True v. Robles

• Decision Date: 10 June 2009
• Docket Number: No. 08-50782.,08-50782.
• Citation: True v. Robles, 571 F.3d 412 (5th Cir. 2009)
• Parties: James E. TRUE, Individually and on Behalf of All Other Similarly Situated Persons, Plaintiff-Appellant, v. Josue ROBLES; John H. Moellering; John P. Abizaid; Patricia C. Barron; John D. Buckelew; Thomas P. Carney; Daniel W. Christman; Eileen M. Collins; Stephen B. Croker; Leslie G. Denend; Thomas B. Fargo; Frederick M. Hamilton; Marcelite J. Harris; William J. Hybl; Jay Johnson; Lester L. Lyles; Michael E. Ryan; Joseph C. Strassner, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

571 F.3d 412

James E. TRUE, Individually and on Behalf of All Other Similarly Situated Persons, Plaintiff-Appellant, v. Josue ROBLES; John H. Moellering; John P. Abizaid; Patricia C. Barron; John D. Buckelew; Thomas P. Carney; Daniel W. Christman; Eileen M. Collins; Stephen B. Croker; Leslie G. Denend; Thomas B. Fargo; Frederick M. Hamilton; Marcelite J. Harris; William J. Hybl; Jay Johnson; Lester L. Lyles; Michael E. Ryan; Joseph C. Strassner, Defendants-Appellees.

No. 08-50782.

United States Court of Appeals, Fifth Circuit.

June 10, 2009.

Gregory Scott Coleman, Edward Caldwell Dawson, Yetter, Warden & Coleman, LLP, Austin, TX, Austin P. Tighe, Jr., Freazell & Tighe, LLP, Austin, TX, David Edward Warden, Richard Paul Yetter, Yetter, Warden & Coleman, L.L.P., Houston, TX, for Plaintiff-Appellant.

David Alun Jones, Ashley Elizabeth Street, Jessica S. Taylor, Akin Gump Strauss Hauer & Feld, San Antonio, TX, for Defendants-Appellees.

Appeal from the United States District Court for the Western District of Texas.

Before REAVLEY, DAVIS and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

This putative class-action suit raises a novel question concerning the fundamental legal structure of a peculiar entity known as a reciprocal insurance exchange, which is essentially an insurance company cooperatively owned by those it insures, known as "members" or "subscribers." Specifically, we must inquire into the nature of the legal relationship between the board of directors of the United Services Automobile Association ("USAA"), a large reciprocal insurance exchange, and its subscribers, and determine what legal duties are created by that relationship. James True, a USAA subscriber, alleges that the USAA board of directors breached fiduciary and contractual duties owed to individual members by retaining billions of dollars in unallocated surplus funds, and not allocating those funds to the USAA savings accounts of individual subscribers. True contends that the unallocated surplus vastly exceeds the amount required by applicable state regulations or needed to ensure USAA's financial stability.

The district court, applying Texas law, dismissed the suit, holding that: (1) the board did not owe a fiduciary duty to USAA's individual members, but rather only to the entity itself, and therefore that individual members could not pursue claims for breach of fiduciary duty or constructive fraud against the board; (2) True's subscriber agreement with USAA was not a contract between True and the board, and thus could not serve as the basis for a breach of contract claim; and (3) True had failed to allege facts sufficient to avoid the application of the business judgment rule to the board's decision. True contends that the district court erred with respect to each of these holdings.

For the reasons discussed in greater detail below, we hold that there is no fiduciary or contractual relationship between individual subscribers and the USAA board of directors, and therefore that True has failed to state a claim for relief. Because we hold that True has failed to allege that the board violated any legal obligation owed to individual subscribers, we do not reach the question of whether the board's decision to retain billions of dollars in unallocated surplus funds, rather than allocate those funds to the USAA savings accounts of individual subscribers, should be accorded business judgment deference. Accordingly, we AFFIRM the judgment of the district court.

