Court of Appeals of Texas,

Houston (14th Dist.).

Charles HARTLAND, Appellant

v.

PROGRESSIVE COUNTY MUTUAL INSURANCE COMPANY, Appellee.

No. 14-07-00955-CV.

April 23, 2009.

Chief Justice HEDGES and Justices ANDERSON and SEYMORE.

MAJORITY OPINION

JOHN S. ANDERSON, Justice.

Appellant, Charles Hartland, filed suit against appellee, Progressive County Mutual Insurance Company, after the denial of an auto-insurance claim for a single-car accident. The jury found appellant did not mail the premium to renew the policy until after the policy had expired; therefore, appellant did not have insurance when the accident occurred. On appeal, appellant contends the parties formed a contract under the terms of the original renewal policy when appellee accepted his premium payment, and therefore, the policy cov-ered the accident. In addition, appellant argues appellee violated the Texas Administrative Code when it denied his claim. We affirm.

1. Factual and Procedural Background

Appellant, Charles Hartland, obtained auto insurance through appellee, Progressive County Mutual Insurance Company. Policy number 37156966-1 began on November 9, 2003, at 12:01 a.m. and ended on May 9, 2004, at 12:01 a.m. Appellee sent appellant a renewal bill on April 14, and a renewal reminder on April 23, stating the renewal policy period would run from May 9 to November 9. Appellant claimed he mailed a check in the amount of the renewal premium on May 8; appellee attached a lockbox report to its counter-claim for declaratory judgment showing the postmark date was May 11. Joan Hartland, appellant’s wife, was in a single-car accident on May 9, 2004 at approximately 8:00 a.m., damaging a car covered under the initial policy.

Appellee presented evidence that it received appellant’s check on May 16, and on May 18, appellee sent appellant a revised renewal declarations page. Policy number 37156966-2 listed coverage dates from May 12, 2004, at 12:01 a.m. to November 12, 2004, at 12:00 a.m., excluding coverage for the date of the accident. Appellant requested review by appellee of the denial of the claim. On August 6, appellee again denied the claim, stating the policy was not in effect at the time of the loss. On December 29, appellant’s attorney sent a letter asking appellee to reconsider; appellee denied the claim once again.

Appellant filed an original petition, alleging breach of contract, unfair claim-settlement practice, breach of duty of good faith and fair dealing, damages, and attorney fees. Appellee filed a counterclaim for declaratory judgment, stating it owed no duty or obligation to Hartland because the policy had expired. Appellee also filed a motion for summary judgment with the same contention as the declaratory judgment. The trial court denied the motion for summary judgment and the case went to trial. The jury answered “No” to the following question: “Do you find that Charles Hartland deposited his renewal policy premium payment with the post office on or before 12:01 a.m. on May 9, 2004?”Appellant then filed a motion for judgment notwithstanding the verdict and to disregard jury findings, arguing that even if he mailed his payment after the policy period ended, appellee formed a contract based on the original terms of the renewal by accepting his payment. The trial court denied appellant’s motion and entered final judgment on the verdict.

1. Discussion

In three issues on appeal appellant contends the trial court erred when it denied appellant’s motion for judgment notwithstanding the verdict because: (1) the parties formed an enforceable contract as a matter of law; and (2) appellee violated sections of the Texas Administrative Code, making any attempts to restrict appellant’s coverage void.FN1Therefore, we will construe appellant’s three issues as actually raising two issues on appeal.

FN1. Appellant raised only the Administrative Code and has not based any assertion of error by the trial court on the provisions of the Texas Insurance Code. Therefore, we do not address what, if any, impact the Insurance Code might have on the facts found in this case. See Valadez v. Avitia. 238 S.W.3d 843, 845 (Tex.App.-El Paso 2007, no pet.)(holding that, in a civil case, an appellate court has no duty, or even the right to perform an independent review of the record and applicable law to determine whether there was error).

1. The Standard of Review

A court may disregard a jury’s verdict and render judgment notwithstanding the verdict (JNOV) if no evidence supports the jury’s findings, or if a directed verdict would have been proper. Tiller v. McClure, 121 S.W.3d 709, 713 ( Tex.2003). To determine whether a JNOV is appropriate, we apply the standards that govern “no evidence,” i.e., legal-sufficiency review. See Keller v. Wilson, 168 S.W.3d 802, 823 ( Tex.2005); Wal-Mart Stores, Inc. v. Miller, 102 S.W.3d 706, 709 ( Tex.2003).

A legal-sufficiency point must be sustained: (1) when there is a complete absence of a vital fact; (2) when rules of law or evidence preclude according weight to the only evidence offered to prove a vital fact; (3) when the evidence offered to prove a vital fact is no more than a scintilla; or (4) when the evidence conclusively establishes the opposite of the vital fact. Keller, 168 S.W.3d at 810. Under the legal-sufficiency standard, we must credit evidence that supports the judgment if reasonable jurors could, and we must disregard contrary evidence unless reasonable jurors could not. See id. at 827.If the evidence falls within the zone of reasonable disagreement, we may not invade the fact-finding role of the jurors, who alone determine the credibility of the witnesses, the weight to give their testimony, and whether to accept or reject all or any part of that testimony. See id. at 822.Unless “there is no favorable evidence” to support the challenged finding or “if contrary evidence renders supporting evidence incompetent … or conclusively es-tablishes the opposite” of the finding, we must affirm. See id. at 810-11.

1. Alleged Contract Formation

In his first issue, appellant argues that the jury’s answer to question one of the charge is immaterial because an enforceable contract exists as a matter of law. Specifically, appellant contends the parties formed a contract under the original terms of the renewal policy when appellee retained payment on the forfeited policy. Appellant raised this issue for the first time in his motion for judgment notwithstanding the verdict.

Appellee characterizes this argument as an affirmative defense of waiver and asserts that appellant cannot raise this argument on appeal because it must have been pleaded or tried by consent. Assuming without deciding that appellant has properly preserved his complaint on appeal, appellant’s first issue is without merit.

It is the general rule that a renewal of an insurance policy constitutes a separate and distinct contract for the period of time covered by the renewal. Zuniga v. Allstate Ins. Co., 693 S.W.2d 735, 738 (Tex.App.-San Antonio 1985, no writ). Any offer by the insurer to renew an insurance contract must be accepted by the insured completely and unequivocally to constitute a new contract. Viking County Mutual Ins. Co. v. Jones, No. 05-91-01815-CV, 1992 WL 211068, at *3 (Tex.App.-Dallas August 31, 1992, no writ) (not designated for publication). The payment of the premium in accordance with provisions of the insurance policy is a condition precedent to establishment of liability against the insurer. Id. The policy in this case states:

If we offer to renew or continue and you or your representative do not accept, this policy will automatically terminate at the end of the current policy period. Failure to pay the required renewal or continuation premium when due shall mean that you have not accepted our offer.

