The decision is consistent with modern trends imposing a fiduciary duty on mutual insurance companies, vis-à-vis policyholders like the Noonans. The decision is also justifiable on public policy grounds, given the inferior position [of the policyholders] to Northwestern.
Numerous jurisdictions and commentators have equated policyholders of mutual insurance companies to stockholders, and entitled to the same fiduciary duty in cases on similar facts. Reiff v. Evans, 630 N.W.2d 278 (Iowa 2001); Couch on Insurance, sec. 39:15; Heritage HealthCare Services, Inc. v. The Beacon Mutual Ins. Co., (2004 WL 253547)(R.I.Super., Jan. 21, 2004); and State Farm Mutual Automobile Ins. Co. v. The Superior Court of Los Angeles County, 8 Cal.Rptr.3d 56 (Cal.App.4th 2003).
Whether the decision is correct with respect to the officers and directors, however, is not so clear. In Heritage Healthcare, for example, the court imposed a fiduciary duty on the mutual insurance company, but dismissed the case against the directors and officers.
Although the court found that they have a fiduciary duty, the court concluded that they breach it only if they acted fraudulently, illegally, or without becoming sufficiently informed to make an independent business decision.
In addition, the C.J.S. citation arguably does not support the courts conclusion. The provision states, Officers and agents … may render themselves liable to the company or its members for gross neglect of duty or for willful wrong in the management of the company and its business. Thus, they are liable to the company or its members for a misappropriation, diversion, or misapplication of its funds. 44 C.J.S. Insurance 114(c)(1993).
The cases cited in this section of the C.J.S. all concern either self-dealing or waste of assets. Arguably, the allegations in the case at bar do not rise to that level.
Thus, the decision is not so firmly grounded in precedent and authority, insofar as it addresses the liability of officers and directors. In addition, although the court discussed the policy reasons why the corporation should be liable for breach of fiduciary duty, it did not justify imposing liability on officers and directors.
– David Ziemer
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David Ziemer can be reached by email.