## Facts

- Federal Kemper Insurance Company issued an automobile liability policy to Aaron Ward; Ward paid the full premium for the policy term.   
- After Ward changed vehicles, Federal Kemper determined that Ward had overpaid and mailed him a $12 refund check, drawn on Citizens National Bank of Decatur, Illinois, payable to Ward.   
- Ward received the $12 check but never endorsed or negotiated it; the check was never presented to or paid by the drawee bank.   
- Federal Kemper later realized the proper refund should have been $4.50, not $12, and sent Ward a bill for the $7.50 difference, which Ward did not recall receiving and never paid.   
- Relying on the alleged nonpayment of $7.50, Federal Kemper mailed Ward a notice cancelling the policy effective October 11, 1981.   
- On November 15, 1981, after the purported cancellation date, Ward was involved in an auto accident causing personal injury and property damage to himself and others.   
- Federal Kemper denied coverage on the ground that the policy had been cancelled for nonpayment of premium; Ward then filed a declaratory judgment action seeking a determination of coverage.   
- The trial court entered judgment for Federal Kemper (functionally akin to granting its motion for summary judgment), holding that the premium was due and that cancellation was proper; Ward appealed to the Court of Special Appeals of Maryland.   

## Issues

1. Whether, under Maryland insurance law, an insurer may cancel an automobile insurance policy for nonpayment of premium when the premium allegedly owed arises solely from the insurer’s own mistaken over-refund and has never actually been debited from the insurer because the insured did not negotiate the refund check.   
2. In light of negotiable-instruments principles, whether the funds represented by an unnegotiated refund check remain the property of the drawer (the insurer) such that no premium is “due and unpaid” to support cancellation for nonpayment.   

## Decision

- The Court of Special Appeals of Maryland held that the $7.50 was **not** a legitimately “due and unpaid” premium because Federal Kemper’s funds represented by the unnegotiated check were never actually paid out; accordingly, Federal Kemper could not properly cancel the policy for nonpayment of that amount.   
- Applying negotiable-instruments law, the court reasoned that until the refund check was negotiated and paid by the drawee bank, the money remained under Federal Kemper’s control; the insurer therefore had not actually suffered a debit or overpayment.   
- The court concluded that cancellation based on a non-existent premium obligation was arbitrary or improper under Maryland’s insurance-cancellation statute, and the insured remained covered at the time of the accident.   
- The appellate court reversed the trial court’s judgment in favor of Federal Kemper and remanded with directions consistent with recognizing coverage under the policy.   

## Legal Principles

- **Nonpayment as a ground for cancellation:** Under Maryland law, an insurer may cancel a policy for nonpayment of premium only if a premium is actually and legitimately due and unpaid; cancellation cannot rest on an arbitrary or mistaken characterization of an amount as “due.”   
- **Effect of unnegotiated checks (negotiable instruments):** When a drawer issues a check that the payee never negotiates or presents for payment, the underlying funds remain with the drawer; no actual payment occurs, and no debit is made from the drawer’s account.   
- **Correction of mistaken refunds:** If an insurer mistakenly issues a refund check in an amount greater than is owed, but the insured never negotiates the check, the insurer retains the ability to correct the error without treating the excess as an enforceable premium debt of the insured.   
- **Interaction of insurance and commercial paper law:** Insurance coverage disputes may be resolved by applying general principles of commercial paper (negotiable instruments law) to determine whether an insured truly owes an amount the insurer characterizes as “premium.”   

## Conclusion

Ward v. Federal Kemper Insurance Co. establishes that an insurer cannot cancel a policy for “nonpayment of premium” where the alleged premium arises from an unnegotiated, mistakenly calculated refund check that never left the insurer’s control; under negotiable-instruments principles, no premium is actually due, and cancellation on that basis is ineffective.


Ward v. Federal Kemper Insurance Co., 489 A.2d 91 (Md. Ct. Spec. App. 1985)