Zappone v. Liberty Life Ins. Co.

• Citation: 349 Md. 45,706 A.2d 1060
• Decision Date: 01 September 1995
• Docket Number: No. 133,133
• Parties: Ricardo D. ZAPPONE et al. v. LIBERTY LIFE INSURANCE COMPANY et al. ,
• Court: Maryland Court of Appeals

Page 45

349 Md. 45

706 A.2d 1060

Ricardo D. ZAPPONE et al. v. LIBERTY LIFE INSURANCE COMPANY et al.

No. 133, Sept. Term, 1995.

Court of Appeals of Maryland.

March 11, 1998.

Gary Howard Simpson, Bethesda, for respondents.

James M. Brault (Brault, Graham, Scott & Brault, on brief), Rockville, for respondents.

Argued before MURPHY, C.J., ^* and ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI,* BELL and RAKER, JJ.

ELDRIDGE, Judge.

We issued a writ of certiorari in this case to determine if the provisions of the Insurance Code pertaining to unfair trade practices by insurers and their agents provide the exclusive or primary remedy for alleged acts of fraud, negligent misrepresentation, and negligence by an insurer or agent in connection with the sale of insurance. The court below answered this question in the affirmative, holding that an aggrieved insured was precluded from maintaining a common law tort action against an agent and an insurer without first invoking and exhausting the administrative and judicial review remedy provided by the Insurance Code. We shall reverse.

I.

Before turning to the facts of this case, it will be useful to review briefly the pertinent provisions of the Insurance Code.

The General Assembly, by Ch. 757 of the Acts of 1947, enacted a new subtitle as part of the Insurance Code, consisting of fifteen new sections, and titled "Unfair and Deceptive Practices." At the time the present litigation was instituted and decided by the court below, this subtitle was codified in Maryland Code (1957, 1994 Repl.Vol.), Art. 48A, subtitle 15, §§ 212-240J, denominated "Unfair Trade Practices." ¹

The purpose of the 1947 enactment, as set forth in Ch. 757, and codified as Art. 48A, § 212, was as follows:

" § 212. Purposes of subtitle.

"The purpose of this subtitle is to regulate trade practices in the business of insurance in accordance with the intent of Congress as expressed in the Act of Congress of March 9, 1945 (Public Law 15, 79th Congress, ch. 20, 50 U.S. Stat. at Large 33), by defining, or providing for determination of, all such practices in this State which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined."

The General Assembly has from time to time added some provisions to the 1947 statute. Nevertheless, the substance of the 1947 enactment has largely remained intact.

Some of the provisions of the Unfair Trade Practices subtitle which may be pertinent to the issue in this case are as follows. Art. 48A, § 217, prohibits any person from, inter alia, making or causing to be made any "statement misrepresenting ... the benefits or advantages" because of any insurance policy. Section 218, inter alia, prohibits a statement or representation with respect to the conduct of insurance business "which is untrue, deceptive or misleading." Section 233(d)(1) makes it a "fraudulent insurance act" for a person to make, knowingly or willfully, "any false or fraudulent statement or representation ... with reference to any application for insurance." Section 216 authorizes the Insurance Commissioner to define unfair practices in the business of insurance in addition to those unfair practices defined in the subtitle.

The general administrative remedy for violations of the Unfair Trade Practices subtitle is contained in § 215. That section provides for charges of unfair trade practices to be made to the Insurance Commissioner, notices of hearings, intervention by interested persons, hearings before the Commissioner, the Commissioner's issuance of cease and desist orders, and judicial review of the cease and desist orders. Section 216 provides for an administrative hearing remedy with respect to practices not defined as unfair practices in the subtitle but determined by the Commissioner to be unfair trade practices. That section provides for injunctions if the unfair practice continues after a final administrative determination. Other sections of the Unfair Trade Practices subtitle contain specific remedial provisions for violations of the particular section involved. See, e.g., § 230A (Commissioner can order monetary penalties and restitution if the section is violated); § 233 (criminal penalties); § 234AA(g) (fine imposed by the Commissioner); § 234C (Commissioner may order an insurer to accept a particular risk).

Moreover, Art. 48A, §§ 35-40, provide an administrative and judicial review remedy generally to enforce the provisions and purposes of the Insurance Code. Furthermore, Art. 48A, § 55, authorizes the Insurance Commissioner to revoke or suspend an insurer's license if the insurer "[v]iolates any provision of this article" or "[k]nowingly fails to comply with any lawful rule, regulation or order of the Commissioner," and § 55A authorizes monetary penalties and restitution in lieu of or in addition to revocation or suspension.

