Could a Maryland car insurance company just declare a policy void and walk away if it believed the driver lied on the application, or did it have to follow a formal cancellation process?

Plain-English summary

The Insurance Commissioner asked whether an auto insurer could unilaterally rescind a policy, treating it as void from the start, based on alleged misrepresentations in the application, or whether the insurer had to follow the Insurance Code's formal cancellation and nonrenewal procedures instead. The question mattered because Maryland required every vehicle owner to carry liability insurance, and unilateral rescission could leave a driver believing they had coverage when, in the insurer's view, they never did.

The Attorney General concluded that an insurer had two lawful paths, and only two: it could cancel or refuse to renew the policy under the Insurance Code's detailed notice-and-hearing requirements, which gave the insured 45 days' advance written notice, the right to protest, and a hearing before the Commissioner, or it could go to court and ask a judge to declare the policy void from its inception. What an insurer could not do was declare the contract rescinded on its own say-so, bypassing both the statutory process and judicial review. The opinion reasoned that allowing unilateral rescission would let insurers evade every procedural and substantive protection built into Maryland's compulsory insurance scheme.

Currency note

This opinion was issued in 1986. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

If a Maryland driver's insurer suspected they had lied on their application, could the insurer just tear up the policy and tell the driver they had no coverage?
No, according to this 1986 opinion. The Attorney General concluded that an insurer could not unilaterally rescind an auto liability policy; it had to either follow the statutory cancellation or nonrenewal procedure or obtain a court judgment declaring the policy void.

What notice was a Maryland driver entitled to before their car insurance policy could be cancelled or not renewed over an alleged misrepresentation?
The opinion described a requirement of written notice by certified mail at least 45 days before the proposed cancellation or nonrenewal date, spelling out the insurer's reasons and the driver's right to protest and request a hearing before the Insurance Commissioner.

Could an insurer still go to court to have an auto policy declared void from the beginning, rather than just canceling it going forward?
Yes. The opinion concluded that judicial rescission remained available as an alternative to statutory cancellation or nonrenewal, since nothing indicated the legislature meant to eliminate that traditional court remedy, only to bar insurers from taking that step on their own without a court's involvement.

Background and statutory framework

Maryland's compulsory auto insurance law required every vehicle owner to maintain liability coverage, backed by an Insurance Code framework (Article 48A, §234A and §240AA) that heavily regulated how insurers could cancel or decline to renew a policy: 45 days' written notice, specific disclosure of the insurer's reasons, a right to protest that stayed the cancellation pending a hearing, and a Commissioner-run hearing at which the insurer bore the burden of justifying its action. The Insurance Code, however, said nothing about rescission, the older common-law remedy of treating a contract as void from the start based on fraud or material misrepresentation.

The opinion surveyed how other jurisdictions handled the tension between rescission and compulsory insurance statutes, including a New York case holding that the state's comprehensive cancellation scheme entirely displaced the common-law rescission remedy, and a California case limiting even statutorily authorized unilateral rescission where it would undermine compulsory-insurance policy goals. The Attorney General took a middle position: reading Maryland's detailed statutory scheme as foreclosing unilateral insurer-initiated rescission (since allowing it would let an insurer sidestep every protection the legislature built into the cancellation and nonrenewal process), while preserving judicial rescission as an available alternative, since nothing suggested the legislature meant to eliminate that traditional remedy when it enacted the compulsory insurance and cancellation statutes.

Citations

Statutes:

• Article 48A, §234A and §234A(a) (substantive standards for cancellation, nonrenewal, and refusal to underwrite)
• Article 48A, §240AA, and subsections (a), (b), (d), (e), and (f) (notice, protest, and hearing procedures for cancellation and nonrenewal)
• TR §17-103, §17-103(a)(2), and §17-103(b) (compulsory auto liability insurance minimums)
• TR §17-104(b) (duty to maintain required security)
• TR §17-106(a) (automatic registration suspension upon lapse of coverage)
• Chapter 73, Laws of Maryland 1972 (enacting compulsory auto insurance and the Maryland Automobile Insurance Fund)
• Chapter 455, Laws of Maryland 1987 (later amendment to §240AA noted in the opinion's Editor's Note)

Cases:

