Ogrinz v. James

• Decision Date: 01 September 1986
• Docket Number: No. 150,150
• Parties: Alexander J. OGRINZ III et al. v. William S. JAMES et al. ,
• Court: Maryland Court of Appeals

Page 381

309 Md. 381

524 A.2d 77

Alexander J. OGRINZ III et al. v. William S. JAMES et al.

No. 150, Sept. Term, 1986.

Court of Appeals of Maryland.

April 21, 1987.

Edward J. Birrane, Jr. (Patrick A. O'Doherty and Barbara Mello, on brief), Baltimore, for appellant.

George A. Nilson and Robert A. Zarnoch, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen., Kathleen M. Sweeney, Margaret Lee Quinn, Linda H. Lamone, Asst. Attys. Gen., on brief), Baltimore, for appellee.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, RODOWSKY, COUCH, McAULIFFE and ADKINS, JJ.

MURPHY, Chief Judge.

This case primarily involves a challenge to the constitutionality of Chapter 281 of the Acts of 1986, which authorized the incorporation, capitalization and operation of a mutual insurance company for the purpose of writing policies of lawyers' professional liability insurance.

I

By Chapter 713 of the Acts of 1977, the General Assembly added Subtitle 40 to the Insurance Code entitled: "Legal Mutual Liability Insurance Society of Maryland." Codified as Md.Code (1957, 1972 Repl.Vol., Cum.Supp.1977) Art. 48A, §§ 566-574, the Act's purpose, as provided in § 567(a), was

"to provide a mechanism for the payment of indemnities to persons suffering injury arising out of the rendering of or the failure to render professional services by attorneys and to provide a mechanism for attorneys to obtain insurance against liability for injury due to the rendering of or failure to render any professional service...."

Section 567(b) provided that the Act would become effective upon a finding by the Insurance Commissioner

"that a substantial number of attorneys are or within six months will be unable to obtain legal malpractice insurance from insurers admitted to write such insurance in Maryland and that the lack of such insurance is hampering the practice of law in Maryland and thereby affecting the ability of the citizens of Maryland to obtain proper legal representation or services."

Section 568(a) provided that, subject to compliance with § 567(b), the Legal Mutual Liability Insurance Society of Maryland (Legal Mutual) would be created as a nonstock corporation. Section 569(d) specified the types of professional liability insurance policies that the Society could issue. Chapter 713 did not contain any means of capitalizing Legal Mutual, and the Act's provisions were never implemented.

Codified as Code (1957, 1986 Repl.Vol.) Art. 48A, §§ 244-244V, Subtitle 16B was added to the Insurance Code by Chapter 737 of the Acts of 1984. Its purpose, as stated in § 244(b), was

"(1) [t]o protect policyholders and the public against the adverse effect of excessive, inadequate, or unfairly discriminatory rates;

(2) [t]o encourage, as the most effective way to produce rates that conform to the standards of paragraph (1) of this subsection, independent action by and reasonable price competition among insurers;

(3) [t]o provide formal regulatory controls for use if price competition fails;

(4) [t]o authorize cooperative action among insurers in the rate-making process, and to regulate such cooperation in order to prevent practices that tend to bring about monopoly or to lessen or destroy competition; and

(5) [t]o provide rates that are responsive to competitive market conditions and to improve the availability of insurance in the State."

Prior to this enactment, insurers were required to file proposed rates with the Insurance Commissioner thirty working days before their effective date; and unless the Commissioner disapproved the proposed rates within that period, they became effective. § 242(d). Subtitle 16B, effective July 1, 1984, changed this process for many types of insurance, including lawyers' professional malpractice insurance. Section 244D established ratemaking standards, and § 244E(a) required covered insurers to file information and rates by the date that they became effective. If the Insurance Commissioner questioned whether insurers were complying with § 244D, § 244-I provided a mechanism for determining compliance, and § 244K authorized the Commissioner to require prior approval of all new rates. Before doing so, however, the Commissioner was required to conduct a hearing to determine whether a reasonable degree of competition existed for the type of insurance under investigation. § 244-I(c)(1); § 244K(a)(1). At this hearing, the insurer carried the burden of establishing that a reasonable degree of competition existed within the particular market. § 244-I(c)(1).

