Mutual Company, Not Just Its Directors, Owes a Fiduciary Duty to Its Members — Case Law Split (Cases Collected)

From Ormond v. Anthem Ins. Cos., 2011 U.S. Dist. LEXIS 71152 (S.D. Ind. July 1, 2011):

Plaintiffs contend that Anthem owed its members a fiduciary duty to reasonably protect their interests and to refrain from gross negligence or wilful conduct that would diminish those interests. According to Plaintiffs, pricing the IPO at $36.00 per share violated that duty, as did significantly increasing the number of shares made available in the IPO.

Again, Anthem addresses the Plaintiffs' claim head on, arguing first that it owed no fiduciary duty and cannot be held liable in negligence when the parties’ relationship is based in contract. According to Anthem, only its officers and directors owed a duty to the members and none of those company officials remain defendants in this case. Anthem argues it cannot be held vicariously liable for any breach of duty on the part of a director or officer. In retort, Plaintiffs argue that a director's violation of his duties can be imputed to the company.

To bolster their claim that a mutual insurance company owes a duty to its members, Plaintiffs point to cases from Iowa, Massachusetts, and Rhode Island. Anthem relies on case law from New York; it also argues that it is "black letter" law that officers and directors owe fiduciary duties, not the corporation. Plaintiffs contend that Anthem's cases represent a minority position with respect to a mutual company's duties and, even then, New York courts have not consistently followed that position. The Court has carefully reviewed cases cited by the parties addressing obligations of mutual insurance companies under similar circumstances, most of which are discussed below, and has also considered the more plentiful case law addressing a corporation's obligations to its shareholders. Simply stated, the Court sides with Plaintiffs on this issue.

In the year 2000, Metropolitan Life Insurance Company demutualized and went through a somewhat similar process as Anthem, only in accordance with New York's demutualization law. Several lawsuits were brought on behalf of the former mutual's members, all alleging that they had not received fair value for their interests. In Shah v. Metropolitan Life Ins. Co., 20003 WL 728869 (N.Y. Sup. Feb. 21, 2003), aff'd in par sub nom., Fiala v. Metropolitan Life Ins. Co., 6 A.D.3d 320 (N.Y. App. 2004), the trial court consolidated several motions to dismiss. The lawsuits set forth numerous common law and statutory claims against various defendants, including Metropolitan Life, its directors, Goldman Sachs and Credit Suisse (the lead underwriters and financial advisors), and the New York Insurance Superintendent. Finding that the lawsuits amounted to a collateral attack on the Insurance Superintendent's decision to approve the demutualization, the court granted all of the pending motions to dismiss and the Insurance Superintendent's motion to convert the declaratory action brought against him under the state conversion laws to one allowed under the general New York statutory provisions allowing for judicial review of a state officer's actions.11 Id. at *18. In doing so, the court found that no private right of action was provided by the New York demutualization laws and that "the relationship between policyholders and a mutual life insurer is generally one of contract, and does not give rise to a fiduciary duty." Id. at *14.

The appellate court agreed that the lawsuits were collateral attacks on the decision of the Commissioner and, as a result, all but one of the New York trial court's claim dismissals were affirmed. Fiala v. Metropolitan Life Ins. Co., 6 A.D.3d 320, 321-322 (N.Y. App. 2004). The appellate court also found that the claims brought based on a breach of fiduciary duty were unsustainable due to the lack of a common law fiduciary duty owed by the insurer to the policyholder. Id. at 322. However, courts in other states have seen things differently.

In Rieff v. Evans, 630 N.W.2d 278 (Iowa 2001), the Supreme Court of Iowa reviewed a lower court's decision to dismiss a lawsuit brought by a group of policyholders alleging that the directors of a mutual insurance company had, over time, constructed and executed a chain of corporate actions resulting in a de facto demutualization of the company without compensation to the policyholders. The plaintiffs sued the directors of the mutual insurance company and the newer controlling stock company, who were for the most part one in the same, along with the stock company and nominally named the mutual company itself. Id. at 281-82. The broad claim was that the policyholders and the mutual company were owed compensation for a de facto conversion and, importantly, one of the theories pursued was breach of fiduciary duties. Id. at 283. The plaintiffs asserted breach of fiduciary duty claims against all the directors and the stock company itself. It was undisputed that the mutual company originally incorporated the stock company as a wholly owned subsidiary and that, subsequently, the directors authorized the sale of stock in the subsidiary to the public. The plaintiffs contended that a manipulation of corporate actions from that point on led to the stock company eventually gaining total control of the assets of both companies.

The lower court dismissed the action based on lack of standing and the running of the applicable statutes of limitation. Id. at 282. The Iowa Supreme Court reversed at least part of that determination, ruling that the existence of a fiduciary duty is dependent on the specific circumstances and, whether directors or not, those who assist in the breach of fiduciary duties may be held liable. Id. at 291. The uniqueness of the facts in that case drove the court to the conclusion that "we find that the policyholders have sufficiently pled the existence of a fiduciary relationship in every defendant to survive this stage of the case." Id. No more specific analysis of whether the corporation itself owed a fiduciary duty is found in the opinion.

