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REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 998 September Term, 1997

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JOHNSON & HIGGINS OF PENNSYLVANIA, INC. v. HALE SHIPPING CORPORATION ________________________________ Murphy C.J. Wenner, Kelly, John F. Sr. (specially assigned), JJ. ________________________________

Opinion by Kelly, J. ________________________________ Filed: May 1, 1998

In

a

seven

count

complaint,

appellee,

Hale

Shipping

Corporation, sued their insurance broker, Johnson & Higgins of Pennsylvania, Inc. ("Johnson & Higgins"), appellant. By

stipulation, the original seven-count complaint was reduced to only two counts, which alleged negligence and breach of contract on the part of Johnson & Higgins. The gravamen of the complaint was that

Johnson & Higgins had failed to protect Hale Shipping's interests when it neglected to seek the deletion of a "refrigeration clause" from a marine insurance policy that covered Hale's transportation of refrigerated cargo on one of its barges. Refrigerated cargo

transported by Hale Shipping was allegedly damaged and the presence of this clause resulted in the marine insurance carrier denying coverage. The owner of the cargo brought a claim against Hale

Shipping in the United States District Court for the Southern District of New York. In addition, a declaratory judgment action

between Hale and its marine insurance carrier was brought before a federal court in Philadelphia. Hale Shipping's case against

Johnson & Higgins was stayed while these cases were pending. In the present case, Hale Shipping sought recovery for losses sustained in defending the United States District Court claims for alleged damage to the cargo in question, any potential liability for the alleged damage to the shipment, and disruption and loss of business due to inappropriate insurance coverage. At trial, the

parties stipulated that Hale Shipping had incurred $50,000 worth of

damages. This case proceeded to trial before a jury sitting in the Circuit Court for Baltimore City and the jury found for Hale Shipping on both counts. The trial court entered judgment in favor Johnson & Higgins then

of Hale Shipping in the amount of $50,000.

filed a motion for judgment notwithstanding the verdict or for a new trial. This motion was denied and Johnson & Higgins then noted

a timely appeal.

ISSUES PRESENTED For our review, Johnson & Higgins presents the following issues, which we have slightly rephrased and renumbered: I. Whether the trial court erred in submitting the case to the jury in light of the evidence that Hale Shipping had failed to read its insurance policies; II. Whether the trial court erred in declining to instruct the jury on Hale Shipping's failure to read its insurance policies; III. (a) Whether the trial court abused its discretion in qualifying a witness for Hale Shipping as an expert; (b) Whether the trial court abused its discretion in permitting Hale Shipping's expert witness to testify as to the complexity of the refrigeration clause, the inability of policyholders to read and understand insurance policies, and the ability of non-marine insurance experts to understand marine insurance policies; IV. Whether the trial court erred in allowing 2

Hale Shipping to inquire into the financial worth of Johnson & Higgins; and V. Whether the trial court erred in denying Johnson & Higgins' motion for judgment notwithstanding the verdict.

FACTUAL BACKGROUND In 1975, Edwin Hale, Sr., formed a trucking company based in Baltimore City. At that time, the company employed three people.

At the time of trial, the company had grown to 500 employees, most of whom worked in Baltimore, but some were located in twelve cities along the east coast from Jacksonville, Florida to Boston,

Massachusetts. In 1984, Mr. Hale decided to expand his business to include marine transport. marine business. Prior to that time, he had no experience in the At trial, Mr. Hale stated that he sought to

discover "a competent group of people" who could advise him on buying barges and tug boats, a law firm and accounting firm who knew about the marine business, and an insurance broker. Mr. Hale

stated that he "went ahead and found out who was the best broker available." He conducted a search, speaking to people already

involved in the marine business and found that Johnson & Higgins was generally considered to be one of the best, if not the best, insurance brokerage company. Mr. Hale met with representatives

from Johnson & Higgins, including Carolyn Schaefer, who would later

3

become Hale Shipping's account manager.

According to Mr. Hale,

these representatives informed him that their company was the best insurance broker in the country. During their meeting, Mr. Hale At

described what the proposed marine operation would entail.

trial, Mr. Hale testified that he retained Johnson & Higgins and that he came to rely on them for their advice. He explained that

he had no expertise in marine insurance and that he had looked for an insurance agent who could give him the proper coverage for the operation he planned to run. The first marine insurance policy obtained by Johnson &

Higgins for Hale Shipping became effective on December 7, 1984. The policy ran for one year and, in ensuing years, through 1987, insurance policies were obtained by Johnson & Higgins for Hale Shipping. Ronald Gartrell, Hale Shipping's operations manager and,

until May 1987, the individual responsible for its marine insurance coverage, testified that he came to rely on Johns & Higgins' expertise in obtaining the necessary insurance coverage for the corporation. He added that over the years, he frequently spoke Ms.

with Ms. Schaefer regarding Hale Shipping's insurance needs.