The renewal notice and bill sent by appellee provided the following payment instructions to appellant: “To renew your policy, please pay at least the minimum amount due by the due date.”The jury found that appellant did not pay his premium on time. Because appellant failed to timely pay the renewal premium, the condition for acceptance of the renewal policy was not met and the policy did not begin, leaving appellant without insurance coverage when the accident occurred. See Id. at *4 (holding because insured did not timely pay renewal premium, policy was not canceled but expired under its own terms and once insured paid renewal premium insurer properly renewed policy effective on the date of the insured’s payment); Zuniga, 693 S.W.2d at 738 (holding that since the renewal payment was not made in accordance with the terms of the policy, the renewal policy never came into existence); Southern Farm Bureau Cas. Ins. Co. v. Davis, 503 S.W.2d 373, 377 (Tex.App.-Amarillo 1973, writ ref’d n.r.e.) (stating offer for renewal of auto insurance could not come to fruition until premium paid); Trinity Universal Ins. Co. v. Rogers, 215 S.W.2d 349, 352 (Tex.App.-Dallas 1948, no writ) (stating no completed contract when insured did not indicate acceptance of renewal policy).

Relying heavily on the Texas Supreme Court case Bailey v. Sovereign Camp, W.O.W., appellant con-tends the parties formed an enforceable contract when appellee accepted appellant’s late premium payment. Bailey was a member of Sovereign Camp, W.O.W., a fraternal benefit society. Bailey v. Sovereign Camp, W.O.W., 116 Tex. 160, 165, 286 S.W. 456, 456 (1926). As part of his membership, Bailey was issued a benefit certificate for $2,000, payable to his wife upon his death. Sovereign Camp, W.O.W. v. Bailey, 277 S.W. 782, 783 (Tex.App.-Texarkana 1925), rev’d, 116 Tex. 160, 286 S.W. 456 (1926). After Bailey died, his wife made a claim for the benefit certificate. Id. at 783.The organization denied the claim, stating that Bailey was never legally reinstated after his suspension for failure to pay his May dues. Id.

Under the organization’s bylaws, Bailey could have been reinstated within 10 days after default if he paid all arrearages and dues and presented a warranty of good health. Bailey, 116 Tex. at 165, 286 S.W. at 456-57. Although Bailey mailed the money order on the tenth day, it was not received until the twelfth day. Bailey, 116 Tex. at 165, 286 S.W. at 457. As a result, Bailey’s payment was untimely because payment had to be received by the agent within the 10-day period. Bailey, 116 Tex. at 165-66, 286 S.W. at 457. Despite Bailey’s late payment, the organization reinstated his membership and did not require the warranty of good health. Bailey, 116 Tex. at 167, 286 S.W. at 457. The court held the organization waived the requirement of good health when it accepted the late payment. Bailey, 116 Tex. at 168, 286 S.W. at 458. In doing so, the court set forth three conditions for waiver of a forfeiture:

First. The insurer must have knowledge of the facts constituting the forfeiture of the certificate. Second. The forfeiture must be complete and absolute. Third. There must be some unequivocal act on the part of the insurer which recognizes the continuance of the policy, or which is wholly inconsistent with the forfeiture.

Bailey, 116 Tex. at 166, 286 S.W. at 457.

The Bailey case is distinguishable from the facts before us. Here, appellant failed to pay a premium to continue his auto-insurance coverage. Appellant’s initial policy had expired as indicated on the renewal bill: “Your current policy will expire on May 9, 2004 at 12:01 a.m.” Appellant has conceded, for the sake of this argument, that his payment was not made until after the expiration of the initial policy and after his wife’s accident. Appellant’s policy provides:

If we offer to renew or continue and you or your representative do not accept, this policy will automatically terminate at the end of the current policy period. Failure to pay the required renewal or continuation premium when due shall mean that you have not accepted our offer.

When the initial policy expired, the relationship between appellant and appellee had ended according to the terms of the initial policy. In Bailey, the organization chose to reinstate Bailey as a member, giving him the right to his existing benefit certificate. In this case, there was no policy in existence. When appellant paid the renewal premium, appellee issued a new policy effective on the date of payment. Unlike Bailey, appellant did not forfeit the right to an existing policy by not paying the premium and then resurrect it when appellee accepted the premium; the policy expired and a new policy did not begin until appellant paid the premium. See Davis, 503 S.W.2d at 377 (holding no insurance coverage on day of auto accident when insured paid renewal premium one day after accident); Rogers, 215 S.W.2d at 352, (holding no insurance coverage on day of auto accident when insured paid renewal premium three days after accident).

Therefore, we overrule appellant’s first issue on appeal.

1. Alleged Texas Administrative Code Violations

In his second issue, appellant asserts appellee violated various sections of the Texas Administrative Code in its handling of appellant’s policy. Appellant did not raise this issue until his reply to appellee’s response to his motion for judgment notwithstanding the verdict. Assuming without deciding appellant properly preserved his complaint on appeal, appellant’s second issue is also without merit.

Appellant is correct that Texas Administrative Code section 5.7005(c) provides “[p]ersonal automobile policies which are written for a period of less than one year must be renewed, at the option of the insured, for additional periods so as to accumulate a minimum of 12 months’ continuous coverage.”28 Tex. Admin. Code § 5.7005(c) (2008). However, coverage can terminate if premium payments are not made to renew the policy before the initial policy expires. See Viking County Mutual Ins., 1992 WL 211068, at *3 (con-cluding that even though policies written for less than a year must be renewed at the option of the insured, a policy terminates under its own terms if the insured does not timely pay the renewal premium); Longoria v. Greyhound Lines, Inc., 699 S.W.2d 298, 304 (Tex.App.-San Antonio 1985, no writ) (concluding policies written for less than one year must be renewed unless premium payments are not made before expiration of initial policy). Here, appellee offered to renew appellant’s six-month policy for an additional six months; however, appellant exercised his option to not renew the policy by failing to make a timely payment to renew the policy, thus ensuring continuous coverage for a one year period of time. Therefore, because the policy expired under its own terms when appellant failed to timely remit his payment to renew his policy, appellee did not violate section 5.7005(c) of the Texas Administrative Code.

*5 Appellant also claims appellee violated section 5.7007 of the Texas Administrative Code. According to section 5.7007(a), “[a] policy must be renewed at expiration, at the option of the policyholder, unless the company has mailed written notice to the policyholder of its intention to decline renewal at least 30 days in advance of the policy expiration date.”28 Tex. Admin. Code § 5.7007(a). Appellee did not have an intention to decline renewal; in fact, appellee offered to renew the policy, at the option of appellant, by sending appellant the notice of renewal. A notice of cancellation is not required when a policy expires under its own terms. See Zuniga, 693 S.W.2d at 738. Because appellant’s policy had expired under its own terms, we hold appellee was not obligated to comply with the cancellation procedures found in section 5.7007(a) of the Texas Administrative Code.