In Silverman v. Liberty Mutual Insurance Company, 13 Mass.L.Rptr. 303, 2001 WL 810157 (Mass. Super. July 11, 2001), the Massachusetts Superior Court faced the issue of whether Liberty Mutual Insurance Company owed its policyholders a fiduciary duty in a different but equally convoluted circumstance involving demutualization. In that instance, the lawsuit was brought by a group of policyholders who sought to stop a demutualization approval vote, alleging that Liberty Mutual was engaging in an effort to mislead policyholders. Id. at *2. Though complicated in proposed execution, the essence of Liberty Mutual's effort to demutualize was to exchange the policyholder's ownership interest in the mutual company for equity in a stock company which would maintain control over a reorganized Liberty Mutual and a number of other former mutual companies bearing similar branding, but offering different lines of insurance. Id.

Liberty Mutual filed a motion to dismiss, asserting in part that its relationship with policyholders was contractual and that it owed no fiduciary duty to its policyholders. Id. at *6. In deciding not to dismiss the complaint, the court opined:

It may indeed be true that the relationship between a stock insurance company and its insured is purely contractual. It may also be true that, with respect to matters concerning the contractual rights of insureds in a mutual insurance company, the mutual insurance company has no fiduciary duty to its insured. However, this Court does not accept that, with respect to disclosures made to policyholders in [sic] a mutual insurance company asking them to surrender their equity rights, the mutual insurance company has no fiduciary duty to its policyholders. This Court need not decide, for purposes of this motion to dismiss, the precise scope of the fiduciary duty that a mutual insurance company owes to policyholders. Given the allegations of the complaint, it is sufficient here for that fiduciary duty to be simply a duty to act in good faith to ensure that policyholders, when asked to vote on a proposal that will extinguish their equity rights, are provided with accurate and adequate information on which to base their vote.


The Rhode Island Superior Court had the benefit of the decisions from Iowa and Massachusetts when it was asked to dismiss an action brought by the policyholders of a mutual insurance company. Heritage Healthcare Services, Inc. v. The Beacon Mutual Insurance Co., 2004 WL 253547 ( R.I.Super. Jan. 21, 2004). The lawsuit was brought to force the mutual to issue dividends from excess surplus in accordance with a plan that the mutual had successfully sought state legislative approval of a few years earlier. Id. at *1. The policyholders alleged breach of contract and breach of fiduciary duty against the mutual and its directors and the defendants moved to dismiss, in part because the company owed no fiduciary duty to the policyholders. Id. at *3.

Noting that the issue of whether a mutual insurance company owed a fiduciary duty to its policyholders was one of first impression in that state, the court compared the policyholders' position to the position of shareholders relative to a stock company. Id. at *4. It then reviewed the case law from other jurisdictions, and while it acknowledged that the contractual relationship existing between the mutual and its policyholders was cause for distin[ction] in some circumstances, the court found that a fiduciary duty similar to that a stock company owes its shareholders is present when the policyholder is asserting ownership or equity rights as opposed to any right to coverage. In doing so, the court reached the following conclusion:

The case law suggests that whether a mutual insurance company owes a fiduciary duty to its policyholders hinges on the claim involved. Specifically, the insurance company does not owe a fiduciary duty requiring it to act with the utmost good faith where the insured is disputing the treatment of the insured's claim to the company. However, when dealing with claims involving policyholders who are acting in their capacity as owners, courts generally treat policyholders as being entitled to the same fiduciary duty as owed to stockholders.

In the instant case, the fiduciary duty claims asserted by Plaintiff involve the decision by corporate executives to retain excess profits, rather than an individual claim under an insurance policy. Therefore, in this case, the claims as alleged implicate the policyholders' rights as owners rather than as insureds. As a result, Defendants owe a fiduciary duty to its [sic] policyholders under the facts as pled.

Id. at *5. The court never differentiated between the corporate defendant and the defendant directors in terms of the fiduciary duty owed to the policyholders.

Anthem takes the position that its directors owed a fiduciary duty to the eligible members, but it was not charged with such a duty as a corporate entity. This Court disagrees for a number of reasons, most of them arising out of the uniqueness of the relationship between Anthem and its eligible members, who are insureds as well.