Schaefer also testified that she knew Hale Shipping had come to rely on her expertise in marine insurance. Each of the insurance policies obtained for Hale Shipping by Johnson & Higgins included an SP-23 form, which contained clause 8(b) regarding the coverage of refrigerated cargo: The Assurer hereby undertakes to make 4

good to the Assured or the Assured's executors, administrators and/or successors, all such loss and/or damage and/or expense as the Assured shall as owners of the vessel named herein have become liable to pay and shall pay on account of the liabilities, risks, events and/or happenings herein set forth: Cargo (8) Liability for loss of, or damage to, or in connection with cargo or other property, excluding mail and parcel post, including baggage and personal effects of passengers, to be carried, carried, or which has been carried on board the vessel named herein: Provided, however, that no liability shall exist under this provision for: (b) Loss of, or damage to, or in connection with cargo requiring refrigeration unless the space, apparatus and means used for the care, custody, and carriage thereof have been surveyed by a classification surveyor or other competent disinterested surveyor under working conditions before the commencement of each voyage and found in all respects fit, and unless accepted for transportation under a form of contract approved, in writing, by the Assurer. Copies of the insurance policies, including the above quoted language, were sent to Hale Shipping, but Mr. Hale never read them. Mr. Gartrell stated that he sometimes skimmed the policies, but that he did not read them. probably skimmed clause 8(b). Mr. Gartrell believed that he had He never contacted the company's 5

attorneys or Carolyn Schaefer, who managed Hale Shipping's account at Johnson & Higgins, regarding that clause. In 1987, Hale Shipping began to transport cargo along a new route which ran from St. John, New Brunswick, Canada to New York. This route would also include, for the first time, Hale Shipping's transport of refrigerated cargo. Initially, Hale Shipping

chartered a container ship, a self-propelled vessel, called the Lanette.1 Mr. Hale explained that he had decided to charter a ship

and its crew because a container ship is much faster than a tug and barge. In May 1987, Hale Shipping received a letter from its

attorneys advising Hale that, in light of a recent federal court decision, the corporation should "carefully examine" the terms of any insurance coverage it may have obtained in connection with the charter of the Lanette "to ensure that the coverage for damage to reefer[2] cargoes is very broadly worded." Mr. Hale testified that

he gave the letter to Johnson & Higgins "to make sure that this was cleared up and we had the proper coverage." According to Mr. Hale,

the existing charter policy was amended by deleting clause 8(b) from the SP-23 form, a change for which Hale Shipping had to pay an

We note that the name of this ship is spelled "Lynette" in the trial transcripts, but is spelled "Lanette" on the insurance policies. We adopt the spelling used on the policies. Mr. Hale explained that the term "reefer" referred to refrigerated containers, which have generators on the front to keep their contents cold or frozen. 6
2

1

additional

premium.

Mr.

Gartrell

also

testified

that

after

communications with Johnson & Higgins, clause 8(b) was deleted from the coverage of the Lanette. Regarding the letter from Hale Shipping's attorneys, Mr. Gartrell also testified that he faxed a copy of it to Ms. Schaefer at Johnson & Higgins. Mr. Gartrell further testified that the

letter received from the attorneys commented that Hale Shipping should contact the attorneys if it wished to have them review Hale's insurance policy to make sure it covered the corporation's potential liabilities under the charter. Mr. Gartrell did not know

if a copy of the insurance policy was ever sent to the attorneys.

Ms. Schaefer testified that it was not until May 1987 that she became aware that Hale Shipping was transporting refrigerated cargo and that in all her prior discussions with representatives of the corporation, she had never been advised that Hale Shipping would be carrying such cargo. Regarding the coverage on the Lanette, Ms.

Schaefer stated that on May 21, 1987, she received the facsimile transmission of the attorneys' letter to Hale Shipping. After

reading the letter, Ms. Schaefer contacted an underwriter and discussed the clause 8(b) for the Lanette as it seemed unfair to ask Hale Shipping to be responsible for the surveys on the ship when Hale was not in charge of the vessel. Ms. Schaefer testified

that the underwriter agreed with her and consented to the deletion

7

of clause 8(b), but the underwriter required that the owner of the vessel monitor the temperature of the refrigerated containers during the course of the voyage. Specifically, the policy called

for a twenty-four hour watch of the refrigerated containers and the keeping of a temperature log. Ms. Schaefer telephoned Mr. Gartrell She sent Gartrell a letter dated

to inform him of her discussions.

