“Mutual insurance, as its name implies, exists where several persons have joined 1

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)

1

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(unpublished) (same). 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. KimberlyClark’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 Litig. 495 F. Supp. 2d 310, 313 (E.D.N.Y. 2

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 precise content of the Business Judgment Rule is provided by state law but, 3

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
 In its admissions below, Factory Mutual describes the corporate board as having 4

“discretion to determine the time, amount and method of distribution of the membership

credit.” 

In Lopez v. State Farm Mutual Automobile Insurance Co., 2008 WL 2744609, at *4 5

(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
 In its briefs, Factory Mutual emphasizes the fact that this case must be decided under 6

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, 3COUCH 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 KimberlyClark 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 KimberlyClark 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, KimberlyClark 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.