Maryland Ins. Comm'r v. Cent. Acceptance Corp.

• Decision Date: 20 December 2011
• Docket Number: No. 7,Sept. Term,2011.,7
• Citation: 424 Md. 1,33 A.3d 949
• Parties: MARYLAND INSURANCE COMMISSIONER v. CENTRAL ACCEPTANCE CORPORATION et al.
• Court: Maryland Court of Appeals

33 A.3d 949

424 Md. 1

MARYLAND INSURANCE COMMISSIONER

v.CENTRAL ACCEPTANCE CORPORATION et al.

No. 7

Sept. Term

2011.

Court of Appeals of Maryland.

Dec. 20, 2011.

Joshua N. Auerbach, Asst. Atty. Gen. (Douglas F. Gansler, Atty. Gen. of Maryland, and Lisa Boylan Hall, Asst. Atty. Gen., Baltimore, MD), on brief, for petitioner/cross-respondent.

Joseph A. Schwartz, III (J. Steven Wise of Schwartz, Metz & Wise, P.A., Baltimore, MD), on brief, for respondent/cross-petitioners.

Marta D. Harting (Venable, LLP, Baltimore, MD; Lee Steven Donner, Laurel, MD), on brief, for respondent/cross-petitioners.

Argued before BELL, C.J., HARRELL, BATTAGLIA, GREENE, ADKINS, BARBERA and JOHN C. ELDRIDGE (Retired, Specially Assigned), JJ.

HARRELL, J.

In 2008, Petitioner, the Maryland Insurance Commissioner (“Commissioner”), issued a Cease–and–Desist Order to Respondents purporting to prevent them from charging interest on loans to consumers to pay automobile insurance premiums in excess of the statutory maximum prescribed in Maryland Code (1957, 2011 Repl. Vol), Insurance Article, § 23–304. Respondents are eight of the largest premium finance companies ¹ that provide loans primarily to customers of the Maryland Automobile Insurance Fund (“MAIF”). Respondents requested a hearing on the Cease–and–Desist Order. Respondents requested twice that the case be transferred to the Office of Administrative Hearings (“OAH”) for hearing and final decision, but the Commissioner denied the requests. Instead, the Commissioner delegated hearing authority to an Associate Deputy Insurance Commissioner (“ADIC”), who presided over the hearing at the Maryland Insurance Administration (“MIA”), and issued a Final Order affirming the Commissioner's Cease–and–Desist Order. Respondents brought a successful judicial review action in the Circuit Court for Baltimore City. The Court of Special Appeals affirmed, agreeing with the Circuit Court's reasoning that actual “command influence,” represented by the Commissioner's delegation of the hearing and final administrative decision-making responsibility to a subordinate, tainted impermissibly Respondents' right to a fair hearing. We resolve, however, that the MIA hearing was fair and without undue “command influence.” Therefore, we vacate the judgment of the Court of Special Appeals and direct it to vacate the judgment of the Circuit Court. Further, we conclude that the Commissioner's interpretation of Ins. Art., § 23–304 is correct, and that Respondents violated the statute when their premium finance agreements operated to assess a finance charge in excess of 1.15% for each 30 days. We conclude also that two Respondents were assessing improperly finance charges to customers whose underlying insurance policies were voided ab initio, because they charged more than 1.15% for each 30 days; however, lawfully applied finance charges on the premiums advanced for these policies before the policies were declared void, may be valid. Accordingly, we shall direct that the Court of Special Appeals direct the Circuit Court for Baltimore City to affirm for the most part, and reverse in small part, the decision of the MIA.

I. Facts and Antecedent Administrative and Judicial Proceedings

The material facts in this case are undisputed. The MAIF is the insurer of last resort for Maryland drivers, where automobile insurance is required statutorily for all motor vehicle owners. Maryland Code (1957, 2011 Repl.Vol.), Transp. Art., § 17–103 & Ins. Art., § 20–301(a). The MAIF is prohibited by statute from accepting installment payments on insurance premiums. Ins. Art., § 20–507(f)(ii). Premium finance companies (“PFCs”) provide loans, through premium finance agreements, to the MAIF's customers who are unable to pay the premium in a lump sum.² PFCs must register with the MIA before making loans to the MAIF's insurance customers, and must meet certain financial requirements. Ins. Art., §§ 23–201(a) & 23–202. The Premium Financing Article of the Insurance Article of the Maryland Code regulates the interest, fees, and charges that PFCs may collect from consumers. ³ The provision primarily at issue in this case is Ins. Art., § 23–304, which addresses finance charges:

The finance charge shall be computed:

(1) on the amount of the entire premium loan advanced, including any taxes or fees that are financed under § 23–301.1 of this subtitle, after subtracting any down payment on the premium loan made be the insured;

(2) from the inception date of the insurance contract or from the due date of the premium, disregarding any grace period or credit allowed for payment of the premium, through the date when the final installment under the premium finance agreement is payable; and

(3) at a rate not exceeding 1.15% for each 30 days, charged in advance.