June 8, 1987 regarding the coverage of the Lanette. The final paragraph of the letter read, in part: "I explained to underwriters that you have no control over the owner's having the vessel surveyed and he agreed to delete the exclusion provided the charter agreement includes the reefer clause ...." Mr. Gartrell testified

that he received the letter and forwarded it to Steven Crouch, an employee of Hale Shipping, who was then handling Hale Shipping's insurance coverage. At the time clause 8(b) was deleted from the policy covering the Lanette, Ms. Schaefer took no action to have the clause deleted from Hale Shipping's tug and barge insurance policy. She testified

that she did not do so as Hale Shipping was not "carrying any refrigerated containers on their fleet." According to Ms.

Schaefer, not until late September or early October did anyone from Hale Shipping contact her regarding clause 8(b) as it pertained to Hale's tug and barge operation. In the fall of 1987, Hale Shipping decided to change from the Lanette to a tug and barge, the Boston Trader, since the

8

corporation was not carrying as much cargo as expected on the ship. The barge, the Boston Trader, was owned by Hale Shipping and was to be towed by Renaissance Towing, an independent towing firm. On August 24, 1987, Mr. Gartrell notified Johnson & Higgins that the Lanette was going off charter, that they would be using a tug and barge instead, and asked Johnson & Higgins to make the appropriate changes to the insurance policy. At that time, Mr. Gartrell

believed that the coverage for refrigerated cargo carried by the Boston Trader would be the same as it had been for the Lanette. When notified that the Boston Trader would replace the Lanette on the St. John to New York route, Ms. Schaefer did not ask the underwriter to delete clause 8(b). Ms. Schaefer explained that she

did not do so as Hale Shipping "knew the surveys were supposed to be done." being done. She also stated that she assumed that the surveys were

By letter dated September 21, 1987, Johnson & Higgins notified Hale Shipping that the insurance policy had been amended to cover the Boston Trader. On September 16, 1987, however, the Boston

Trader had arrived in New York with a refrigerated cargo of herring roe, which appeared to have thawed and spoiled. The voyage was

scheduled to have lasted approximately seventy hours and the refrigeration equipment was last checked thirty-five hours prior to arrival in New York. Hale Shipping filed an insurance claim, which

9

was denied as the necessary refrigeration surveys had not been conducted. Hale Shipping was then sued by the company for whom it

had transported the cargo. Mr. Hale testified that it would have been impractical for the company's operation to have independent surveys conducted on the individual refrigeration systems prior to each voyage, as arrivals were not an exact science. The port of St. John has extreme tides,

which limit access to the port, and the weather conditions can be severe, which affects the loading of vessels. On January 28, 1988,

Hale Shipping again paid an additional premium to have clause 8(b) of the SP-23 form amended as to the tug and barge operation. Mr. Hale also testified that he never received any telephone calls from Ms. Schaefer regarding the risks to the corporation of having clause 8(b) in the policy. He stated that the refrigerated

cargo was the "premium cargo" that Hale Shipping was carrying and that this cargo would make the maritime operation viable and profitable. He explained that it was a large part of the operation

and that it was also the most sensitive because of the value of the cargo. Ms. Schaefer testified that in late September or early

October, Hale Shipping contacted her about deleting clause 8(b) from the insurance policy. She contacted the underwriter who Ms.

agreed to cover the cargo with deletion of the clause.

Schaefer subsequently received a letter from the underwriter, who explained that he would agree to the deletion of the clause 10

provided

an

additional

premium

was

paid

and

certain

other

conditions were met.

By letter dated October 19, 1987, Ms. According to

Schaefer forwarded this information to Mr. Gartrell.

Ms. Schaefer, at that time, she had not been informed by Hale Shipping of any loss of cargo on the Boston Trader. The

underwriter then inspected Hale Shipping's operation and declined to cover the transportation of any refrigerated cargo. Upon

receipt of a letter conveying that information, Ms. Schaefer contacted Mr. Gartrell. Eventually, the underwriter agreed to According to Ms. Schaefer, it

delete clause 8(b) from the policy.

cost Hale Shipping an additional premium of $12,000 annually to delete the clause. Edwin Cave was qualified as an expert witness in the areas of marine insurance coverage and the obligations of brokers and underwriters. He was permitted to testify, over objection, that

clause 8(b), which he stated was designed to cover self-propelled vessels, was impractical for a tug and barge operation. Mr. Cave

also opined that an insurance broker has a duty to advise a client about risks within a maritime policy, which are very complex. Mr.

Cave believed that clause 8(b) was one of those complex clauses that would require explanation by the insurance broker. further opined that certain clauses are very Mr. Cave to

difficult

understand unless a person has training reading marine insurance policies. He stated that the broker should advise the client about

11

their duties and liabilities under clause 8(b).

