Opinion ID: 65377
Heading Depth: 2
Heading Rank: 1

Heading: Kimberly-Clark's claims are properly analyzed under contract law

Text: Factory Mutual contends that Kimberly-Clark's claims for a portion of the surplus distribution implicate corporate governance law, specifically the business judgment rule, [3] and therefore should not be considered under a 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 method [4] are corporate governance matters and thereby insulated from most policyholder lawsuits by the business judgment rule. See Equitable Life Assurance Society of the U.S. v. Brown, 213 U.S. 25, 47, 29 S.Ct. 404, 53 L.Ed. 682 (1909); Brown v. Royal Highlanders, 140 Neb. 54, 299 N.W. 467, 471 (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., 207 Ga.App. 756, 429 S.E.2d 304, 307 (1993); Greeff v. Equitable Life Assurance Soc. of U.S., 160 N.Y. 19, 54 N.E. 712, 715 (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 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]