## Facts

- Federal Kemper issued an automobile liability policy to Aaron Ward (and his then wife) effective May 19, 1981 to November 17, 1981; Ward paid the premium in full.
- After a vehicle change, the insurer mailed Ward a $12 refund check on August 4, 1981; Ward received the check but never cashed or deposited it.
- The insurer later determined the correct refund should have been $4.50 and billed Ward on August 18, 1981 for the $7.50 difference; Ward did not pay.
- The insurer mailed a notice canceling the policy effective October 11, 1981 for “nonpayment of premium” (the asserted $7.50).
- Ward was in an automobile accident on November 15, 1981; the insurer denied coverage on the ground the policy had been canceled.
- Ward sought declaratory relief in the Circuit Court for Baltimore City; the court entered judgment for the insurer, and Ward appealed.

## Issues

1. Whether an insurer may cancel an automobile policy for “nonpayment of premium” when the asserted unpaid premium arises from a mistaken over-refund check that the insured never negotiated.
2. Whether the uncashed refund check transferred the underlying funds to the insured such that an additional premium became “due and unpaid” at the time of cancellation.
3. Whether canceling for nonpayment when no premium is actually due is an arbitrary or capricious cancellation barred by Maryland insurance law.

## Decision

- The Maryland Court of Special Appeals reversed the judgment for the insurer and held the cancellation ineffective.
- Because Ward never negotiated the $12 refund check, the underlying funds never left the insurer’s account, and Ward did not owe an additional $7.50 premium.
- With no premium “due and unpaid,” cancellation for nonpayment was improper; the policy remained in force at the time of Ward’s accident.
- The case was remanded for entry of judgment consistent with the determination that coverage existed.

## Legal Principles

- Delivery of a check does not itself transfer the underlying funds; the drawer’s account is not debited, and the payee does not receive the money, until the check is negotiated and paid.
- An insurer may not cancel a policy for “nonpayment of premium” unless an actual premium obligation is due and unpaid at the time of cancellation.
- A cancellation grounded on a non-existent debt is arbitrary or capricious and violates Maryland’s statutory prohibition on arbitrary, capricious, or unfairly discriminatory cancellations.

## Conclusion

Because the refund check was never negotiated, the insurer never paid out the over-refund and Ward never became indebted for the alleged $7.50; cancellation for nonpayment was therefore invalid, and the policy provided coverage for the later accident.


Ward v. Fed. Kemper Ins. Co., 62 Md. App. 351, 489 A.2d 91 (Ct. Spec. App. 1985)