It is Important to Honor Substance Over Form
In the Maryland motor vehicle insurance law, the phrase “first named insured” makes what the Court of Appeals of Maryland calls “a cameo appearance” in
Kelly Swartzbaugh, et al. v. Encompass Insurance Company of America, No. 100 (Md. 04/25/2012) It serves only to identify the person who has authority to accept or waive certain types of coverage under a policy. Because Maryland statutes fail to define the phrase “first named insured” the highest court in Maryland was called upon to explain its meaning and determine if a waiver of uninsured motorist or underinsured motorist cover when waived by the applicant could be ignored because the person signing the waiver was not named first in line in the policy applications.
Motor Vehicle Insurance
Since the early 1970s, Maryland’s compulsory motor vehicle insurance law has been designed to ensure that those who own and operate motor vehicles registered in the State are financially able to pay compensation for damages from motor vehicle accidents. That law makes automobile liability insurance a prerequisite to the registration of a motor vehicle. The law specifies certain types of coverage that a policy must contain. As a result, policies will generally contain similar or identical provisions in order to comply with Maryland law, although there is no standard automobile insurance policy in Maryland.
A policy must provide protection against damages caused by uninsured motorists, sometimes referred to as “UM coverage.” It is well-settled that UM coverage includes coverage for accidents involving under-insured, as well as uninsured, motorists.
Waivers of UM Coverage
With respect to UM coverage, State law allows for waivers of the coverage that the law otherwise specifies. In particular, under the State insurance code, UM coverage under a motor vehicle insurance policy is by default equal to the liability coverage under the policy. This level of coverage may be waived, however, in favor of a lesser amount at least equal to the minimum coverage required by the motor vehicle law. The waiver must be in writing on a form devised by the state that complies with certain statutory standards concerning format and content. The waiver is to be executed by the “first named insured.” Again, the waiver of higher limits of coverage will reduce the premium owed for the policy.
The facts are straightforward and not in dispute. This case concerns an insurance policy purchased by Kenneth and Lynne Swartzbaugh and its potential coverage of an accident involving their daughter, Kelly Swartzbaugh. In July 1998, Lynne, who handled the family finances with respect to insurance and related items, applied for insurance coverage for the family with a local independent insurance broker. She ultimately purchased a “package” policy that included both homeowners and motor vehicle insurance with Respondent Encompass Insurance Company. With respect to motor vehicle insurance, the policy provided liability coverage in the amounts of $250,000 per person and up to $500,000 per accident. As later amended, it listed three vehicles, and named Kenneth, Lynne, and Kelly as drivers. Lynne executed a waiver of higher UM coverage on the standard form.
By its terms, consistent with Maryland law, the waiver remained in effect until withdrawn. In March 2008, Kelly was injured while a passenger in an accident involving an under-insured driver. The driver’s insurer tendered the limits of his policy. Because the higher limits of UM coverage on the Petitioners’ own motor vehicle policy had been waived, she was unable to collect further damages from Encompass under that policy’s UM coverage. The Petitioners then brought a declaratory judgment action in the Circuit Court for Carroll County, seeking a declaration that the waiver was ineffective on the ground that Lynne was not in fact the “first named insured” on the policy. The circuit court disagreed and ruled that the waiver signed by Lynne was valid and enforceable.
Petitioners challenge the effectiveness of Lynne’s waiver of enhanced UM coverage. The effectiveness of the waiver turns on whether Lynne was properly considered the “first named insured” with respect to the Petitioners’ motor vehicle insurance policy at the time she executed the waiver in 1998. The determination of this question is, in part, a matter of statutory construction — for it is the statute that specifies that the waiver is to be made by the “first named insured.”
Neither the State motor vehicle law nor the insurance code explicitly requires any particular individuals to be named in, or insured under, a motor vehicle insurance policy. The law literally requires that vehicles, not specific individuals, be covered. Neither the motor vehicle law nor the insurance code necessarily dictates the identity of the individuals to be insured under a policy, much less designates who should be “first named insured.”
A motor vehicle insurance policy also typically covers various classes of individuals who are not specifically named in the policy. For example, some individuals insured under a motor vehicle policy are covered by “omnibus” clauses that describe categories of individuals, such members of the policyholder’s family or permissive users of the automobile. Thus, it appears likely that the concept of a “named insured,” at least in the context of an automobile insurance policy, distinguishes those individuals covered by the policy who are specifically named in the policy, in contrast to those who are covered but only generally described and not named.
The Court of Special Appeals found no evidence in the legislative history that, in requiring the waiver to be made by the “first named insured,” the Legislature was expressing a policy choice keyed to name order. The court concluded that the parties to an insurance policy could designate the “first named insured” in the policy documents, regardless of the order in which insured individuals are listed.
In a space labeled “Policyholder,” Kenneth’s name appears above Lynne’s, though this does not appear to be a complete listing of named insured individuals as Kelly’s name does not appear in this section of the policy. All three Petitioners are named as “rated drivers” in several places in the policy, but the order of names differs — Kenneth’s name appears first in one instance and Lynne’s name appears first in another.
The one place in the policy documents that expressly uses the phrase “first named insured” is the form for the waiver of enhanced UM coverage. Lynne signed this form.
The UM coverage waiver form that Lynne executed was devised by the state in compliance with the legislative directive. On that form, the signatory avers that he or she is the “first named insured/applicant” and the line for signature identifies the signatory as the “First Named Insured.” This is consistent with the view that the individual who acted for the other insured parties in applying for insurance coverage would presumably be “first named insured” for purposes of a waiver once the policy was issued. The highest court in Maryland noted that if one could always identify the first named insured simply by reference to name order, a certification of that status would be unnecessary. The certification on the waiver form thus anticipates the possibility that one who is named later on other policy documents might act for the other insured parties.
The highest court in Maryland agreed with the intermediate appellate court that the use of the phrase “first named insured,” at least in the context of motor vehicle insurance, has a notion of primacy. The policy underlying the waiver provision was to allow insurance consumers to make an informed choice between enhanced UM benefits at a higher premium and a lower level of benefits with a correspondingly lower premium.
The Court concluded that the named insureds are entitled to determine who will exercise that choice and serve as primary or first named insured. In the absence of a specific designation in the policy documents, the waiver form fills that gap by requiring the individual who executes the form to certify his or her status as “first named insured.”
Lynne fit the statutory definition of a “named insured.” There is no question that Lynne was the household member in charge of procuring and making decisions about insurance. She decided to waive the enhanced UM coverage in favor of a lower premium. She certified herself to be “first named insured/applicant” in the waiver form.
In Maryland, in the context of motor vehicle insurance policy, the phrase “first named insured” refers to a person insured under the policy and specifically named in the policy who acts on behalf of the other insured parties and is designated as “first named insured” in the policy documents. The injured party was, therefore, limited to a recovery of the limits chosen for UIM coverage.
This is a case that wended its way through all available courts in Maryland because, after the accident, with 20/20 hindsight, the insured sought to revoke the waiver for which they received a major premium discount, and force their insurer to pay limits it did not agree to pay at the time the policy was issued.
Insurance is a contract where the insured only obtains the coverage sought and should never be allowed to change the terms of the policy after an accident to provide coverage they refused but which, after the accident, they determined they needed.
(c) 2012 – Barry Zalma
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.
He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant.
Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.