II.

As the case was decided in favor of the defendants upon their motions to dismiss and for summary judgment, we set forth the facts in the light most favorable for the plaintiffs. The basic facts are as follows.

The plaintiffs and petitioners in the present case are Ricardo D. Zappone and Print-A-Copy, Inc. Zappone is the sole shareholder of Print-A-Copy, a small business engaged in the printing, copying, and office supply trade in Montgomery County, Maryland. In addition to being sole shareholder, Zappone is also the president and an employee of Print-A-Copy. The respondents are Liberty Life Insurance Company, First Financial Resources, Inc., and William Ray Miller. First Financial is an independent insurance agency owned and operated by Miller and his wife. At all times relevant to this proceeding, First Financial was the licensed managing general agency and Miller was the licensed general agent for Liberty Life in the State of Maryland.

In March 1989, Miller and First Financial contacted Zappone concerning the purchase of life insurance from Liberty Life. Zappone, then 62 years of age, informed Miller that he wished to purchase a life insurance policy that, in addition to yielding benefits in the event of his premature death, would build up a large cash value relatively quickly to provide funds for his anticipated retirement in approximately twelve years. Miller indicated that he would attempt to procure from Liberty Life a policy meeting these stated needs, and Zappone executed an application for life insurance with Liberty Life.

During the succeeding months, Miller described to Zappone a life insurance plan called the "Executive Wealth Builder II," which he indicated would meet Zappone's needs. This plan consisted of a life insurance policy with a face amount of $1,000,000.00 that could be used as a deferred compensation plan to accumulate sizable cash value in a short period of time. Using several of Liberty Life's computer-generated illustrations of policy performance, Miller told Zappone that the policy could be fully funded by a one time premium payment of $500,000.00, that no additional premium payments would be required in order for the policy to perform and accumulate cash value as represented, and that the policy would accumulate sufficient retirement funds within twelve years. In addition to the one-time $500,000.00 premium payment, Miller told Zappone that an additional payment of $10,000.00 in "earnest money" to act as a binder would be required to put the policy into force. Based upon these representations, Zappone agreed to purchase the policy.

At Miller's suggestion, Zappone financed the purchase of the policy through the use of a "split dollar" agreement between himself and Print-A-Copy. Pursuant to this arrangement, Print-A-Copy loaned Zappone $510,000.00 to pay the policy's premium, and Zappone granted Print-A-Copy a security interest in the proceeds of the policy up to the amount of the loan. Print-A-Copy obtained a loan from Maryland National Bank in the amount of $510,000.00, and assigned its security interest in the policy to the bank as security for the loan. Print-A-Copy agreed to this split dollar arrangement because Miller represented to Zappone that the interest paid by Print-A-Copy on the loan would be deductible from its tax returns on a yearly basis. After obtaining the loan, Print-A-Copy delivered four checks totaling $510,000.00 to Miller, representing payment of the policy premium.

In July 1989, Liberty Life issued an insurance policy in Zappone's name. The policy, however, called for the payment of monthly premiums instead of a one-time premium, as had been represented to Zappone by Miller and First Financial. Shortly thereafter, at First Financial's request, Liberty Life converted this policy to a single premium policy.

Subsequently, Zappone learned from his tax advisor that the amount of interest paid by Print-A-Copy on the loan from Maryland National Bank was not deductible on Print-A-Copy's tax returns, and that Miller's representations in this regard were not accurate. When confronted with this information, however, Miller continued to represent to Zappone that the interest payments were tax deductible.

In May 1990, Liberty Life notified Zappone by letter that Zappone's $510,000.00 premium payment exceeded, by $407,034.48, certain maximum limits established by tax legislation enacted by Congress in 1988. ² This letter advised Zappone that he would be taxed on any policy distributions in excess of the amount of premiums paid into the policy if his policy premiums exceeded the new maximum limits. The letter suggested several options that would satisfy the statutory requirements, including: (1) depositing the excess premium amount into an "advance premium deposit account," which would automatically pay the maximum allowable statutory amounts into the policy, while the interest on the account would be taxed annually, and Zappone could withdraw interest or principal at any time; (2) depositing the excess amount into a "side fund...