Appellant next contends appellee violated sections 5.7011 and 5.7014 of the Texas Administrative Code. However, pursuant to section 5.7001(b), sections 5.7011 and 5.7014 apply to all automobile insurance policies except personal automobile policies. 28 Tex. Admin. Code § 5.7001(b). Since appellant’s policy was a personal automobile insurance policy, sections 5.7011 and 5.7014 do not apply and appellee was not required to comply with any procedures found therein.

Appellant also contends appellee’s conduct violated section 5.7004 of the Texas Administrative Code. Section 5.7004 provides:

Any company that declines to recognize or put into effect additional coverage to which an insured is entitled under the provisions of an existing policy, or that attempts to reduce or restrict coverage under the provisions of an existing policy by endorsements or by any other means, is in violation of these sections if such acts are performed without the consent of the insured, and shall be subject to the same penalties as a policy that is cancelled in violation of these sections.

28 Tex. Admin. Code § 5.7004.

Because appellant’s policy expired under its own terms, appellee did not (1) impose a restriction or reduction on his coverage; or (2) decline to recognize or put into effect additional coverage. See Zuniga, 693 S.W.2d at 738. Therefore, we hold appellee did not violate section 5.7004 and overrule appellant’s second issue on appeal.

III. Conclusion

Having overruled appellant’s issues on appeal, we affirm the judgment of the trial court.

SEYMORE, J., dissenting without opinion.