• Government Employees Ins. Co. v. Insurance Comm'r, 273 Md. 467, 483 (1975)
• Insurance Comm'r v. Allstate Ins. Co., 268 Md. 428, 442 (1973)
• First Nat'l Bank v. Fidelity & Deposit Co., 283 Md. 228, 242 (1978)
• Pennsylvania Nat. Mut. Cas. Ins. Co. v. Gartelman, 288 Md. 151, 154 (1980)
• Government Employees Ins. Co. v. Taylor, 270 Md. 11, 17 (1973)
• Reserve Ins. Co. v. Duckett, 240 Md. 591 (1965)
• Glen Alden Corp. v. Duwall, 240 Md. 405 (1965)
• Vincent v. Palmer, 179 Md. 365 (1941)
• Ryan v. Brady, 34 Md. App. 41 (1976)
• Stiegler v. Eureka Life Ins. Co., 146 Md. 629 (1928)
• Suburban Garden Farm Homes Corp. v. Adams, 171 Md. 213 (1937)
• Great United Realty Co. v. Lewis, 203 Md. 442, 450 (1954)
• Bartlett v. Department of Transportation, 40 Md. App. 47, 50 (1978)
• Erie Ins. Exchange v. Lane, 246 Md. 55 (1967)
• Baker v. Continental Casualty Co., 201 Md. 464 (1952)
• Teeter v. Allstate Ins. Co., 192 N.Y.S.2d 610 (App. Div. 1959), aff'd, 212 N.Y.S.2d 71 (N.Y. 1961)
• Barrera v. State Farm Mut. Auto. Ins. Co., 456 P.2d 674 (Cal. 1969)
• McClurkin v. Maldonado, 304 Md. 225, 233 (1985)
• Kindley v. Governor of Maryland, 289 Md. 620, 625 (1981)
• Bradshaw v. Prince George's County, 284 Md. 294, 303 (1979)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1986/Volume71_1986.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

Insurance—Recission—Vehicle Liability Insurance-Insurer Seeking To Terminate Policy Based On Insured's Misrepresentations May Cancel Or Refuse To Renew The Policy Under Insurance Code Provisions Or May Seek Judicial Recission But May Not Rescind The Policy Unilaterally.

December 1, 1986

The Honorable Edward J. Muhl
Insurance Commissioner

You have requested our opinion concerning the applicability of certain provisions of the Insurance Code to rescission of an automobile liability insurance contract. Specifically, you have asked whether an insurer may unilaterally rescind such an insurance contract, and treat it as void ab initio, based on alleged material misrepresentations in the application for insurance; or whether an insurer that desires either to cancel or to refuse to renew the insurance policy may do so only in accordance with the substantive and procedural requirements imposed by the Insurance Code.

For the reasons given below, we conclude that, in order to terminate an automobile liability insurance contract based on alleged material misrepresentations by the insured, an insurer may (i) cancel or refuse to renew the policy in accordance with Article 48A, §§234A and 240AA of the Maryland Code or (ii) seek judicial rescission and a declaration that the policy is void ab initio. However, the insurer may not rescind the policy unilaterally.

I
Cancellation and Nonrenewal of Motor Vehicle Liability Insurance Policies in Maryland

Cancellations and nonrenewals of motor vehicle liability insurance policies in Maryland are governed by Article 48A, §§234A and 240AA.1 Section 240AA "was adopted solely as a repository for the comprehensive procedures governing cancellations and nonrenewals; ... the major substantive criteria for such proposed actions [are] to be found in §234A." Government Employees Ins. Co. v. Insurance Comm'r, 273 Md. 467, 483 (1975).

An insurer that intends to "cancel or fail to renew a policy of motor vehicle liability insurance ... for any reason other than nonpayment of premium" must send written notice by certified mail to the insured at least forty-five days in advance of the proposed effective date of the action. §240AA(a) and (b). The notice must be in triplicate and state in clear and specific terms, on a form approved by the Commissioner, the following information:

"(i) The proposed action to be taken;
(ii) The proposed effective date of the action;
(iii) The insurer's actual reasons for proposing to take such action;
(iv) An offer to exclude a named driver from the policy, if applicable;
(v) The right of the insured to replace the insurance through the Maryland Automobile Insurance Fund and the current address and telephone number of the fund;
(vi) The right of the insured to protest the proposed action and to request a hearing thereon before the Commissioner by signing two copies of the notice and sending them to the Commissioner within ten days;
(vii) That if a protest is filed by the insured, the current insurance will remain in effect pending a determination by the Commissioner; and
(viii) The authority of the Commissioner to award reasonable counsel fees to the insured for services rendered in connection with any such hearing if he finds the proposed action of the insurer to be unjustified." §240AA(b).

