Evander as the hospital's broker.

On January 30, 1985, the hospital issued a "broker of record" letter, authorizing Alexander to represent its insurance interests. The letter allowed Alexander to negotiate on the hospital's behalf "as respects changes in existing insurance policies and in closing, changing, increasing or cancelling insurance...." The letter specifically provided that it was "intended to include all policies presently placed with Mutual Fire ... through Shand, Morahan & Company."

Evander was disappointed by the hospital's decision. Mr. Evander wrote to Dr. Swift, telling her that "[h]aving initiated, developed and shepherded the current program through the past ten (10) years we feel, to be candid, as if there has been a death in the family without knowing the cause." Mr. Evander explained that he had continually modified the hospital's insurance program over the years, negotiating with Shand and Mutual Fire for concessions for his client. Under the circumstances, he wrote, it would be unfair for the hospital to appoint another broker if it intended to renew the Mutual Fire policies, because "to have [another broker] step into our shoes after establishing and developing the program, we trust you will agree is an unearned position."

Bob Liston, the Shand Vice President responsible for the hospital account, agreed with Evander. By February 1, 1985, Liston had learned that Alexander was ready to send Shand a broker of record letter from the hospital. On that date he wrote a memorandum to Joe Prochaska, Shand's Chairman, explaining that he had told Evander once, and Dr. Swift twice, that Shand would not accept a broker of record letter on the Mutual Fire policies from anyone except Evander. In support of his position, Mr. Liston noted Mr. Evander's many achievements for Shand: business worth over $39,000,000 which he had produced for Shand from Maryland, his careful attention to insurance legislation in Maryland, and his support of Shand through the implementation of sharp rate increases.

For its part, the hospital was concerned that it might lose its access to Mutual Fire. The hospital committee was reluctant to forego any options in the precarious liability insurance market, and Dr. Swift told Alexander that Alexander's continued representation of the hospital depended on an agreement from Shand that the hospital, through Alexander, could renew the existing Mutual Fire policies if the hospital chose to do so.

Joe Prochaska and Mac Calhoun, the Chairman and President of Shand, were asked to attend a meeting of top Alexander executives in Scottsdale, Arizona, in early February 1985. Prochaska and Calhoun met with the President of Alexander, Michael White. As a consequence of the meeting, White called Dr. Swift to tell her that Shand had no option but to accept the broker's letter from Alexander, and Shand did accept the letter.

At some time in early 1985, the hospital and Alexander entered into a brokerage contract. Alexander was appointed broker for the hospital for one year, 3 beginning July 1, 1985. 4 Alexander was to provide a full range of brokerage services, and the hospital was to pay a flat annual fee of $250,000, payable in monthly installments. The parties expressly noted the consequences of the flat fee arrangement, stating in their agreement that

"[t]he fees are intended to replace the commissions associated with procuring insurance. Therefore, all insurance quotations should be obtained net of commission fees. If this is not possible a credit will be granted in an amount equal to the commission."

This provision obliged Alexander to give the hospital credit for any insurance payment by the hospital that represented commission, since Alexander would already have been paid an agreed price for its services.

After Alexander's appointment as broker, and before the July 1, 1985, date for termination of Evander's services Evander continued to service the hospital account and to receive its commission on premiums paid by the hospital. Meanwhile, Alexander and the hospital were reviewing the range of available insurance options. Ultimately the hospital chose a system of self-insurance rather than renewal of the Mutual Fire policies. This decision was predicated on the exercise of the OEP option.

On May 6, 1985, Alexander told Shand that the hospital would not renew the Mutual Fire policies when they expired at the end of June. Alexander also told Shand that the hospital intended to exercise the OEP option. Shand passed the news on to Evander. On May 8, 1985, Evander sent a letter to the hospital, explaining how the OEP option had to be exercised and calculating the premium for the exercise of the option. Evander also claimed a commission on the premium. The alleged prior understanding between Shand and Evander was that Evander would receive a commission of 8% of premiums on policies procured by Evander. Evander calculated the amount of the OEP premium to be over $3,000,000, and asked Shand for a commission of $265,907.28.

Evander's request for a commission on the OEP premium threatened to wipe out Alexander's entire fee from the hospital for the year beginning July 1, 1985. If Shand's bill to the hospital were to include a sum equal to Evander's commission, as the bill undoubtedly would if Shand paid Evander, then, under the terms of the fee agreement between Alexander and the hospital, Alexander would be obliged to credit the hospital with the amount of the commission. Alexander asked Shand to bill the hospital for the exercise of the option in an amount that did not include...

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