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Policyholder Control of a Mutual Life Insurance Company

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Policyholder Control of a Mutual Life Insurance Company Cleveland State Law Review Volume 22 Issue 3 Article 6 1973 Policyholder Control of a Mutual Life Insurance Company Buist M. Anderson Follow this and additional works at: https://engagedscholarship.csuohio.edu/clevstlrev How does access to this work benefit ou?y Let us know! Recommended Citation Buist M. Anderson, Policyholder Control of a Mutual Life Insurance Company, 22 Clev. St. L. Rev. 439 (1973) available at https://engagedscholarship.csuohio.edu/clevstlrev/vol22/iss3/6 This Article is brought to you for free and open access by the Journals at EngagedScholarship@CSU. It has been accepted for inclusion in Cleveland State Law Review by an authorized editor of EngagedScholarship@CSU. For more information, please contact [email protected]. Policyholder Control of a Mutual Life Insurance Company Buist A. Anderson* F ROM TIME TO TIME DURING the last hundred years or more, there have been discussions concerning the control or the lack of control by policyholders of mutual life insurance companies.1 While this is certainly not a new issue, there have been several recent developments. One recent development is a so-called "class action" suit brought in October 1972 against four large mutual life insurance companies in the United States District Court for the Southern District of New York.2 This antitrust suit was brought on behalf of three policyholders as representatives of a class consisting of all mutual life insurance policyholders. The complaint alleges, among other things, a conspiracy among defendant insurance companies to use outdated and antiquated mortality tables, to charge unreasonably high and redundant premium rates, and to create self-perpetuating management. This suit requests the court to order the defendants to refrain from violating the Federal antitrust laws, to correct their accounting procedures so that policyowners can more accurately determine the actual cost of their insurance, to refrain from using surplus funds for ventures unrelated to the insurance business, to distribute to B-S., Univ- of Virginia; LL.B. Yale Univ.; Member of the Alamaba, Connecticut and United States Supreme Court Bars; retired Vice President, Counsel and Corporate Secretary of Con- necticut General Life Insurance Company, and presently Counsel to the Hartford law firm of Murtha, Cullina, Richter and Pinney; author of the Third Edition of VANCE ON INSUR- ANCE and for many years editor, Legal Notes for TRANSACTIONS of the Society of Actuaries and the Actuarial Society of America; past President of the Association of Life Insurance Counsel, a past Chairman of the Legal Section of American Life Convention, and the author of a number of articles relating to insurance. TEMPORARY NATIONAL ECONOMIC COMMITnE, MONOGRAPH 28, STLDY OF LEGAL RE- SERVE LIFE INSURANCE COMPANIES 13-27 (G.P.O. 1941). One method of classifying life insurance companies is according to the legal form of their ownership. In general, stock insurance companies can be defined as being that type of organization in which individuals purchase shares of stock in the company in the expecta- tation, or at least the hope, of appreciation in the value of their shares. As such, the stock- holders legally own the company and may cast votes in proportion to their shareholdings for the election of the board of directors. Further, the stockholders share in the profits and losses of the company as do the stockholders in any other corporation. In contrast to a stock insurance company, a mutual insurance company is said to be legally "owned" by the policyholders; consequently, the policyholder in a mutual insurance company is both a customer and an owner of the company, whereas the policyholder in a stock insurance company is only a customer. Therefore, each policyowner in the mutual in- surance company usually may cast one vote for the election of the board of directors, irre- spective of the amouunt of insurance the policyowner may own, while the stock company policyowner, being merely a customer, except in rare instances, does nor have a vote at stock- holder meetings and as such does not have a voice in the election of the board of directors. In short, stock insurance companies are organizations owned by investors who purchase shares of stock for profit while mutual insurance companies are organizations owned by policyholders themselves. 