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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 08-10450
KIMBERLY-CLARK CORPORATION
Plaintiff – Appellee
v.
FACTORY MUTUAL INSURANCE COMPANY
Defendant – Appellant
Appeal from the United States District Court
for the Northern District of Texas
Before GARWOOD, DENNIS, and PRADO, Circuit Judges.
DENNIS, Circuit Judge:
This case concerns defendant-appellant Factory Mutual’s decision in
October 2003 to distribute to its policyholders a $325 million membership credit
that was contingent on policy renewal. Factory Mutual is a mutual insurance
company and plaintiff-appellee Kimberly-Clark was a policyholder for almost 1
United States Court of Appeals
Fifth Circuit
F I L E D
April 27, 2009
Charles R. Fulbruge III
Clerk
(unpublished) (same).
2
30 years with Factory Mutual and its predecessor company. The district court
concluded that Factory Mutual breached its contract with Kimberly-Clark when
it denied Kimberly-Clark its equitable share of the $325 million distribution.
The district court held that because Kimberly-Clark was a policyholder and
member in good-standing on the distribution’s record date, Kimberly-Clark
should be accorded its equitable share. We agree and AFFIRM the district
court’s judgment.
BACKGROUND
Factory Mutual’s charter stipulates that the company, like all mutual
insurance companies, will “establish and maintain a surplus against
extraordinary losses and other contingencies, by appropriating from time to time
such sums as the board of directors may determine” “in addition to any unearned
premium or reinsurance.” In accordance with the charter, Factory Mutual
maintains a surplus fund that includes appropriated sums and unearned
premiums to cover extraordinary losses and other contingencies. In mid-2003,
Factory Mutual initiated internal discussions regarding a membership credit for
its policyholders. One major reason for a membership credit was the unexpected
growth in the surplus funds.
At about the same time, after extensive discussions with Factory Mutual,
Kimberly-Clark indicated to Factory Mutual during a meeting with Factory
Mutual on August 26, 2003, that it intended not to renew its policy. Kimberly-
Clark’s policy expired on October 1, 2003.
On October 8, 2003, Factory Mutual informed the Rhode Island
Department of Business Regulation (“DBR”) that it was planning a proposed
membership credit. On October 9, 2003, Factory Mutual’s Board of Directors
3
approved the proposed $325 million membership credit. Factory Mutual publicly
announced the credit on October 20, 2003. In a series of documents, Factory
Mutual described the membership credit to its policyholders. Factory Mutual set
eligibility for the distribution as follows: “[a]ll Factory Mutual Insurance
Company policyholders . . . on the date of record will be eligible to receive the
membership credit when their policies renew during the membership credit
period.” (emphasis added). Factory Mutual thereby conditioned the distribution
of the membership credit on a policyholder’s future act — signing a policy
renewal before the policy expired. Factory Mutual also established the “date of
record” (or record date) as September 30, 2003.
In its notices to policyholders, Factory Mutual specifically linked the
membership credit to its surplus growth and framed the distribution as a reward
or return from that growth. In an October 20, 2003 press release, Factory
Mutual stated:
Policyholders of commercial and industrial property insurer FM
Global will receive a collective US$325 million in savings on their
premium beginning January 1, 2004 as a result of lower than
expected property losses during recent years, resulting in higher than
projected surplus growth. The return will be disbursed to FM Global
policyholders as a membership credit on premium for 2004 policy
renewals.
(emphasis added). Factory Mutual specifically apportioned shares of the
membership credit distribution based on the amount of each policyholder’s
premium contribution on the record date and the number of years the
policyholder held a policy with the company. The distribution acted akin to a
mutual insurance company’s typical distribution of surplus capital as a return
to policyholders in proportion to their past contributions, except that Factory
See, e.g., In re MetLife Demutualization 2 Litig. 495 F. Supp. 2d 310, 313 (E.D.N.Y.
2007) (“A mutual insurance company’s role with respect to its policyholders is to apportion the
company’s surplus — created in part from the payment of premiums paid by the policyholders
— equitably among policyholders in proportion to their contributions thereto.”); RUSS &
SEGALLA, 3 COUCH ON INS. § 39:18 (“As a general rule, the ‘surplus’ of a mutual company
belongs equitably to the policyholders who contributed to it, in the proportion in which they
contributed.”).
4
Mutual’s distribution was contingent on policy renewal.2
On the distribution’s record date, Kimberly-Clark was a Factory Mutual
policyholder in good standing, but it had decided not to renew its policy when the
policy expired on October 1, 2003. Because it was a policyholder in good standing
on the distribution’s record date, Kimberly-Clark requested a portion of the 2004
membership credit in cash, which Factory Mutual denied. Subsequent
negotiations between the parties failed to resolve the dispute. Kimberly-Clark
therefore filed suit on September 30, 2005, in the 116th Judicial District Court
of Dallas County, Texas, against Factory Mutual, alleging breach of contract,
fraud, negligent misrepresentation, unjust enrichment, and violations of the
Texas Insurance Code. On October 24, 2005, Factory Mutual filed a notice of
removal to the United States District Court for the Northern District of Texas.
On October 5, 2006, the parties entered into a joint stipulation, dismissing with
prejudice the fraud and negligent misrepresentation claims along with several
Texas Insurance Code claims. On December 15, 2006, both parties filed crossmotions
for summary judgment on the breach of contract, unjust enrichment,
and remaining Texas Insurance Code claims.
On September 21, 2007, the district court issued a Memorandum Order
granting summary judgment in favor of Kimberly-Clark on the breach of
contract claim awarding Kimberly-Clark $3,062,776.90 in damages. The
damages reflect the share of the distribution that Kimberly-Clark would have
received had it been accorded a share. The district court found that the charter
5
of the company, the by-laws, and the policy unambiguously confirmed that
Kimberly Clark “bargained for coverage by and membership in a mutual
insurance company (as opposed to a stock insurance company) and all of the
rights and benefits that typically accompany membership in a mutual insurance
company.” The district court therefore concluded that:
Thus, the Court infers that under the Policy, upon purchasing a
policy and obtaining membership in the Company, a policyholder
gains an interest in the surplus and has a right to its equitable
share in any distribution of such surplus as declared by the Board,
so long as the policyholder is a member of the company on the
relevant date. Consequently, refusing to provide Kimberly-Clark its
equitable share of the surplus, even though the company was a
member of Factory Mutual on the record date, breaches the Policy.
Factory Mutual timely appeals on two grounds: (1) that the district court
erroneously considered the plaintiff’s claims within a breach-of-contract
framework rather than under a corporate governance framework; and (2) if the
claims are considered within a breach-of-contract framework, the district court
erred in concluding that Factory Mutual breached its contract.
STANDARD OF REVIEW
This court reviews a district court’s grant of summary judgment de novo,
applying the same standards as the district court: A party is entitled to
summary judgment only if “the pleadings, the discovery and disclosure materials
on file, and any affidavits show that there is no genuine issue as to any material
fact and that the movant is entitled to judgment as a matter of law.” FED. R. CIV.
P. 56(c). On a motion for summary judgment, the court must view the facts in
the light most favorable to the non-moving party and draw all reasonable
inferences in its favor. See Hockman v. Westward Commc’ns, LLC, 407 F.3d 317,
325 (5th Cir. 2004). In reviewing the evidence, the court must therefore “refrain
from making credibility determinations or weighing the evidence.” Turner v.
“The pr 3 ecise content of the Business Judgment Rule is provided by state law but,
generally speaking, ‘[u]nder this familiar rule of American jurisprudence, the courts refrain
