Pincus v. Mut. Assur. Co.
| Decision Date | 03 December 1976 |
| Docket Number | 4604 |
| Citation | 4 Pa. D. & C.3d 71 |
| Parties | Pincus v. The Mutual Assurance Company |
| Court | Pennsylvania Commonwealth Court |
March term, 1973
Pace Reich, for plaintiffs.
Harvey Bartle and Erwin Lodge, Irwin Paul, Robert Rosen Wm. Ewing, Michael Rutenberg, Jenkins, Miller & Jenkins for defendants.
Adjudication in equity.
I. ISSUES
Plaintiffs, Erwin L. Pincus and his wife, Hinda, perpetual fire insurance policyholders with defendant, The Mutual Assurance Company (" Mutual" ), have brought this action in equity on behalf of themselves and all other similarly situated Mutual policyholders, seeking to compel Mutual to distribute $ 10,000,000 of its assets currently held in an unallocated fund. [1] Plaintiffs contend that the $ 10,000,000 is being held for no legitimate corporate purpose and that the failure of Mutual and its board of trustees, also defendants, to make such a distribution constitutes an unreasonable and arbitrary abuse of the trustees' discretion.
Mutual, its wholly owned subsidiary, The Stock Insurance Company of the Green Tree (" Subsidiary" ), and the board of trustees assert that it, the board of trustees, has in fact exercised sound judgment and discretion in the operation of Mutual and its subsidiary. Further, defendants contend that the requested distribution would seriously undermine the financial position of Mutual and the subsidiary. . . .
III. DISCUSSION
B. Merits
Suits which seek to challenge the dividend policy of mutual companies such as herein involved, are governed by the legal principles applicable to similar suits brought against stock companies: Gross v. Philadelphia Contributionship, 73 D.& C. 2nd 654 (Phila. Co. 1975). Traditionally, the courts of this Commonwealth have been hesitant to interfere with the internal management of corporations: Hopkins v. Union Canvas Goods Company, 104 Pa.Super 264, 158 A. 301 (1932); Guttmann v. Duquesne Brewing Company, 120 Pitts. L. J. 453 (1972). The burden a plaintiff must meet to compel such judicial intervention is extremely heavy. Only if clear disregard of official duties, arbitrary or manifestly erroneous actions, abuse of discretion, or bad faith on the part of directors or trustees is established may such relief be properly granted: Hopkins v. Union Canvas Goods Company, supra, 104 Pa.Super at 266; Gross v. Philadelphia Contributionship, 73 D.& C. 2d at 663. Plaintiffs have failed to meet this burden.
A 1974 actuarial study commissioned by defendants indicated that if present trends in new business, interest income from investments, inflation and dividends continue, it would be in dire financial circumstances as early as 1983 even if it retained all of its present assets. Conversely, plaintiffs assert that the distribution of the $ 10,000,000 which it contends Mutual holds for no legitimate purpose would in no way harm the financial position of the corporate defendants.
Plaintiffs, in their case, by their own actuarial experts attempted to discount defendants' actuarial information on two grounds. First, they suggest, that even if defendants' information were valid, the great economic loss predicted would result largely from the assumed forecasts of future new business and future dividends; two factors over which the companies have a good deal of control. Plaintiffs urge that defendants could either stop writing new business and in effect become a security investment company and/or modify its dividend practice in relation to limited new business which is written, i.e., use a different, smaller dividend scale.
Such a suggestion would directly contradict several fundamental premises on which Mutual was founded in 1786. As alluded to above in Finding of Fact 24, Mutual was founded to provide fire insurance to the public on the most equal terms, and this was to be accomplished without a view towards profit: Charter of the Mutual Assurance Company for Insuring Houses from Loss by Fire, Act of Incorporation of February 27, 1786 [12 Pa. Statutes at Large (1785-1787) Ch. MCCI, pp. 151-158] section 1. If Mutual were to stop or greatly reduce its quest for new business in the future, it would no longer be fulfilling the mandate of its original charter to offer fire insurance equally to the public.
In making their request, plaintiffs contend that they are somehow more entitled to the surplus of the company built up over the last 190 years, than some newcomer. Yet, the original charter of this insurance company dictates that its primary purpose for existence is to provide fire insurance to the public in the most equitable manner, not to pay large dividends to existing policyholders. Similarly, a discriminatory dividend policy vis-a-vis new policyholders would violate this same provision.
Keeping the 1974 actuarial study in mind and then by the the prudent use of all of Mutual's assets, the board of trustees hopes to be able to continue serving the purpose for which Mutual was formed. Though under the original charter this was to be done without a view towards personal profit, it must be stressed that presently members of plaintiff class have been and are still receiving generous dividends on their deposits. In fact, the individual plaintiffs themselves have received dividends of up to 20 per cent per year on their original 1955 deposit.
Defendants admit that eventually they must curtail this generous dividend policy although when this will be done will be a function of the future economy, amount of new business being written and competition. Nevertheless, it seems such a determination should be left to the board of trustees. Thus, plaintiffs' initial attack on defendants' explanations must be rejected since " this represents a disagreement on a matter of business judgment, and one trained in the law who sits as a Judge would indeed be foolish to substitute his opinion and judgment on business matters for that of the duly elected Board of Directors." Guttman v. Duquesne Brewing Company, supra, 120 Pitts. L. J. at 455.
Plaintiffs' second and more fundamental attack on defendants' actuarial evidence deals with the validity of the assumptions on which defendants' actuary made his projections for the future. They submit that the assumptions used in defendants' study as to future expenses, future investment income, future new business and future dividends are so unrealistic as to give an incorrect picture of Mutual's present and future financial positions. In contrast, plaintiffs produced their own actuarial experts who sought to demonstrate that if different underlying assumptions were used, Mutual's future financial picture would be so dramatically different as to permit the requested distribution to be accomplished without any harm to the company.
Specifically, plaintiffs assert that defendants' actuary's assumptions of future investment income are too low despite the fact that they closely resemble the actual experience of Mutual over the past years. It is suggested that by restructuring its investment portfolio Mutual could increase expected income though they do not fully consider such things as the federal income tax impact on such a restructuring. Similarly, they challenge the expense assumptions although they too are closely tied to past experience. Likewise, they challenge the new business assumptions notwithstanding the insistence of Mutual's officers that the introduction of homeowner's coverage by the subsidiary could very well account for such an increase in the future.
Obviously the validity, accuracy and usefulness of any actuarial...
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