Ontario Court Of Appeal Speaks To Policyholder Rights On An Insurance Company Demutualization

On May 22, 2014, the Ontario Court of Appeal released its decision in Mandeville v The Manufacturers Life Insurance Company, a unanimous decision of Gillese, Blair and Strathy, JJA., written by Gillese JA. In the decision, the Court determined that the defendant/ respondent ("Manulife") was not negligent in failing to protect the right to demutualization benefits of certain class action plaintiff participating policyholders of Manulife when their policies were transferred to another insurer prior to Manulife's demutualization. Given the imminent release of Regulations permitting the demutualization of federally incorporated property and casualty insurance companies ("P&C Companies"), what this decision has to say about the nature of a mutual policyholder's ownership interests, and the duty of care of an insurer to protect such interests, becomes increasingly important.

Insurance companies come in two basic ownership forms, stock companies, organized much like a standard business corporation and owned by their shareholders, and mutual companies. In a mutual company, there are no shareholders and a certain class or classes of policyholders (in life insurance companies, generally referred to as "participating policyholders", and in P&C Companies as "mutual policyholders") are conferred governance rights through a combination of contract rights (in the policy of insurance), the by-laws of the insurer, and statute (which may be federal or provincial, depending on where the insurance company is incorporated). These governance rights include the right to vote at policyholder meetings, and are accompanied by the possibility of receiving policy dividends (in the case of a life insurance company) or premium refunds or rebates (in the case of a P&C Company). In the case of a "demutualization" of the mutual company, policyholders are generally assumed to have the right to receive "demutualization benefits". Some mutual companies (both life insurers and P&C Companies) are "pure mutuals" meaning that all the policies that they issue are participating policies or mutual policies, having these governance and ownership rights. Other mutual companies also issue cash policies, possessing only a contract right to insurance, but no governance or ownership rights.

A "demutualization" is the process by which a mutual insurance company coverts itself into a stock company. This is done by way of the cancellation of the governance (voting) and other ownership rights of the participating or mutual policyholders and the issuance of shares of the new stock company to the policyholders, or to a new financial holding company, which in exchange issues its voting shares to the policyholders. The assets of the insurance...