from second guessing business decisions made by corporate directors in the absence of a
showing of fraud, unfairness or overreaching.’” Hoffman v. Kramer, 362 F.3d 308, 317 n.4 (5th
Cir. 2004) (quoting Capital Bancshares, Inc. v. F.D.I.C., 957 F.2d 203, 207 (5th Cir. 1992))
(alteration in original).
6
Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007).
ANALYSIS
I. Kimberly-Clark’s claims are properly analyzed under contract law
Factory Mutual contends that Kimberly-Clark’s claims for a portion of the
surplus distribution implicate corporate governance law, specifically the
“business judgment rule,” and therefore should not be considered under a 3
breach-of-contract framework. This choice between viewing a mutual insurance
policyholder’s claims as a matter of contract or as a matter of internal corporate
governance originates with the policyholder’s dual roles vis-a-vis the mutual
insurance company: the policyholder is both an insured customer and also a
controlling member of the insurer-company. See, e.g., Keystone Auto. Club Cas.
Co. v. Comm’r, 122 F.2d 886, 889-90 (3d Cir. 1941); Ohio Farmers Indem. Co. v.
Comm’r, 108 F.2d 665, 667 (6th Cir. 1940); Hutchins Mut. Ins. Co. of D.C. v.
Hazen, 105 F.2d 53, 57 (D.C. Cir. 1939). Kimberly-Clark’s claims against Factory
Mutual can be framed as either a breach of Kimberly-Clark and Factory
Mutual’s contractual relationship or as Kimberly-Clark’s disagreement with
other co-members about corporate governance and internal affairs.
Kimberly-Clark’s underlying claims allege that Factory Mutual improperly
denied Kimberly-Clark’s right, or eligibility, to a share of an announced surplus
disbursement. Courts clearly consider a policyholder’s right to a share of a
surplus distribution as a matter governed by contract law whereas a
policyholder’s grievances with a surplus distribution’s “timing, amount, and
4 In its admissions below, Factory Mutual describes the corporate board as having
“discretion to determine the time, amount and method of distribution of the membership
credit.”
5 In Lopez v. State Farm Mutual Automobile Insurance Co., 2008 WL 2744609, at *4
(Tex. App.-Corpus Christi June 30, 2008) (unpublished), a Texas Court of Appeals in an
unpublished decision contrasted the policyholder’s contractual right to participate in
announced dividends and the corporate board’s discretion over the distribution of those
dividends: (1) “Mutual insurance policyholders do not purchase the right to receive dividends,
only the right to participate in dividends, if any, on terms and conditions fixed by the board”
and (2) “The relationship between a mutual insurance company and its policyholders is
contractual, not fiduciary, and the insurer owes no duties to the policyholders other than those
stated in the policy.”
7
method” are corporate governance matters and thereby insulated from most 4
policyholder lawsuits by the business judgment rule. See Equitable Life
Assurance Society of the U.S. v. Brown, 213 U.S. 25, 47 (1909); Brown v. Royal
Highlanders, 299 N.W. 467, 471 (Neb. 1941); see also Prudential Ins. Co. of Am.
v. Miller Brewing Co., 789 F.2d 1269, 1279 (7th Cir. 1986); Andrews v. Equitable
Life Assurance Soc. of U.S., 124 F.2d 788, 789 (7th Cir. 1941); Boynton v. State
Farm Mut. Auto. Ins. Co., 429 S.E.2d 304, 307 (Ga. Ct. App. 1993); Greeff v.
Equitable Life Assurance Soc. of U.S., 54 N.E. 712, 715 (N.Y. 1899). 5
The parties do not dispute the propriety of the timing or amount of the
distribution, but Factory Mutual contends that its corporate decisions in respect
to a policyholder’s eligibility for a surplus distribution should be considered as
part of its discretion over the “method” of a surplus distribution. At issue in this
case is whether Factory Mutual’s “method” of distribution discriminates against
a particular subset of policyholders because they chose not to renew their polices
but were otherwise in good standing and had contributed to the surplus. Such
discrimination would be clearly outside of the board’s discretion over surplus
distributions because it would contravene state policy and is thereby not
protected by the business judgment rule. See N.Y. Life Ins. Co. v. Street, 265
6 In its briefs, Factory Mutual emphasizes the fact that this case must be decided under
Rhode Island and not Texas law. However, Factory Mutual also concedes in its briefs and in
oral argument that Texas and Rhode Island’s formulations of the business judgment rule do
not conflict. Compare Cates v. Sparkman, 11 S.W. 846, 849 (Tex. 1889) with Lynch v. John W.
Kennedy Co., No. PB 03-3355, 2005 WL 1530469, at *6 (R.I. Super. Ct. June 23, 2005)
(unpublished) (announcing similar formulations of the business judgment rule). Factory
Mutual is correct that corporate governance issues must be adjudicated using the law of the
state of incorporation, in this case, Rhode Island. See Askanase v. Fatjo, 130 F.3d 657, 670 (5th
Cir. 1997). However, because the business judgment rules for Rhode Island and Texas do not
conflict, this court need not undertake a choice-of-law analysis. See Railroad Mgmt. Co., L.L.C.
v. CFS La. Midstream Co., 428 F.3d 214, 222 (5th Cir. 2005) (“Where there are no differences
between the relevant substantive laws of the respective states, there is no conflict, and a court
need not undertake a choice of law analysis.”). The parties also do not dispute that the
pertinent rules under Texas and Rhode Island contract law applicable to this case are not in
conflict. Accordingly, we also need not engage in a choice-of-law analysis for the contract
claims.
8
S.W. 397, 402-03 (Tex. Civ. App. 1924); TEX. INS. CODE § 544.052; RHODE ISLAND
GEN. LAWS § 27-8-4 (describing state policy against discrimination among
insureds of the same class). The question presented to us is therefore: whether
Factory Mutual’s discrimination breaches Kimberly-Clark’s right to a
distribution share if other policy-holders, with materially identical contracts and
materially identical rights to a share, had received their shares. Accordingly,
Kimberly-Clark’s claims for a distribution share must be analyzed under a
breach-of-contract rubric and not under the business judgment rule. 6
II. Factory Mutual breached its contract with Kimberly-Clark when it
denied Kimberly-Clark its share of the surplus distribution
The policy contract is clearly labeled a “mutual insurance” contract. The
policy is silent as to the board’s discretion over the distribution of excess surplus,
but states that “[t]his policy is issued by a mutual company having special
regulations lawfully applicable to its organization, membership, policies, or
contracts of insurance.” It also states that “[t]he insured by accepting this policy
hereby becomes a member of this Company and subject to the provisions of its
charter and by-laws, with power to vote at its meetings.” Section 5 of Factory
9
Mutual’s Charter states:
[E]ach natural person, partnership, association, corporation or legal
entity insured on the mutual plan by the Corporation shall be a
member of the Corporation during the term of its policy, but no
longer, and at all meetings of the members shall be entitled to one
vote either in person or by proxy; provided, however, that where
there is more than one insured under any policy, such insureds shall
nevertheless be deemed to be a single member of the Corporation for
all purposes. The Corporation may issue policies which do not
entitle the insured to membership in the Corporation nor to
participate in its surplus.
(emphasis added). Finally, section 10 of Factory Mutual’s charter states: “Upon
termination of the membership of any member, all his or its right and interest
in the surplus, reserves and other assets of the Corporation shall forthwith
cease.” In sum, Factory Mutual and Kimberly-Clark’s contract (1) is a “mutual
insurance” policy; (2) acknowledges the “special regulations” applicable to
mutual insurance companies; and (3) grants policyholders an entitlement as a
member for “all purposes,” which includes (4) rights and interests in the surplus
until the policy’s termination (unless the policy states otherwise, which is not the
case here).
Courts consistently describe “mutual insurance” contracts as creating
certain settled expectations between the parties. As the Wisconsin Supreme
Court noted:
Every policy-holder [of a mutual insurance company] knows, or
ought to know, that he will remain a member so long as he remains
a policy-holder and no longer. He knows, or ought to know, that as
soon as his membership relation is established he becomes
possessed of an equitable interest in the assets of the company