Section 240AA further provides that an insured shall have the right to protest the proposed action within 30 days after receipt of the notice and that a protest duly filed shall stay the proposed action of the insurer pending a final determination by the Commissioner. §§240AA(d) and (e). At any hearing conducted by the Commissioner within the scope of §240AA, the insurer "has the burden of proving its proposed action to be justified and, in doing so, may rely only upon the reasons set forth in its notice to the insured." §240AA(f).

The panoply of procedural protections provided to an insured by §240AA go hand in hand with the substantive limitations imposed upon insurer action by §234A. This latter section, originally enacted in 1970, prohibits discrimination in underwriting and provides, in part, that:

"No insurer ... shall cancel or refuse to underwrite or renew a particular insurance risk or class of risk for any reason based in whole or in part upon race, color, creed, sex, or blindness of an applicant or policyholder or for any arbitrary, capricious, or unfairly discriminatory reason." §234A(a).

An insurer that intends to cancel, refuse to underwrite, or refuse to renew a risk must do so by the application of standards that are reasonably related to the insurer's economic and business purposes. At any hearing to determine whether §234A has been violated, the burden of persuasion is upon the insurer to demonstrate that the cancellation, or refusal to underwrite or renew, is justified by the application of those standards. §234A(a). The Court of Appeals has held that the major substantive criteria for cancellations and nonrenewals are to be found in §234A and that this section prohibits an insurer, when it cancels or refuses to underwrite or renew an insurance policy, from relying upon any irrelevant considerations similar to, and "within the frame of reference of," those specifically enumerated. Insurance Comm'r v. Allstate Ins. Co., 268 Md. 428, 442 (1973).

These safeguards not only protect the insured against arbitrary cancellation or nonrenewal but also further the public policy objectives of compulsory liability insurance. In Chapter 73, Laws of Maryland 1972, the General Assembly enacted a compulsory motor vehicle insurance law. This law requires the owner of any motor vehicle registered in Maryland to maintain a vehicle liability insurance policy in certain amounts. §17-103 of the Transportation Article ("TR" Article).2 A vehicle owner "shall maintain the required security for the vehicle during the registration period." TR §17-104(b). If the required security for any vehicle terminates or otherwise lapses at any time, the registration of that vehicle is automatically suspended. TR §17-106(a). These requirements have "the overall remedial purpose of protecting the public by assuring that operators and owners of motor vehicles are financially able to pay compensation for damages resulting from motor vehicle accidents." Pennsylvania Nat. Mut. Cas. Ins. Co. v. Gartelman, 288 Md. 151, 154 (1980).

Continuous insurance coverage is essential to the effectiveness of a law mandating automobile insurance in fixed amounts. An insured must receive adequate notice of a proposed cancellation or nonrenewal so that replacement insurance coverage can be obtained, unnecessary gaps in coverage avoided, and the protection available to innocent third party accident victims preserved. See Government Employees Ins. Co. v. Taylor, 270 Md. 11, 17 (1973). In addition, the statutory termination provisions allow the insured to avoid the consequences flowing from a lapse in coverage, such as suspension of vehicle registration. See Reserve Ins. Co. v. Duckett, 240 Md. 591 (1965). For these reasons, the very same bill that enacted mandatory vehicle liability insurance, Chapter 73, Laws of Maryland 1972, also amended the Insurance Code to add the procedural protections of §240AA.

