Wade Clark Mulcahy LLP

<p style="text-align: justify;">Where an employer pays premiums to a mutual insurance company to obtain a policy for its employee, and the mutual insurance company subsequently demutualizes, who is entitled to the New York Insurance Law §7307(e)(3) proceeds from demutualization: the employer or employee? According to the New York Court of Appeals, the employee, as the policyholder, is often going to be entitled to the proceeds from demutualization.</p>
<p style="text-align: justify;">In<em> <a href="https://www.wcmlaw.com/wp-content/uploads/2022/06/Columbia-Memorial-Hospital-v.-Hinds-2.pdf">Columbia Memorial Hospital v. Hinds</a></em>, 2022 WL 1572408 (N.Y. 2022), a mutual insurance company (“Mutual Insurer”) issued professional liability insurance policies (“Subject Policies”) to eight medical professionals (“Employees”). The premiums for the Subject Policies were paid for by the Employees’ employers (“Employers”). The Mutual Insurer eventually demutualized and was acquired by a third-party. In compliance with New York Insurance Law §7307(e)(3), the Mutual Insurer sought to distribute $2.502 billion in cash consideration to “Eligible Policyholders” pursuant to its “Plan of Conversion.”</p>
<p style="text-align: justify;">Notably, the Employers included insurance coverage as a term of employment in the Employees’ employment agreements, and the Employers were each designated as administrators of the Subject Policies, thereby handling administrative logistics such as receiving dividends and paying policy premiums. As such, after the Mutual Insurer’s demutualization, the Employers asserted they—and not the Employees—were entitled to the cash consideration, despite the absence of an assignment of the cash consideration to the Employers. In brief, the Employers argued that, regardless of their legal entitlement, they should nevertheless receive the cash consideration as a matter of equity because the Employees would be unjustly enriched if they were entitled to the cash consideration. In response, the Employees each initiated lawsuits against the Employers, arguing that the Employees were entitled to the cash consideration pursuant to the Mutual Insurer’s “Plan of Conversion.”</p>
<p style="text-align: justify;">On consolidated appeal, the New York Court of Appeals held that the Employees were indeed entitled to the cash consideration under New York Insurance Law §7307(e)(3). The Court explained that, when an employer pays premiums to a mutual insurance company to obtain a policy of which its employee is the policyholder, and the insurance company subsequently demutualizes, the policyholder is entitled to the proceeds from the demutualization absent contrary terms in the contract of employment, insurance policy, or separate agreement. Therefore, to be compliant with New York Insurance Law §7307(e)(3), mutual insurance companies going through the process of demutualization should assign cash consideration to their listed policyholders, even when premiums are paid by non-policyholders, unless a valid agreement exists stating otherwise.</p>
<p style="text-align: justify;">Thanks to Drew Fryhoff for his contribution to this article.  Should you have any questions, please contact <a href="mailto:tbracken@wcmlaw.com">Thomas Bracken</a>.</p>