consisting of all accumulations prior to his time, and such as may be
added thereto during his membership, but which cannot be realized
on in possession in the absence of a necessary distribution of the
surplus on account of the company going out of business, or in some
proper way.
10
Huber v. Martin, 105 N.W. 1031, 1039 (Wis. 1906); see also Fid. & Cas. Co. of
N.Y. v. Metro. Life Ins. Co., 248 N.Y.S.2d 559, 565 (N.Y. Sup. Ct. 1963). The
Supreme Court in Pennsylvania Mutual Life Insurance Co. v. Lederer described
the mutual company in this way:
In a mutual company, whatever the field of its operation, the
premium exacted is necessarily greater than the expected cost of the
insurance, as the redundancy in the premium furnishes the
guaranty fund out of which extraordinary losses may be met, while
in a stock company they may be met from the capital stock
subscribed. It is of the essence of mutual insurance that the excess
in the premium over the actual cost as later ascertained shall be
returned to the policy holder.
252 U.S. 523, 525 (1920); see also Nat’l Chiropractic Ins. Co. v. United States,
494 F.2d 332, 334 (8th Cir. 1974); Thompson v. White River Burial Ass’n, 178
F.2d 954, 957 (8th Cir. 1950); Keystone Mut. Cas. Co. v. Driscoll, 137 F.2d 907,
911 (3d Cir. 1943). Basically, the settled expectations when entering a contract
with a mutual insurance company are: (1) the policyholders pay premiums into
a common fund to cover contingencies, and (2) if there is an accumulated excess
of capital beyond what is necessary to cover contingencies (i.e., excess surplus),
the insurance company returns the excess in surplus distributions to the
policyholders. This essential aspect of the mutual insurance company’s
relationship with its policyholders is so-called insurance at actual cost or
“insurance at cost.” See White River Burial Ass’n, 178 F.2d at 957 (“To say that
an essential of mutual insurance is that the excess of premiums received over
the actual cost of insurance shall be returned to the policyholders is but another
way of saying that the essential of mutuality is insurance at cost.”). We have
stated that “[t]he furnishing of insurance to members at cost is the chief aim and
function of a mutual insurance company, and any company which does not
return to the policyholders or members the excess of the premium over the cost
11
cannot be said to be a mutual insurance company.” Am. Ins. Co. of Tex. v.
Thomas, 146 F.2d 434, 436 (5th Cir. 1945). Texas courts also agree with
describing the mutual insurance company’s purpose as providing policyholders
insurance “at cost.” See Mercury Life & Health Co. v. Hughes, 271 S.W.2d 842,
845 (Tex. Civ. App. 1954) (“While the [mutual insurance] policyholders do not
receive dividends, they get other equally valuable benefits. It is the duty of the
directors to operate the company as economically as possible and furnish
insurance to its policyholders as near actual cost as possible.”). Other authorities
unanimously agree in describing the purpose of a mutual insurance company as
providing insurance “at cost.” See, e.g., Mut. Fire Ins. Co. of Germantown v.
United States, 142 F.2d 344, 347 (3d Cir. 1944); Fid. & Cas. Co. of N.Y., 248
N.Y.S.2d at 566 (“The distribution of divisible surplus is in reality an adjustment
of the premium in retrospect of the amount found to have been actually
necessary to cover the contingencies which materialized and it effects a
reduction in the cost of the insurance.”); Dryden v. Sun Life Assurance Co. of
Can., 737 F. Supp. 1058, 1062-63 (S.D. Ind. 1989); C.J. Simons & Co. v. Am.
Mut. Liab. Ins. Co., 257 A.2d 743, 745 (N.J. Sup. Ct. 1969); McQuade v. Thacher,
198 N.Y.S.2d 715, 718 (N.Y. Sup. Ct. 1960). See generally RUSS & SEGALLA, 1
COUCH ON INS. § 1:32 (“The object [of mutual insurance] is to provide insurance
protection at cost.”).
Consequently, because they contracted for “at cost” insurance,
policyholders who contribute to a surplus are equitably “entitled” to a share of
any announced surplus distribution as a proportionate return on their prior
contributions to the accumulated capital stock. See, e.g., In re MetLife
Demutualization Litig. 495 F. Supp.2d 310, 313 (E.D.N.Y. 2007); RUSS &
SEGALLA, 3 COUCH ON INS. § 39:18 (“As a general rule, the ‘surplus’ of a mutual
company belongs equitably to the policyholders who contributed to it, in the
12
proportion in which they contributed.”). Consistent with these authorities, we
have stated, in a diversity case involving Texas law, that:
Dividends normally belong to the stockholders, which in a mutual
company are the policyholders, but the insured though not a
stockholder may by contract be allowed to participate. This share in
profits more naturally belongs to the insured than to the
beneficiary, and is a return to him of a part of his premium which
the year’s results have shown was not necessary to have been paid
to maintain the insurance with its legal reserve.
Union Cent. Life Ins. Co. v. Williams, 65 F.2d 240, 243 (5th Cir. 1933). Similarly,
Rhode Island has defined “mutual insurance company” to “mean[ ] a corporation
in which shares are held exclusively by members to whom profits are distributed
as dividends and members are both the insurer and the insured” in a health
insurance act. R. I. GEN. LAWS § 27-66-4(9) (emphasis added). Here, Factory
Mutual’s surplus distribution was apportioned based on past contributions, and
therefore policyholders who contributed, like Kimberly-Clark, should be entitled
to a share.
Because the right to the surplus is dictated by contract and is the
policyholder’s equitable right based on past contributions, the corporate board
has no competing right to the surplus assets once they announce the surplus to
policyholders. The Kentucky Supreme Court has stated:
[W]here the company is a mutual, being conducted on the plan of
giving the cheapest safe insurance to its members, all surplus ought
to belong to the members, the policy holders. For in a purely mutual
company there are no stockholders, and no one else therefore to
whom the surplus could go than its policy holders. And it should in
equity go to those who had contributed it. The officers of such a
corporation being paid salaries for their services have no interest as
such in the surplus.
U.S. Life Ins. Co. v. Spinks, 96 S.W. 889, 894 (Ky. 1906) (emphasis added); see
13
also Carlton v. S. Mut. Ins. Co., 72 Ga. 371, 1884 WL 2172, at *21 (Ga. June 10,
1884); RUSS & SEGALLA, 3 COUCH ON INS. § 39:37. Like a trustee, the board
manages and holds the funds until the funds are distributed to the insuredbeneficiary,
at which point it no longer has a competing interest over the funds.
Summarizing these principles, Russ & Segalla, 3 Couch on Insurance § 39:40,
concludes:
Although the legal title to the property of a mutual company
is held by the company, the property is held for the benefit of its
members, policyholders, and stockholders. The funds of the company
are to be treated as a trust fund for the members. . . .
Each member has the same proportionate interest that every
other member possesses. Policyholders are entitled to participate
in the annual surplus of the company and if there is an inequitable
distribution of surplus a policyholder may sue to obtain his or her
proportionate share. The right to share in a surplus may, however,
be restricted to current policyholders.
(footnotes omitted); see also Huber, 105 N.W. at 1032. Accordingly, a corporate
board has the discretion to manage the “timing, amount, and method” of a
surplus distribution but once a distribution’s timing, amount and method is
declared, the distribution funds no longer constitute the company’s property;
instead, the funds become the joint asset held by the members who are
policyholders at the distribution’s operative date. The Wisconsin Supreme Court
stated:
All this results in a necessity that some definite time be adopted
when the rights of individuals become fixed, after which may be
applied the arithmetical process by which they become known. In
deference to such necessity, the rule has become settled as to stock
corporations that a dividend belongs to those who own the stock
when it is declared. Complete analogy exists between rights of
members in a mutual insurance company and stockholders in a
stock company in and to such a surplus. Declaring a dividend is
nothing but authoritatively deciding to distribute some or all of the
14
surplus. We therefore think it entirely logical to apply the foregoing
well-established rule, and to hold that on March 19, 1906,[the
dividend distribution] became separated from the corporate assets
and became the property of the several members then existing,