The Indiana Supreme Court has said that the relationship between a policyholder and the insurance company is a special one. In discussing that relationship, the Indiana Supreme Court has stated: "This contractual relationship is at times a traditional arms-length dealing between two parties, as in the initial purchase of a policy, but is also at times one of a fiduciary nature, and, at other times, an adversarial one . . .". Erie Ins. Co. v. Hickman by Smith, 622 N.E.2d 515, 518 (Ind. 1993) (citation omitted). The special relationship that existed between Anthem and its eligible member policyholders was such that the traditional axiom — that individual directors, not the entity itself, owe a fiduciary duty — does not apply. The general rule that the directors, and not the corporation itself, owe a fiduciary duty to shareholders is grounded in the notion that there would be an analytical anomaly if shareholders held the corporation vicariously liable for the reckless acts of a director, because the cost of the director's breach of the fiduciary duty would end up falling back on the shareholders, who are the injured party seeking redress. Arnold v. Society For Savings Bankcorp, Inc., 678 A.2d 533, 539-540 (Del. 1996). In the case at bar, no such anomaly would exist. Plaintiffs own no stock in Anthem, Inc. (at least none received as a result of the demutualization), and any damage award would not be paid out of the equity interests held by policyholders of Anthem Insurance Companies, Inc., as their interests were extinguished on the effective date of the conversion.

There are additional distinctions. While the Plaintiffs, like all eligible members, had an equity interest in the corporation, it was completely tied to the insurance policy. Unlike a typical corporate shareholder, Plaintiffs did not have the ability to sell or otherwise divest themselves of their equity interest in the corporation other than to simply give up the insurance policy. Only the corporation could choose to excise the policyholder's equity interest from the insurance contract and extinguish it through a demutualization; therefore, the interest was in essence being held in trust by the corporation. Fiduciary duties arise when one holds something in trust for the benefit of others. See, e.g., Singer v. Noe, 238 N.E.2d 678, 680 (Ind. Ct. App. 1968).

This Court also finds the case law from Iowa, Massachusetts, and Rhode Island to be more persuasive. Defendants' New York cases focused more on whether Plaintiffs claims were a collateral attack on the Insurance Superintendent's order than on the relationship of the insurer to the insured, though they did indeed opine on the lack of a fiduciary duty. The bottom line is that this Court believes the Rhode Island court said it best by recognizing that the existence of a fiduciary duty on the part of a mutual insurance company hinges on the nature of the claim. Heritage Healthcare, at *5.

Even ignoring differences between the circumstances in the New York demutualization cases and the circumstances in the case at bar, our sister court in the Southern District of New York has found that New York does not disavow a fiduciary relationship between a mutual company and its policyholders as a matter of law. In Dornberger v. Metropolitan Life Ins. Co., 961 F. Supp. 506, 545-546 (S.D.N.Y. 1997), the court acknowledged that there was authority in New York case law for finding that the relationship was only one of arms-length and therefore no fiduciary duty attached. But the court also noted that at least one decision had held that there was room for finding a broader fiduciary relationship and another federal district court had concluded that the assessment of the relationship and ensuing duties should be left to the jury. Id. at 546 (citing United States v. Brennan, 938 F. Supp. 1111, 1120-21 (E.D.N.Y. 1996) and Estate of Wheaton, Meager v. Metropolitan Life Ins. Co., 463 N.Y.S.2d 727 (Sup. Ct. 1983).

In the end, when a district court is faced with a novel issue under Indiana law, it must predict how the Indiana Supreme Court would rule. Pisciotta v. Old Nat. Bancorp, 499 F.3d 629, 635 (7th Cir. 2007). In Erie Ins., the Indiana Supreme Court made it fairly clear that an insurer always has the contract-based duty to act in good faith toward a policyholder and may also have additional fiduciary obligations depending on the particular circumstance at hand. Erie Ins. Co. v. Hickman by Smith, 622 N.E.2d at 518. That sounds similar to the decisions from Iowa, Massachusetts and Rhode Island.

Plaintiffs assert two tort counts in their Fourth Amended Complaint — a breach of fiduciary duty claim and a negligence claim. The Court sees no need for separate treatment here, as the key to any tort recovery is to define as a matter of law the duty, if any, imposed by Indiana law on the Defendants. To that end, the Court finds that Indiana would impose a duty on Anthem to act in good faith and with reasonable care in obtaining approval of its conversion plan and in executing that plan following IDOI's conditional approval. For purposes of this lawsuit, the inquiry is whether the company exercised such care in pricing and sizing the IPO. If Anthem's Board or pricing committee failed to act with the care that an ordinarily prudent person in a like position would exercise in pricing and sizing the IPO, the corporation itself can be held liable. This is consistent with the obligations Indiana law places on individual corporate directors.12 See Ind. Code § 23-1-35-1. Under the circumstances, the Court believes that these obligations would apply to the corporation.

The Court has determined that the relationship between Anthem and its members was more than a garden-variety, arms-length contractual relationship. Accordingly, Defendants' contention that the economic loss doctrine bars a tort claim is without merit. As the Indiana Supreme Court noted last year, the economic loss rule in Indiana has several exceptions, including where fiduciaries or insurers have assumed specific obligations. U.S. Bank, N.A. v. Integrity Land Title, 929 N.E.2d 742, 745-746 (Ind. 2010). Because the record includes evidence sufficient to create a material question of fact as to whether the appropriate business judgment was utilized by Anthem in executing the IPO, the economic loss rule will not operate to bar the trial of this claim. Summary judgment is DENIED on this tort claim for breach of duty.

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