2 Steingart v. The Equitable Life Assuru. Soc'y, Civil No. 72-4271 (S.D.N.Y., filed Oct. 6, 1972). Published by EngagedScholarship@CSU, 1973 1 440 CLEVELAND STATE LAW REVIEW [Vol. 22.439 policyowners the excessive sums now being held as surplus, and to institute proper procedural actions to assure policyowners just par- ticipation in the management and affairs of the companies. A second recent development is a 1972 law review article assert- ing that there is an emergency justifying reform. The author ad- vocates a year-long study by the National Association of Insurance Commissioners, and in the interim, "speedy" enactment by all states of a "temporary mutual insurance company control bill. ' 4 The pro- posed legislation would: (1) require mutual insurance companies to furnish their policyholders with annual proxy or information statements containing information similar to that supplied shareholders of stock companies and liberalize nominating procedures for the election of directors . .. (2) require the return to policyholders in the form of dividends of all premiums not needed for the sound conduct of the business as determined by reserve and actuarial tables prescribed annually by the Superintendent of Insurance after public hearings; and (3) prohibit the acquisition or initiation of operation by mutual insurance companies of businesses outside the imme- diate insurance field served by them and require divestiture within three years of such unrelated businesses now owned.5 The National Association of Insurance Commissioners has met in regular sessions three times since that article was published, and the author of that article may have brought his proposal to the at- tention of one or more commissioners of insurance. However, it was not placed on the agenda of any one of the three meetings, and there is no published evidence that this proposal was considered. If the com- missioners had thought that there were any real and pressing evil to be corrected, it might reasonably be assumed that the matter would have been discussed at one of the meetings. Another relatively recent law review article,6 which dealt with the aspect of control in mutual life insurance companies, reached the conclusion that there is actually a conflict of interest between the policyholders and the management of a mutual life insurance com- 3Kreider, Who Owns the Mutuals? Proposals For Reform of Aembersbip Rights in Mutual Insurance and Banking Companies, 41 UCIN.L.REV. 275 (1972). 4Id. at 307. 5Id. at 311. 6 Hethcrington, Fact v. Fiction: Wbo Owns Mutual Insurance Companies, 1969 WIS.L.REv. 1068. https://engagedscholarship.csuohio.edu/clevstlrev/vol22/iss3/6 2 1973J POLICYHOLDER CONTROL-MUTUAL INSURANCE CO. 441 pany.7 The author's reasoning which supported this conclusion was basically by way of a two-part analysis of the policyholder's position in mutual life insurance companies. The first part of the article looked at the mutual policyholder as an owner. In this initial phase of analysis the author recognized that although the policyholder is legally the owner of the mutual company, he is not actually the owner in the normal business sense, since he does not bear the risk of personal liability in the event of insolvency, does not have a right to profits, and does not have the ability to con- trol the management.9 To support his conclusion that there is a conflict of interest be- tween the policyholder and the management regarding the ownership aspect of mutual companies, the author stated that because the policy- holder considers himself nothing more than a consumer of services offered by management, he has no interest in the management aspect of the company 10 and, consequently, the interests of the policyholder are not seriously involved in management decisions. 1 The second part of the author's analysis considered the mutual life insurance company from the management perspective. The author reasoned that although mutual managements attempt to conserve cor- porate assets and promote corporate growth, these objectives are in- appropriate for mutual stock companies because such goals are adverse to policyholder interests. The author concluded that these manage- ment objectives were adverse to policyholder interests, due to the fact that the policyholder is principally interested in securing the maxi- mum protection at the lowest cost. 3 Since the stated purpose of the article was simply an analysis of the position of the policyholder in mutual insurance companies, 14 the author made no definite recommendations for improving the policy- holder's position. The facts of life are that one does not get "reform" either by the legislative or the administrative process unless the need for re- form is established. The authors of the two law review articles cer- tainly have not established this need. What they have done is to 7Id. at 1102. 'Id. at 1070. 9 Id. at 1071. 'lId. at 1086. 11Id. at 1085. "Id. at 1102. 131d. 1 Id,. at 1069. Published by EngagedScholarship@CSU, 1973 3 CLEVELAND STATE LAW REVIEW [Vol. 22:439 repeat what all familiar with the situation already know, namely that the policyholders of a mutual life insurance company have little voice in the selection of management. However, it must be recognized that individual stockholders of a large stock life insurance company also have little voice in the selection of management where the stock is widely held and where there is no gross mismanagement. Both authors seem to think that the stock life insurance situation is much better than the mutual life situation from the standpoint of control by the "owners." However, both with large stock life insurance companies and with mutual life insurance companies, the boards of directors or trustees are, in fact, self-perpetuating bodies.
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