II
Rescission of Automobile Liability Insurance

A. Common Law Background

At common law, a contract could be rescinded by mutual consent, by an action in equity, or as a defense to an action at law. See, e.g., Glen Alden Corp. v. Duwall, 240 Md. 405 (1965); Vincent v. Palmer, 179 Md. 365 (1941); Ryan v. Brady, 34 Md. App. 41 (1976). Although some authority suggests that rescission of a contract may be accomplished merely by giving adequate notice to the other party, the cases generally evince a decided preference for judicial intervention. Compare Stiegler v. Eureka Life Ins. Co., 146 Md. 629 (1928) with, e.g., Suburban Garden Farm Homes Corp. v. Adams, 171 Md. 213 (1937). Rescission of a contract without mutual consent is viewed as an extraordinary equitable remedy, to be granted by a court of competent jurisdiction only upon proof of fraud, duress, or other wrongdoing. Great United Realty Co. v. Lewis, 203 Md. 442, 450 (1954); Suburban Garden Farm Homes Corp. v. Adams, 171 Md. at 218; Bartlett v. Department of Transportation, 40 Md. App. 47, 50 (1978).

In order to rescind a contract void ab initio based on misrepresentation in the inducement, the party seeking rescission must establish that the misrepresentation is material to the risk. Erie Ins. Exchange v. Lane, 246 Md. 55 (1967). Whether a misrepresentation has been made, and whether it is material to the risk, are questions for the trier of fact. Erie Ins. Exchange v. Lane, 246 Md. at 63; Baker v. Continental Casualty Co., 201 Md. 464 (1952).

Generally, in cases dealing with automobile liability insurance rescission, the rescission is effected by, or enforced through, judicial action. However, it is unsettled whether judicial rescission is the exclusive method available to an insurer or whether an insurer may rescind a contract unilaterally, without going to court.

B. Effect of Compulsory Insurance Laws

The Insurance Code makes no mention of rescission as a method by which an insurer may terminate a policy of motor vehicle liability insurance. Nor does any recent Maryland case address the question.3

However, a New York court has addressed the effect of New York's compulsory insurance law, comparable to Maryland's, on rescission of an automobile liability insurance contract. In Teeter v. Allstate Ins. Co., 192 N.Y.S.2d 610 (App. Div. 1959), aff'd, 212 N.Y.S.2d 71 (N.Y. 1961), the court held that the remedy of rescission ab initio of an automobile insurance policy for fraud did not survive the adoption of the compulsory automobile insurance law. The statutorily prescribed methods for cancelling or refusing to renew such a policy were held to have supplanted the common law right to rescission. Teeter rests largely on the nature of New York's procedural scheme for terminating coverage, which the court described as "all embracing." 192 N.Y.S.2d at 617. The court also observed that the compulsory automobile insurance law

"relies, to a large extent, upon penal sanctions which are wholly incompatible with the recognition of a right of rescission ab initio as between the insurer and the insured. The Legislature plainly intended to give the insured a reasonable opportunity to obtain other insurance or to surrender his license plates, without suffering any penalty, in the event of the termination of coverage for any reason." Id.

Finally, the court noted, had the New York legislature intended to allow rescission to be an available remedy, it could have so provided in the statute. 192 N.Y.S.2d at 615-16.

One commentator has concluded that, in general, compulsory automobile liability statutes "destroy an insurance company's former common law remedy to retroactive rescission of the contract for fraud and... substitute therefor a statutory right to cancel prospectively but not retrospectively." 7 Williston on Contracts §920, at 631 (Jaeger ed. 1963).4

III
Statutory Limits on Right to Rescission in Maryland

As discussed in Part I above, the Insurance Code provides two methods by which an insurer may terminate coverage under a policy of automobile liability insurance, cancellation and nonrenewal. The procedural requirements imposed by §240AA are delineated in great detail and are designed to ensure that no policyholder will be denied an adequate opportunity to contest the insurer's proposed action or to obtain replacement coverage, if necessary. Section 234A establishes substantive criteria for the cancellation or nonrenewal of any insurance policy and places the burden squarely upon the insurer to justify its proposed action.

Given this comprehensive statutory scheme, and observant of the fact that Maryland is a compulsory automobile insurance state, we believe that the General Assembly did not intend to allow an insurer to terminate coverage under a policy of motor vehicle liability insurance merely by declaring that the insured made a material misrepresentation on the insurance application. To view the legislative intent otherwise would leave a gaping hole in the statutory scheme through which an insurer could walk at will merely by alleging material misrepresentation.5 If unilateral rescission were permissible, the insured would be stripped of all of the Insurance Code's procedural and substantive protections applicable to cancellations and nonrenewals and would be faced with the unenviable choice of accepting the rescission or applying to a court for an injunction to halt it.

