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Matthiesen, Wickert & Lehrer, S.C. feels it is an honor and a privilege to represent all of its subrogation clients. However, mutual insurance companies hold a special place in our hearts because of their long and distinguished heritage in the annals of insurance history and the rural and local nature of their roots. Subrogating on behalf of a mutual insurance company often requires special handling and techniques considering the nature of the individuals and businesses they insure and the types of losses they frequently encounter. Effectively representing them begins with an understanding of what they are and who they insure. It is a question not often asked and even less frequently answered.
Simply put, a mutual insurance company is one which is owned entirely by its policyholders. In contrast, a stock insurance company is owned by investors who purchase capital stock and any profits generated is distributed to the investors without necessarily benefiting the policyholders. Mutual insurers don’t have capital stock like “stock insurers” and their profits are either utilized within the company or returned to its policyholders in the form of dividends. Mutuality occurs when a group of people agree to mutually share in a risk. If one member suffers a loss, everyone helps that member recover. No single person has to bear the full burden of a loss. Mutual policyholders have the right to attend the annual meeting of policyholders, run for election as a director, and to vote for directors. They have both an active voice and a stake in the operation of the mutual insurer. Mutuals and stocks are not the only insurance structures (e.g., fraternal groups), but they are the most prevalent way insurers structure themselves. Worldwide, mutuals outnumber stocks. In the U.S., however, stock insurance companies still outnumber mutuals.
The oldest insurance company in America was a mutual insurer which actually predates America itself. The Friendly Society for Mutual Insurance of Houses Against Fire was founded in Charles Towne (later renamed Charleston), S.C. in 1736. It filed bankruptcy after the Great Fire of 1740, which destroyed more than 300 buildings. In 1752, Benjamin Franklin and a number of Philadelphia volunteer firefighters established the first lasting insurance company—The Philadelphia Contributionship. Its founding principle was “Whereby every man might help another without any disservice to himself.”
Mutuals were born of necessity—initially because there were no other options and later because stock insurers were unavailable for farmers and rural businesses who also needed insurance coverage. They were created by associations or groups of professionals whose members could not locate sufficient or affordable coverage elsewhere. Rural cooperation among farmers and other professions revealed that considerable savings could be had by mutuality. Mutuals were formed under special charters and initially operated without any guidance or supervision. Over time, one state after another developed insurance departments which eventually began to require reporting from the mutuals.
The development of mutual insurers continued well into the 20th Century. For example, In the 1970s, the North Carolina Bar Association was faced with the realization that professional liability insurance was hard to find and expensive, and that premiums were continuing to rise. Malpractice coverage was dominated by a few companies with no real commitment to insuring lawyers. The bar association met to discuss organizing a mutual insurance company, and Lawyers Mutual Insurance Company was the result. CUNA Mutual Insurance Company represents the needs of America’s credit unions.
Whether a mutual carrier has an advantage over stock carriers is a long-standing argument. It is undeniable, however, that one benefit of mutual insurance is that capital can be returned directly to the policyholders in the form of either policyholder dividends or premium credits. Stock companies, on the other hand, are owned by shareholders interested in profits. Stock company dividends go to shareholders not policyholders. Stock company policyholders also do not have the ability to vote for board members as they do in mutuals. As a result, mutuals often take a big picture view on risk tolerance, pricing, and investment. They usually have a larger percentage of assets invested in equities than do stock companies who often employ more volatile income investments with higher returns but more risk. In addition, because so many mutuals were formed by associations or groups of professionals, they frequently focus on a single line of business and develop a great deal of expertise in a single area.
On the flip side a mutual insurer does not have the ability to issue more stock if it needs more capital. Therefore, they tend to be better capitalized, which in turn means they can withstand catastrophic losses easier. Mutuals are not necessarily always small, local companies. Times have changed and Liberty Mutual Insurance is the sixth largest auto insurance company in America and the fourth largest property casualty insurer (by market share). Mutuals aren’t always recognizable by their name either. American Family Insurance Company is a private mutual company. Some mutuals “demutualize” and become stock companies. Prudential and MetLife are two examples. This process involves policyholders being issued stock and the shares trade on a public stock exchange.
Mutual insurance company policyholders are eager to see that their company aggressively investigates and pursues subrogation on even the smallest of claims. Subrogation dollars recovered are returned to the policyholders more directly than with stock companies, where successful recoveries have an effect on a company’s profitability. Because subrogation remains the only effective tool for turning back the hands of time and erasing a major loss which could otherwise have devastating effects for a single policyholder or an entire mutual company, mutual insurers should pay special attention to subrogation training and employ subrogation counsel to aggressively squeeze every last recovery dime out of claims.
For questions about mutual insurance company subrogation or subrogation in general, contact Gary Wickert at [email protected].