payable to each on demand when the amount to which he was
entitled had been ascertained.
Zinn v. Germantown Farmers’ Mut. Ins. Co.,111 N.W. 1107, 1108 (Wis. 1907)
(emphasis added) (citations omitted). As the Wisconsin Supreme Court
acknowledged, there is a “complete analogy” between the “rights of members in
a mutual insurance company and stockholders in a stock company in and to such
a surplus.” Id. As this court has stated in the analogous context of stockholder
dividends:
Under the law of Texas, a declaration of dividends creates a debt
owed by the corporation in favor of each stockholder which cannot
be rescinded. Although the declaration of this dividend provided
that the sums thereunder were payable to the stockholders of record
at such times and in such installments during the year as the
directors saw fit, the liability of the company accrued as of the date
of the declaration.
C.I.R. v. Cohen, 121 F.2d 348, 349 (5th Cir. 1941) (footnote omitted). In short,
when a distribution is declared, the company becomes liable to pay the
policyholders because they collectively own any announced distribution from the
surplus. Because the corporate board controls the timing of the distribution, it
necessarily establishes “some definite time . . . when the rights of [policyholders]
become fixed” and the distributed funds are owned by those policyholders who
have rights at that time. Zinn,111 N.W. at 1108.
The parties dispute the date when rights of the policyholders became fixed
for the distribution, i.e., the distribution’s operative date. Factory Mutual
contends the operative date that fixes the rights of the policyholders is the date
the corporate board declared its approval of the distribution (i.e., the
The corporate board of a mutual insurance company does not necessarily have to 7
restrict a distribution to “current policyholders” at the time of the decision or announcement;
it may choose to set a retroactive operative date. See RUSS & SEGALLA, 3 COUCH ON INSURANCE
§ 39:40 (“The right to share in a surplus may, however, be restricted to current policyholders.”
(emphasis added)). The dissent relies on a provision of the Charter that simply provides that
a policy is effective only during the effective life of the policy. The corporate board decided to
set the operative date, i.e., the “record date,” for its distribution on a date within the effective
life of Kimberly-Clark’s policy. The board also stated that “[a]ll Factory Mutual Insurance
Company policyholders . . . on the date of record will be eligible to receive the membership
credit when their policies renew during the membership credit period.” (emphasis added).
Unlike the cases cited by the dissent, the board here clearly set a record date that was
different from the declaration date. In fact, the corporate board in Spence v. Medical Mutual
Liability Insurance Society of Maryland, 500 A.2d 1066, 1067 (Md. Ct. Spec. App. 1985)
emphasized the date of record and not the declaration date as the operative date of the
distribution. As we noted above, the record date defines the set of policyholders entitled to the
distribution and the timing of the distribution, i.e., setting the record-date, is protected by the
“business judgment rule,” a point conceded by Factory Mutual.
15
“declaration date”), which was October 9. Kimberly-Clark contends the operative
date was the date of record or the record-date as described in the public notices
to members describing the distribution details, which is September 30. Factory 7
Mutual’s contention is without merit. Again, the “complete analogy” between
stockholders in stock companies and mutual insurance policyholders, as to the
distribution of a surplus, is useful. The distribution materials specifically
establish the record date as September 30, 2003, and on that date Kimberly-
Clark was a policyholder in good standing. The “declaration date” is important
only because the company incurs liability to pay its promised distribution on the
declaration date. However, we have defined the “record date” as the operative
date one uses to determine the set of stockholders who can participate in a stock
corporation’s dividend distribution, i.e., the stockholders “of record.” See, e.g.,
Caruth Corp. v. United States, 865 F.2d 644, 648 (5th Cir. 1989) (“In general,
dividend income is taxed to the shareholder who, on the record date, owns the
stock with respect to which dividends are paid and who is entitled to receive the
16
dividend.”); Cohen, 121 F.2d at 349 (noting that the company incurred its
liability to pay dividends on the declaration date to the stockholders “of record”).
See generally BLACK’S LAW DICTIONARY 423 (8th ed. 2004)(defining “record date”
to mean the “[t]he date on which a stockholder must own shares to be entitled
to vote or receive a dividend. — Also termed date of record”). The relevant state
statutes also emphasize the importance of the “record date” as the operative date
to ascertain the stockholders of record for a capital distribution in stock
corporations. See TEX. BUS. CORP. ACT ANN. art. 2.26 (describing the record date
as determining which shareholders have rights to a stock dividend); R. I. GEN.
LAWS § 7-1.2-614(a)(2) (same). Accordingly, the record date is the effective date
to determine which stockholders can partake in the distribution even though the
company accrues its liability to pay the announced distribution to those
stockholders of record on the declaration date. See, e.g., Cohen, 121 F.2d at 349.
In accordance with these general principles and the complete analogy, as to the
right to receive surplus distributions, between stockholders and mutual
insurance policyholders, Kimberly-Clark, as a policyholder of good-standing on
the record date, was entitled to participate in the distributed surplus.
Factory Mutual’s final argument against according Kimberly-Clark its
share is based on the fact that Kimberly-Clark did not renew its policy before it
expired, which the board had established as a condition precedent for
participating in the distribution. The Kentucky Court of Appeals and a New
York court, the only courts to directly confront this issue, barred the conditioning
of surplus distributions on future renewal by relying on the general principles
underlying mutual insurance we described above. See Mut. Ben. Liab. Ins. Co.
v Davis, 73 S.W. 1020, 1021 (Ky. Ct. App. 1903); Wells v. Metro. Life Ins. Co., 13
N.Y.S.2d 22, 25-26 (N.Y. City Ct. 1939); see also Aetna Liab. Ins. Co. v Hartley,
67 S.W. 19, 21, opinion modified on other grounds, 68 S.W. 1081 (Ky. Ct. App.
Factory Mutual cites Bryant v. Mutual Benefit Life Insurance Co., 109 F. 748, 756 8
(M.D. Tenn. 1901), and Petrie v. Mutual Benefit Life Insurance Co., 100 N.W. 236, 238-39
(Minn. 1904), as espousing opposing positions, i.e., permitting mutual insurance companies
to condition distributions on renewal. We disagree with Factory Mutual’s reading of those
cases. The corporate board in each case conditioned a surplus dividend on a future premium
payment because the policyholder was in arrears. In other words, the policyholders in those
cases were not members “in good standing” and therefore not on equal footing with other
members who actually contributed to the capital surplus and were therefore entitled to an
equitable share. E.g., Wells, 13 N.Y.S.2d at 25. In Bryant, the court allowed a mutual company
to refuse to credit an anticipated dividend before that same year’s contribution was paid. See
Bryant, 109 F. at 755-57. In Petrie, the Minnesota court similarly permitted the corporate
board to only apply a dividend credit to the policyholder’s delinquent account if the
policyholder paid the premium due in the year of the dividend. 100 N.W. at 239. In both cases,
the policyholders loaned from the mutual company against their policy and were in arrears;
the policyholders were thereby borrowing against and depleting the company’s capital stock.
See Bryant, 109 F. at 749-50; Petrie, 100 N.W. at 237-38. In such circumstances, a mutual
company, consistent with its general principles, can condition the policyholder’s right to
anticipated dividends on the payment of existing debts and policy renewal, because dividends
derive from accumulated contributions and excess capital stock; in other words, the past
failure to pay those contributions and the taking out of loans that deplete the capital stock can
justify the adjustment of those members’ equitable right to a dividend distribution unless they
promise to pay premiums that reduce their debt to the capital stock. See RUSS & SEGALLA,
COUCH ON INSURANCE § 77:7 (citing Bryant, 109 F. at 748; Petrie, 100 N.W. at 236). It is
