The Rights and Obligations of Policyholders, Board of Directors, and Management
Policyholder Rights and Interests in a Mutual Insurer
Policyholders' interests in a mutual insurance company are derived from more than one source. The insurance policy itself establishes a defined set of rights which will differ from contract to contract and from state to state. In addition, policyholders of mutual insurance companies are members of the mutual insurance company and have certain other interests which do not accrue to the holder of an insurance policy from a stock insurance company. These mutual interests also vary from company to company and from state to state. Although the term "membership" more accurately describes the legal and contractual relationship between a mutual insurance company and its policyholders, it is often referred to as the policyholder's "ownership" interest in a mutual insurance company.
Policyholders have certain rights which arise out of the purchase of an insurance policy, the most important of which is the right to receive the benefits of the insurance contract. Like policyholders of any other type of insurance entity, policyholders of mutual insurance companies have the right to have valid claims paid. Contractual interests cannot be affected or diminished by the mutual insurance company either directly or through corporate transactions.
Although it is commonly stated that policyholders own a mutual insurer, the membership interest of a mutual policyholder is not equivalent to ownership. In its most common sense, ownership usually implies a right of dominion and control over property, including the right to dispose of the property.
The distinction between ownership and membership is most clearly illustrated by comparing the interests of a mutual policyholder in a mutual insurance company with the ownership rights of a stockholder in a stock insurance company. In a stock company, stockholders have a specific property interest in the stock, which generally includes the right to sell or otherwise dispose of a share of the ownership in the company. The ownership interest is independent of any relationship the stockholder may have with the company as a policyholder. In a mutual insurer, policyholders, or members, do not have the ability to sell or otherwise transfer individual ownership. The ownership interest arises out of the policy of insurance and does not survive the termination of the policy of insurance.
The membership interests of a policyholder of a mutual property and casualty company are very different from the policyholder of a mutual life insurance company. Many life insurance products raise an expectancy of a long term relationship with the insurer and a tangible interest in certain assets of the company.
Although most states recognize the ownership interest of the mutual insurance policyholder in their insolvency statutes, at least two states hold that the mutual policyholder does not have a recognizable interest in the excess surplus of a dissolved mutual insurer. Wisconsin and Minnesota have enacted statutes that recognize, beyond a certain limit, that assets of a mutual insurer are a public interest, and not the property interest of current policyholders. Other states have provided look-back provisions.
A key component of the concept of policyholder membership rights is the ability to participate in the governance of the organization. Governance rights relate to the right of a member to have a say in how the entity is managed or run. Members participate in the governance of the organization through the selection of a board of directors. Each state's laws will dictate to varying degrees how the members' rights to participate in the election of directors are implemented. There may be specific requirements on the form of the proxy, quorum requirements, voting rights, members' right of access to membership lists, members' right to notice of all meetings, how membership meetings are conducted, and qualifications of directors. Various laws generally recognize that there are significant distinctions between the interest of a shareholder, who has made an investment with the expectation of an investment return, and a member of a mutual insurance company whose expectations are primarily focused on the insurance policy itself.
In addition to the right to vote for a board of directors, in most states mutual policyholders also have the right to vote on fundamental corporate transactions involving mergers, demutualizations, and the sale of all or substantially all of the assets of the company. The technical requirements, that is, how and when such a vote shall be conducted, are controlled by the corporate and insurance laws of the various states, as well as by the charter and by-laws of the individual mutual insurer.
Policyholders' exercise of governance rights varies dramatically among mutual insurers. Participation may be affected by a number of causes, including level of company communication, policyholder approval or disapproval of the insurer's current performance, the nature of the insurer's business or the mission of the mutual insurer and the composition and specific interests of its members.
A citizen who has the right to vote for elected officials and chooses not to exercise that right does not see that right diminished. Similarly, even if a policyholder chooses not to vote, it reflects an individual choice which rests with the policyholder, but in no event diminishes this right.
In significant transactions, the eligibility of members to vote, timing of notices to members, and the form of the information provided to the members are controlled by general corporate law and specific laws applicable to mutual insurance companies, as well as the charter and bylaws of the mutual company. Timing and form of notices are crucial to a member's ability to understand a proposed transaction. It is important, especially in controversial transactions, that mutual insurers do not rely solely on legal notices but instead use as many forms of communication as possible to constantly educate policyholders and other interested parties.
A mutual policyholder's right to participate in the profits or surplus of a mutual insurance company may be referred to as participation rights. Profits of a mutual company may be used to benefit members in four ways: addition to surplus, premium credits, policy dividends, or premium reductions. How and when a policyholder will receive a participation benefit is a decision made under the direction and control of the board of directors.
One of the most important goals of any mutual insurance company is to create a financially strong organization that will be able to serve its members well into the future. Past and present members contribute to the insurer's surplus for the benefit of both current and future policyholders. A significant benefit for a mutual policyholder is the insurer's ability to retain sufficient surplus to prevent the need for frequent variations in premiums, and to dampen the effects of extraordinary periodic underwriting losses. Addition to surplus is a valid and necessary use of insurer gains, providing benefit to policyholders.
Accordingly, policyholders only have the right to receive a dividend if and when it is declared by the board of directors. They may also have the right to participate in the distribution of the company's surplus, but only if permitted by State statute and only if the board of directors and the policyholders approve either a decision to convert to stock ownership form or the company is liquidated. The right to participate in the surplus of the company is conditional, transitory and not guaranteed. No member has a right to "cash out" his individual membership interest.