Maryland Court: Premium Financing Firms Overcharged Auto Policyholders

By | December 30, 2011

A Maryland court ruled last week that the state’s largest premium financing companies were engaged in illegal financing practices against auto insurance policyholders.

In Maryland, most auto insurance policyholders can set up interest-free installment payment plans for their premiums through their carrier. But such accommodations are not allowed for policyholders with Maryland Automobile Insurance Fund (MAIF), which covers drivers who are denied by private insurers.

Instead, any MAIF policyholder who can’t pay the total policy premium in advance must finance that premium through one of the state’s premium finance companies (PFCs).

The latest decision by the Maryland Court of Appeal affirmed earlier findings that said the method of collecting interest used by the premium finance companies is illegal. Under Maryland law, premium financing companies are prohibited from collecting interest on loans to policyholders in excess of 1.15 percent for any 30-day period.

But premium financing companies have been using an accounting method that “front loads” interest in the early part of the loan period. If a policyholder cancels a policy early in the loan term, which occurs in the majority of PFC loans, the PFC collects more interest than otherwise would be permitted for each 30-day period.

The Court of Appeals stated that when a premium finance agreement is canceled early, the interest calculation method used by the premium finance companies, “operates to the disadvantage of consumer because the interest charges are weighted more heavily in the early months of the contract repayment period.”

The Court underscored that the statute in question “was designed to eradicate and eliminate…’usurious interest and excessive service charges.'”

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