Amid growing concern about the availability and cost of legal malpractice insurance, the Insurance Commissioner held a Subtitle 16B hearing on November 14, 1984. 11 Md.Reg. 1948 (1984). As a result, he found that reasonable competition did not exist in the legal malpractice insurance market, and he invoked the provisions of § 244K that required insurers to justify all rate increases prior to their effective date. 12 Md.Reg. 741 (1985). Without further action by the Insurance Commissioner, that order remained effective for one year. § 244K(c). On February 10, 1986, the Insurance Commissioner again determined, based on a hearing held on January 30, 1986, that a reasonable degree of competition did not exist in the legal malpractice insurance market. 13 Md.Reg. 720 (1986). That order expired February 10, 1987. ¹

Chapter 281 of the Acts of 1986, an emergency bill that took effect on April 29, 1986, amended Subtitle 40 of the Insurance Code in a number of particulars in order to facilitate the creation and operation of Legal Mutual. Amended § 567(b) provided that Subtitle 40, as amended, would become effective thirty days after the Insurance Commissioner (1) received a petition from the Maryland State Bar Association (MSBA) requesting Legal Mutual's establishment and (2) determined "that a reasonable degree of competition does not exist in the State for legal professional liability insurance under Subtitle 16B of this Article." Section 567(b)(2) provided that, if the Commissioner "has not issued an order finding that a reasonable degree of competition does not exist for legal professional liability insurance before receiving the [MSBA] petition," he must hold a hearing within ten days of the receipt of the petition and pass an order within fifteen days thereafter. The Subsection further specified that, if the Commissioner determined that "a reasonable degree of competition does not exist," then the provisions of amended Subtitle 40 "shall become effective immediately on the date of the Commissioner's order." Upon taking effect, the Governor is required by § 569 to appoint a Board of Directors to govern the Society and to direct its incorporation. The Society is not an agency or instrumentality of the State, and the State may not budget for or provide general fund appropriations for it. § 568(e).

In addition to the types of insurance originally authorized to be written by Legal Mutual under Chapter 281 of the Acts of 1976, amended § 569(c)(4) authorized it to write property, casualty and surety insurance "related or incidental to the practice of law or to the facilities, equipment and premises used by attorneys in the practice of law." ²

Section 570(a) of the 1986 Act made provision for certification to the State Treasurer within thirty days after Legal Mutual's incorporation of "a list of all attorneys admitted to practice law in the State as shown in the records of the Clients' Security Trust Fund ... on the date of the Society's incorporation." Section 570(b) mandated the imposition upon all such attorneys of a "special one-time tax for the privilege of practicing law in the State" in the amount of $150, to be collected by the State Treasurer. Section 570(c) provided, inter alia, that failure to pay the tax would result in a lien being imposed upon the attorney's real and personal property. Section 570(d)(1) "dedicates the proceeds of the tax ... as the initial policyholders' surplus of the Society." Section 570(e) makes provision for a nonrefundable "membership fee which shall be payable by an attorney at the time of application to the Society for a policy of insurance." This subsection further provides that the membership fee may not be credited against any premium payable to the Society for a policy of insurance, but that an attorney who has paid the tax "shall be credited with the amount of the tax paid against his liability for any membership fee." Section 570(f) provides that, upon payment of the membership fee, an attorney may be insured by the Society "for any and all hazards customarily insured by the Society, subject to any coverage limitations specified by the Society in accordance with policy limitations, exclusions, conditions, deductibles, and loss-sharing requirements." Under § 572(c), Legal Mutual is authorized to "refuse to underwrite or cancel any risk that does not meet its underwriting standards subject to the applicable provisions of this Title."

II

On May 14, 1986, the MSBA petitioned the Insurance Commissioner to create Legal Mutual. Thereafter, by letter dated May 20, 1986, the Commissioner determined that the requirements of § 567(b) had been met by the order of February 10, 1986; he, therefore, authorized the creation of Legal Mutual. The Governor then appointed the initial Board of Directors of the Society, and the Insurance Commissioner approved its incorporation on July 1, 1986.

A number of attorneys filed a declaratory judgment action in the Circuit Court for Baltimore City, mounting a broad-based challenge (a) to the constitutionality of the amendments to Subtitle 40, as enacted by Chapter 281 of the Acts of 1986 and (b) to the legality of Legal Mutual's activation under the provisions of the statute. Among others, a declaration was sought that the tax was unconstitutional and that the Society's incorporation was unlawful. The court (Kaplan, J.) declared the Act constitutional in all of the challenged respects and determined that Legal...