Premium finance agreements may be cancelled, in the event of an installment payment default as specified in the contract, provided the implicated PFC provides the customer with a notice of intent to cancel at least 10 days prior to cancelling the contract. Ins. Art., §§ 23–402(a) & 23–403. When an insurance contract is canceled—whether by the insurer, insured, or the PFC—the MAIF returns the gross unearned premiums due under the contract, computed pro rata, to the PFC. Ins. Art., § 23–405(a). The PFC then returns “to the insured the amount of unearned premium that exceeds any amount due under the premium finance agreement.” Ins. Art., § 23–405(b).

Respondents use the Rule of 78s (sometimes referred to as the “Rule”) to calculate the amount of interest due with each installment under the premium finance agreement. The Rule of 78s is an arithmetic method to calculate earned interest that allows the PFCs to collect more in interest during the first half of the loan repayment term than the latter half.⁴ Re spondents require typically ten-month repayment plans, so the Rule is modified to a “Rule of 55s” in such instances. The Rule is not prohibited specifically by the Insurance Article.

When a premium finance agreement is cancelled early, the Rule operates to the disadvantage of consumers because the interest charges are weighted more heavily in the early months of the contract repayment period.⁵ Two of the Respondents, Insurance Billing Services and U.S. Capital Associates, assess finance charges using the Rule, even when the underlying insurance policy is cancelled or voided ab initio.⁶ The MIA did not disapprove previously the use of the Rule by the PFCs and, in fact, states currently that the Rule is allowed for computing finance charges, so long as its use does not result in the consumer being required to pay more than 1.15% interest for any 30–day period.

In May 2008, the predecessor Commissioner of the current Commissioner commenced an investigation into the earned interest calculations used by the PFCs from 1 November 2007 to 30 April 2008. In a 19 May 2008 letter, the predecessor Commissioner requested specific documents from Respondents in order to compile a “Market Conduct Investigation Report.” The investigation revealed that, because of how the PFCs used the Rule, consumers who cancelled their premium finance agreements in the first five months, or whose insurance policies were declared void ab initio, paid finance charges greater than 1.15% for each 30 days that the loan was outstanding. The predecessor Commissioner issued a Cease–and–Desist Order on 6 October 2008 that prevented Respondents from collecting interest in excess of 1.15% for each 30–day period on any and all premium finance agreements, including those canceled before maturity. The Cease–and–Desist Order required also that Insurance Billing Services and U.S. Capital Associates identify customers who paid interest on insurance policies voided ab initio by the MAIF and for these PFC's to refund all interest charged and pay pre-judgment interest of six percent to those consumers.

Respondents requested timely a hearing on the Commissioner's Cease–and–Desist Order. The request resulted in a stay of the Order, by operation of statute. Ins. Art., § 2–212 (providing that a hearing demand made within ten days of an order of the Commissioner stays the effect of the order until the result of the hearing is set forth in another order). The Commissioner delegated to an ADIC the responsibility to conduct the hearing and make the final administrative decision. Respondents requested twice that the hearing be transferred to and conducted by the OAH, arguing that the ADIC could not be a fair and impartial presiding official with respect to the Cease–and–Desist Order issued by the Commissioner, the ADIC's hierarchical superior. The Commissioner denied both requests.⁷ The ADIC's hearing took place over 9 December 2008 to 11 December 2008. Respondents subpoenaed the Commissioner to attend the hearing, but he testified actually as a witness for the MIA. In that testimony, the Commissioner explained his rationale supporting the investigatory conclusions and the basis for the Cease–and–Desist Order. Respondents attempted to show that the Commissioner ratified previously the use of the Rule by, among other things ( see n. 15 infra, introducing evidence that the MIA proposed twice, but withdrew, regulations that had the same effect as the Cease–and–Desist Order (to force PFCs to charge interest pro rata, rather than according to the Rule)).

On 22 January 2009, the ADIC issued a Final Order affirming the conclusions of law and directions in the Commissioner's Cease–and–Desist Order. The Final Order concluded that Respondents were not entitled to have their administrative appeal transferred to the OAH because the Insurance Article allowed specifically the Commissioner to delegate the role of hearing officer and that delegation to the OAH was purely discretionary. The Final Order required Insurance Billing Services and U.S. Capital Associates to identify customers who paid a finance charge on underlying policies found to be void ab initio,...