undisputed that Kimberly-Clark was a policyholder in good standing on the record date and
had contributed to the accumulated capital stock. Therefore, these cases are inapposite.
Factory Mutual also references an unpublished memorandum order from a district
court in Ohio for further support. See Andersons, Inc. v. Factory Mut. Ins. Co., No. 3:01 CV
7620 (Memorandum Opinion) (N.D. Ohio Sept. 3, 2003) (unpublished).Not only is this
unpublished order’s precedential value limited, it does not provide any reasons for its
conclusion that Factory Mutual’s membership credit program is a “unilateral contract.” It also
does not consider the fact that Factory Mutual is a mutual insurance company. For these
reasons, the order is not persuasive.
17
1902). We agree with these authorities. As we noted earlier, once a surplus 8
distribution is announced, the policyholders on the record date own the surplus
and the corporate board no longer has any rights or interests in the distributed
amounts. Accordingly, Kimberly-Clark, as a policyholder of record, owned a
share of the surplus, and Factory Mutual cannot then disentitle Kimberly-Clark
based its subsequent failure to renew its policy — presumably, Kimberly-Clark
could have changed its mind and decided to renew its policy on October 1, which
18
is after the distribution’s record date. As a practical matter, Factory Mutual’s
eligibility rules effectively bar any return of excess capital to members on the
record date who no longer need insurance or cannot afford to renew their
insurance, thereby directly contravening members’ equitable rights to a
distribution from a surplus that was created, in part, by their past contributions.
Conditioning a right to a distribution on renewal would add a new condition to
the policy that substantially limits and encumbers a policyholder’s rights to a
surplus distribution without any contractual basis and undermines the settled
expectation that mutual insurance provides insurance “at cost.”
In this case, Factory Mutual declared a $325 million distribution from
excess surplus funds as a return to policyholders and it apportioned the
distribution based on the policyholders’ contribution to the accumulated capital
stock, i.e., their past premiums. Factory Mutual segregated this amount from its
capital stock on October 9, 2003, for existing policyholders of the record date:
September 30, 2003. Once Factory Mutual’s corporate board segregated the $325
million from the surplus and marked it for distribution to existing members on
the record date, those existing members became entitled to the whole amount
based on their equitable share as calculated pursuant to the board’s formulas.
The corporate board also became liable to follow through with the distribution
on the date of declaration. Furthermore, after declaring the surplus, the board
could not then condition a policyholder’s right to a share of the distribution on
a future, post-record-date act, such as policy renewal, because the board no
longer had any competing interests or rights to the distribution funds. Since
Kimberly-Clark was a policyholder on the record date, it equitably owns a share
of the distribution calculated pursuant to the board’s formula whether or not it
had renewed its policy before the policy’s expiration. Therefore, the district court
properly awarded Kimberly-Clark its properly calculated share of the
19
distribution.
For these reasons, we AFFIRM the district court’s judgment.
20
GARWOOD, Circuit Judge, dissenting.
I respectfully dissent. It is undisputed that Kimberly-Clark’s only
relevant Factory Mutual policy expired by its terms on September 30, 2003,
that prior to that time Kimberly-Clark had determined not to renew the
policy, so informing Factory Mutual in late August 2003, and that Kimberly-
Clark never attempted to renew the policy. On October 9, 2003, after the
Kimberly-Clark policy had indisputably expired, the Factory Mutual’s Board
of Directors declared a some $325 million surplus all of which would be
credited to policyholders as of September 30, 2003 as a reduction of the
premium payable on the renewal of their policy. As Kimberly-Clark’s policy
had already expired, and there was never any attempt to renew it, Kimberly-
Clark received nothing by virtue of the October 9, 2003 board action, but
nevertheless claims an entitlement to a share of the $325 million surplus.
Kimberly-Clark’s relevant policy expressly states that it is subject to
the terms of the Charter of Factory Mutual. Section 5 of the Charter provides
that a policyholder of the corporation “shall be a member of the Corporation
during the term of its policy, but no longer,” and section 10 of the Charter
states that “upon termination of the membership of any member, all his or its
right and interest in the surplus, reserves and other assets of the Corporation
shall forthwith cease.” There is no evidence that these Charter provisions
ever read otherwise at any relevant time, nor has their validity been
challenged in this case. For example, in Zinn v. Germantown Farmers’
Mutual, 111 NW 1107 (Wis. 1907), a mutual insurance company on March 19,
1906 declared a $50,000 surplus to be distributed to members “entitled
thereto.” It was held that only those who were policyholders on March 19,
1906 – the date the surplus was declared and ordered distributed – were
entitled to participate, specifically excluding, inter alia, those “who had held
21
policies and contributed toward the surplus, but whose policies had lapsed
and expired, and who were not policyholders on March 19, 1906.” See also,
e.g., Spence v. Medical Mut. Liab. Ins. Soc’y of Maryland, 500 A2d 1066, 1067
(Md. App. 1985) (“former policyholders of a mutual company . . . are not
entitled to participate in the distribution of a dividend from earned surplus
stemming from a year from which they had policies in effect.” (emphasis
added)); Russ & Segalla, 3 Couch on Insurance (2005) § 39.40 (“The right to
share in surplus may, however, be restricted to current policyholders.”).
This is not to suggest that charter provisions such as those of section 5
and 10 of the Factory Mutual Charter must be included in every mutual
insurance company’s charter. A charter which does not include such
provisions would likely not thereby be invalid. However, it strains logic well
past the breaking point to suggest, as does the majority in its footnote 7,
which simply ignores section 10 of the Charter and misreads section 5, that
once the choice is made to include such provisions in the charter of a mutual
insurance company, its Board of Directors is thereafter free to disregard
them.
At no time since September 30, 2003, has Kimberly-Clark been a
member of Factory Mutual. Consequently, Kimberly-Clark was entitled to no
share of the distribution of surplus provided for in the October 9 Board
resolution. The Board had no power to itself amend the Factory Mutual
Charter, and did not purport to do so. On October 9, the Factory Mutual
Board could have declared a surplus distribution payable to, and only to, all
who were members on that date, which would have included nothing for
Kimberly-Clark.
The fact that Factory Mutual conditioned receipt of the surplus
distribution on policy renewal, providing the distribution be only a credit on
22
the renewal premium, is nothing of which Kimberly-Clark has any right to
complain, because it had no right to any distribution of any of the surplus.
Kimberly-Clark was not a member on October 9, 2003, and was entitled
to no part of the surplus determined to then exist and then ordered to be
distributed, and it has not been a member at any time since September 30,
2003, and thus its rights were not in any way infringed by the Board
resolution of October 9, 2003.
I accordingly respectfully dissent.

1 “Mutual insurance, as its name implies, exists where several persons have joined
together for their united protection, each member contributing to a fund for the payment of
the losses and expenses. Under such an organization, each member is in a sense both an
insured and an insurer . . . The policyholders in a mutual are equivalent to stockholders in a
stock corporation in so far as rights and remedies are concerned. Like stockholders,
policyholders participate in the operation of the mutual through voting rights, and share in
the company’s financial success or failure.” LEE RUSS & THOMAS SEGALLA, 3 COUCH ON INS.
§ 39:15 (3d ed. 2008) (footnotes omitted); see also Heritage Healthcare Servs., Inc. v. Beacon
Mut. Ins. Co., No. C.A. 02-7016, 2004 WL 253547, at *4 (R.I. Super. Ct. Jan. 21, 2004)

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