Calif. Court Upholds Mutuals’ Discretion on Dividends

December 31, 2003

A California Court of Appeals ruled that policyholders of mutual companies cannot compel directors to declare dividends unless they can provide evidence that the board failed to declare dividends due to fraud, oppression, dishonesty, illegality or lack of informed and independent decision making, reported the National Association of Mutual Insurance Cos. (NAMIC) newsletter.

The decision is favorable for direct writer State Farm, and entitles mutual insurance companies and their boards to the protection of the business judgment rule on decisions affecting dividends and other internal governance practices.

“This decision is important for NAMIC member companies because it reaffirms the principles that have guided mutual company boards for years regarding dividend decisions,” said Gregg Dykstra, NAMIC general counsel, “It also reaffirms the central role of the state of domicile in reviewing and overseeing the internal financial and operational affairs of an insurance company in general.”

The court identified several legal authorities which specifically listed the declaration and payment of dividends as an area of corporate governance covered by the internal affairs doctrine. The court relied heavily on this analysis in forcefully addressing the nature of the policyholder’s complaint.

The appellate court did not, however, dismiss the case, but instructed the trial court to revise its order regarding the appropriate law to be applied. The court left open the possibility that State Farm could now petition that the case be dismissed under the argument that California, while not precluded from hearing the case, is an inconvenient forum in which to litigate.

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