At the same time, we do not believe that we need to go as far as did the New York court in Teeter and conclude that the common law right to rescission has been entirely supplanted by the statutory scheme. It is doubtful that the General Assembly, by enacting §§234A and 240AA as well as a compulsory automobile insurance law, intended to deprive an insurer of the right to seek judicial rescission of an automobile liability insurance contract as an alternative to cancellation or nonrenewal.6 Absent a clear expression of legislative intent to the contrary, we believe that the right to seek judicial rescission of an automobile liability insurance policy remains intact.

As noted in Part IIB above, the Insurance Code does not address the issue of rescission of a motor vehicle liability insurance policy. The Insurance Commissioner does have the authority, under §§234A and 240AA, to determine whether an insurer has acted in accordance with the law in cancelling, or refusing to underwrite or renew, an insurance risk or class of risk. However, the Commissioner's jurisdiction does not extend to determining whether an insurer has established grounds for rescission of an insurance contract. Only a court can declare that the contract is void ab initio.

IV
Conclusion

In summary, it is our opinion that, in order to terminate an automobile liability insurance contract based on alleged material misrepresentations by the insured, an insurer may (i) cancel or refuse to renew the policy in accordance with Article 48A, §§234A and 240AA or (ii) seek judicial rescission and a declaration that the policy is void ab initio. However, the insurer may not rescind the policy unilaterally.

Stephen H. Sachs
Attorney General
Meg R. Loeschke
Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions and Advice

Editor's Note: Article 48A, §240AA has been amended to require additional detail in a cancellation notice. Chapter 455, Laws of Maryland 1987.

1 All statutory references in this opinion, unless otherwise stated, are to Article 48A, the Insurance Code.

2 The minimum levels of required coverage are set out in TR §17-103(b). Under TR §17-103(a)(2), the Motor Vehicle Administration "may accept another form of security in place of a vehicle liability insurance policy if it finds that the other form of insurance adequately provides the benefits required by [TR §17-103(b)]." Chapter 73 also created the Maryland Automobile Insurance Fund, to provide insurance coverage for poor risks. See First Nat'l Bank v. Fidelity & Deposit Co., 283 Md. 228, 242 (1978).

3 All of the Maryland cases dealing with rescission of automobile liability insurance policies arose prior to the enactment of Maryland's compulsory automobile insurance law and of §§234A and 240AA. See, e.g., Southern Gen. Ins. Co. v. O'Keefe, 275 F. Supp. (D. Md. 1967); State Farm Mut. Auto. Ins. Co. v. West, 149 F. Supp. 269 (D. Md. 1957); Strumpf v. State Farm Mut. Auto. Ins. Co., 252 Md. 696 (1969). Other Maryland cases that have addressed the issue of rescission of insurance contracts dealt primarily with life insurance policies containing provisions for rescission within a specified time period. See Silberstein v. Massachusetts Mut. Life Ins. Co., 189 Md. 182 (1947); Penn Mutual Ins. Co. v. Hartle, 165 Md. 120 (1933); Stiegler v. Eureka Life Ins. Co., 146 Md. 629 (1928).

4 See also Barrera v. State Farm Mut. Auto. Ins. Co., 456 P.2d 674 (Cal. 1969), in which the California Supreme Court held that an insurer's actions under a statute expressly permitting unilateral rescission of automobile liability insurance policies nevertheless were limited by the public policy underlying mandatory insurance laws: "We ... cannot accept a construction of the statute governing rescission of insurance policies, insofar as it applies to automobile liability insurers, which would serve only the financial interest of the insurer and directly thwart that public policy." 456 P.2d at 684.

5 Statutes must be read in such a way as to avoid unjust, illogical, absurd, or unreasonable consequences. See, e.g., McClurkin v. Maldonado, 304 Md. 225, 233 (1985); Kindley v. Governor of Maryland, 289 Md. 620, 625 (1981).

6 Statutes in derogation of common law rights should be strictly construed. E.g., Bradshaw v. Prince George's County, 284 Md. 294, 303 (1979); Stoll v. Mayor and City Council of Baltimore, 163 Md. 282, 293 (1932); In re Special Investigation No. 202, 53 Md. App. 96, 103 (1982); Dillon v. Great Atlantic and Pacific Tea Co., 43 Md. App. 161, 166 (1979).