American Association of Insurance Management Consultants

DERIVATIVE SUIT EXPOSURE FROM OFFICERS AND DIRECTORS

Summary: 

I do not truly understand the rationale in suing the company adjuster in a lawsuit against the Insurance Company, since he has no independent duties apart from those of the Insurance Company. However, Directors and Officers of corporations owe fiduciary duties to corporate stockholders and to the Corporate business entity itself. A Mutual Insurance Company which is owned by the policyholders therefore owes two sets of overlapping fiduciary duties. The first set of duties is to the policyholders as corporate owners (Stakeholders). The second set of overlapping fiduciary duties comes as a result of the insurance company owning fiduciary duties to the policyholders. (http://www.legalmatch.com/law-library/article/corporate-fiduciary-duties...)

Full article: 

I do not truly understand the rationale in suing the company adjuster in a lawsuit against the Insurance Company, since he has no independent duties apart from those of the Insurance Company. However, Directors and Officers of corporations owe fiduciary duties to corporate stockholders and to the Corporate business entity itself. A Mutual Insurance Company which is owned by the policyholders therefore owes two sets of overlapping fiduciary duties. The first set of duties is to the policyholders as corporate owners (Stakeholders). The second set of overlapping fiduciary duties comes as a result of the insurance company owning fiduciary duties to the policyholders. (http://www.legalmatch.com/law-library/article/corporate-fiduciary-duties...)

 

Officers and Directors Fiduciary Duties to the insurance Company include:

 

1.  Duty of Care:

      a. Must fully inform themselves of all material information reasonably available to them

      b. May rely (reasonably/in good faith) on experts and advisors

      c. Must act with care in discharge of their duties - in a manner in which they would act if they were conducting their own             affairs

      d. Considering whether met their duty of care in taking action:

     i. Amount of deliberation

     ii. Time to and review of materials

     iii. Documentation

2. Duty of Loyalty:

     a. Directors must have the interest of the corporation/its stockholders (owners)

          ahead of their own personal interests

     b. Good faith - not a standalone fiduciary duty but a subset of the duty of loyalty

3. Enhanced Scrutiny

4. Against Self-Dealing

5. Required Disclosure

6. Good Faith & Fair Dealing - herein is a separate duty of the Company to the policyholder

 

Check for the following in your client's Mutual lnsurer:

 

1. What is its expense ratio as compared to the industry?

2. Who are the service providers?

3. ls there a claims manual and how is it used?

4. What is the pay and benefits for directors/officers?

5. ls the board a "disinterested" board?

6. What is the experience of the Board and its qualifications?

7. Does the Board also run/control another related entity of the mutual and is it an interlocking

directorate for which they are also paid to serve on its board?

8. What are the reasons given for any of its rate increases as provided to the state regulator?

(These are generally available through filings through the state's web site.)

9. Is nepotism evident in hiring, position, pay or promotions?

10. ls a proxy vote available and how is it used?

 

Remember, any relationship that is alleged to be self-serving is not protected by the business judgment rule for the officer and director.

 

In Addition to the above, Texas and in other states there may be the other substantial issues if the mutual insurer is a "Farm Mutual". Which is a license held by some mutual insurers operating in Texas under chapter 911 of the Texas insurance Code. Any Company operating under this code has the name "Farm Mutual" or some derivative of that name somewhere in its business name, by statute. Each State's insurance laws are a bit different and a review of the state's laws and the particular operation charter of the mutual insurer need to be reviewed. In Texas, Farm Mutuals are a holdover from when insurance was an infant and farmers had a particular need that was not being met by conventional insurance, they had low funding requirements, easy formation, often issued “participating" policies, (policies in which the insurance company could demand additional funding from the policyholders to pay claims), and in fact did not require the salesman to have an agents insurance license. Today they serve no specific unique purpose since other entities such as Farm Bureau, which is NOT a farm mutual, could easily cover the exposures insured by a farm mutual. As such, some states like Arkansas have legislatively prohibited the formation of any further Farm Mutual.

 

FARM MUTUAL INSURER: (a special kind of mutual insurer)

 

The Farm Mutual System was created to advantage the policyholder, not the Company.

 

1. Farm Mutuals pay no (0) premium taxes to the state (which would infer that the premiums  paid by the policyholder for the coverage should be lower than for those companies that do)

 

2. lt does not file or have approved any coverage forms with the Texas Department of Insurance, (TDI).

 

3. lt does not file or have approved any rates with the Texas Department of lnsurance, (TDl).

 

4. It does not file “withdrawal plans” to the TDI, in the event it decides to stop writing insurance in a particular area.

 

5. lt is not assessed or pay any funds to the Texas Wind Storm lnsurance Association, (TWIA)

 

6. lt does not pay any assessment to the Texas Office of Public lnsurance Counsel, and therefore such administrative office does not provide any oversight protection.

 

7. Since both the coverage and the rate are not overseen by the TDl, the TDI has adopted a very

hands off attitude towards any regulatory oversight of a Farm Mutual... the policyholder is really on his own as far as oversight of insurance is considered and the behavior of its  Officers and Directors.

 

8. Every policy issued by a Farm Mutual MUST include a copy of the Farm Mutual’s By-Laws, which are part of the insurance policy...In these by-laws you will also find the so called benefits the “member” (policyholder)  is entitled to have as a result of the mutual operating as a Farm Mutual.  These rights include the right to vote and the right to participate in the company beyond that of an ordinary “Mutual” company.  If you find the by-laws have essentially stripped the policyholder of his rights, mid convention year votes were held to amend the by-laws, is being operated in a fashion contrary to the statutes and its own by-laws, has not provided his coverage or the directors or officers “interests” are placed above those of the policyholder, it may be ripe for a derivative suit. (Do not expect that the TDI to assure that Farm Mutuals operate as a Farm Mutual per the law...for the benefit of its policyholders...it will not, a derivative suit may be necessary.) The case may be that the by-laws were changed mid policy term, which means since the by-laws must be part of the policy, the policy wording was changed mid-term.

 

9. Officers and Directors are by design "interested parties", some Farm Mutuals in fact require that each director and officer have their dwelling coverage with the Farm Mutual.  In fact often the case is the Directors are on and a part of the sales force for the Farm Mutual. If the salesman for the policy obtained by your client was not sold to him by a director, he may have been discriminated against since the open secret at some Farm Mutuals is that directors get preferential treatment in the business they sell.

 

10. Discrimination may be evidenced in the Board Makeup, often times you will find no minority representation or representation on the board approximating its policyholder makeup. According to the census bureau about 38% of TX considers themselves to be Hispanic or Latino. 

 

11. Check the qualifications and ultimate pay of the directors and the officers running the Farm Mutual company, besides being interested parties, if the qualifications highlight that he only went to high school, you may appropriately wonder what qualifies him to receive the high pay plus benefits which are paid for by the policyholder in his ownership of the Company. Or if there is anything which smacks that the officers or directors are operating the company as if they owned it rather than the policyholders,  that looks to be a fiduciary breach.  

 

This appears to be a ripe area for a lawsuit, in addition to the company not properly paying the claim; it may have harmed the policyholder as a stakeholder by its business practices.

 

Considering that the pro insurance laws generated recently in Texas are focused on claim’s payment and not to the mutual insurance company’s behavior towards its stakeholder, this should be a considered avenue of recovery for the policyholder.