Mr. Cave also

stated that the Boston Trader should have been substituted for the Lanette under the same terms and conditions as the Lanette had been operating under, i.e., the deletion of the clause 8(b). We will include additional facts as necessary in our

discussion of the issues presented.

DISCUSSION I. Johnson & Higgins claims that Hale Shipping's failure to read the insurance policies it had received from 1984 to 1987, or its limited precaution of merely skimming the policies, including the policy covering the Lanette, and its resultant failure to ask Johnson & Higgins to remove clause 8(b) from the SP-23 form is a complete defense, as a matter of law, to the negligence and breach of contract actions. In support of its position, Johnson & Higgins

refers us to Twelve Knotts Ltd. Partnership v. Fireman's Fund Ins. Co., 87 Md. App. 88 (1991), in which the insured's failure to read the policy doomed its negligence and breach of contract actions. Johnson & Higgins also contends that although Hale Shipping had not received the insurance policy for the Boston Trader prior to the incident in question, in light of its three years of failing to read the policies, it cannot now claim that it would have read and rejected the policy if it had been received before the loss. 12

We begin by examining the Twelve Knotts case.

There, a

limited partnership was formed as a real estate holding company. When various insurance executive policies committee were had due its to expire, the

partnership's

executive

director

prepare a request for proposal to solicit replacement policies. The proposal sought, inter alia, a three-year insurance policy for property and liability insurance at an annual premium, payable in periodic installments, but guaranteed not to increase during the three-year period. A copy of the request was sent to Commercial

Lines, a corporate insurance broker, who, in turn, submitted a proposal involving a policy from Fireman's Fund Insurance Company. Under the proposal, the premium due could be paid in twelve monthly installments, but the proposal said nothing as to a three-year guarantee of the premium. In all, the executive committee received four responses to its request. Those four proposals were summarized in a document The proposal

prepared by the partnership's executive director.

submitted by Commercial Lines was "far superior" to the other three. 87 Md. App. at 92. The executive director's document also

included the notation that the annual premium under the Commercial Lines proposal was guaranteed for three years and evidence was presented that the president of Commercial Lines had conveyed that information to the director. The partnership's executive committee considered the four

13

proposals, but as the proposal from Commercial Lines was 35% less expensive than the other three and was the only one to offer a three-year rate guarantee, there was little doubt as to the outcome of the decision to be made. The committee elected to place the That same day, Commercial

insurance through Commercial Lines.

Lines issued a binder from Fireman's Fund Insurance Company for the insurance. The binder listed a premium, but stated nothing about One month later, when Commercial

whether that rate was guaranteed.

Lines ordered the permanent policy, it requested the guarantee. The policy issued by a stock company embodied in Fireman's Fund provided that if the premiums for the three-year period were not paid in advance, the premium would be calculated annually in accordance with the company's rates. The policy also contained an

integration clause by which the limited partnership agreed that the policy embodied all agreements between the partnership and the insurance company. Two months after receiving the policy, the president of

Commercial Lines forwarded it to the limited partnership, but mentioned nothing about the absence of the three-year rate

guarantee or the need to pay the full 3 year premium at the inception of the policy in order to obtain a fixed premium option. The partnership's executive director never read the policy, nor did he refer it to any of the partners. The limited partnership paid the first year's premiums on a monthly basis. At the end of the first year, the insurer attempted 14

to cancel the policy, but was unable to do so as the policy was for three years. The insurer then dramatically increased the premium

and the limited partnership obtained its insurance elsewhere for a cost, over the next two years, it claimed was $223,087 above the rate it thought had been guaranteed. The limited partnership brought an action against the insurer and Commercial Lines alleging, inter alia, negligence and breach of contract. The limited partnership argued that although the non-

conformance of the policy would have been readily discovered if it had read the policy, the partnership was entitled to rely on Commercial Lines having properly performed its duty and was not required to read the policy to ensure that it complied with the underlying contract. claim must fail. This Court held that the breach of contract

We explained that "[b]y receiving the policy and

remaining silent until the end of the policy year, [the limited partnership] is deemed to have accepted the policy with the nonconforming provision in it." 87 Md. App. at 105. In reaching that

conclusion, we adopted a rule, that provides: "[W]hen the insured accepts a policy, he accepts all of its stipulations, provided they are legal and not contrary to public policy. Where changes from the application appear in the delivered contract, under a more stringent doctrine the insured has a duty to examine it promptly and notify the company immediately of his refusal to accept it. If such policy is accepted or is retained an unreasonable length of time, the insured is presumed to have ratified any changes therein and to have agreed to all its terms." 15

Twelve

Knotts,

87

Md.

App.

at

104

(quoting

12

J.

Appleman,

Insurance Law and Practice,

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