I. Background

A. Reciprocal Insurance Exchanges

1. In General

The parties refer to USAA as a "reciprocal interinsurance exchange," but such an association is also referred to as a "reciprocal insurer," a "reciprocal insurance exchange," an "interinsurance exchange," an "interindemnity exchange," or a "reciprocal." The most commonly used name appears to be "reciprocal insurance exchange." A reciprocal insurance exchange is essentially an insurance company cooperatively owned by those it insures. See Kiepfer v. Beller, 944 F.2d 1213, 1216 (5th Cir.1991); Wilson v. Marshall, 218 S.W.2d 345, 346 (Tex.Civ.App.1949). Through such an entity, members "undertake to indemnify each other against certain kinds of losses by means of a mutual exchange of insurance contracts, usually through the medium of a common attorney-in-fact appointed for that purpose by each of the underwriters...." 43 Am. Jur.2d Insurance § 81 (2008). Thus, in its pure form, a reciprocal insurance exchange is a web of contractual relationships between subscribers who agree to insure one another, consummated through a common agent with power of attorney. See Dennis F. Reinmuth, The Regulation Of Reciprocal Insurance Exchanges 11 (1967) ("[C]onceptually a reciprocal consists of a series of private contracts among the members or subscribers, each agreeing to insure one another, the exchange of insurance being consummated through the common agent of the members, the attorney-in-fact, and by means of the subscriber's agreement of power of attorney.").

2. A Brief History

When reciprocal insurance exchanges were first established in the late nineteenth century, subscribers had several, not joint, liability on all of the exchange's liabilities. See Lee v. Interinsurance Exch. of the Auto. Club of S. Cal., 50 Cal.App.4th 694, 702-03, 57 Cal.Rptr.2d 798 (1996) (citing Delos v. Farmers Ins. Group, 93 Cal.App.3d 642, 652, 155 Cal. Rptr. 843 (1979); 2 Couch on Insurance 2d § 18.11, at 613 (1984); Reinmuth, supra, at 10-20). The exchange had no capital, and funds for the payment of losses were collected from subscribers after losses occurred. Id. at 703, 57 Cal.Rptr.2d 798 (citing Mitchell v. Pac.Greyhound Lines, 33 Cal.App.2d 53, 59-60, 91 P.2d 176 (1939); Couch, supra, §§ 18:11, at 614-15; Reinmuth, supra, at 2).

To avoid delays, exchanges began collecting advance annual deposits, which were kept in a separate account for each subscriber, with the subscriber's pro rata share of losses and expenses being deducted as needed. If a subscriber's account had a positive balance at the end of the year, that amount became part of a subscriber's "savings" or "surplus," and was either distributed to subscribers or held until the subscriber withdrew from the exchange. If the balance was negative, the subscriber could be assessed for a specified maximum amount beyond their deposit. Id. at 703, 57 Cal.Rptr.2d 798 (citing Couch, supra, §§ 18:26-18:30, at 633-641; Reinmuth, supra, at 2, 30-31).

The original concept of reciprocal insurance contemplated the allocation of all surplus to the accounts of individual subscribers, but over time it became customary for reciprocals to accumulate unallocated surplus, which was held perpetually in anticipation of catastrophic losses and not subject to withdrawal by departing subscribers. However, the use of such separate surplus accounts is merely an internal bookkeeping device; all assets are held in a common fund, and there is no physical segregation of assets to individuals. Reinmuth, supra, at 31. As a result of the accumulation of surplus assets, many reciprocals, including USAA, began issuing nonassessable policies, under which subscribers had no contingent liability for claims, expenses, or losses of the exchange. See Lee, 50 Cal.App.4th at 703-04, 57 Cal.Rptr.2d 798 (citing Reinmuth, supra, at 2, 18, 30-37, 186-87). True holds such a nonassessable policy from USAA.

3. Under Texas Law

The Texas Insurance Code specifically authorizes the establishment of reciprocal insurance exchanges and establishes rules relating to their operation. See Tex. Ins. Code Ann. § 942 (2008); see also 44 Tex. Jur.3d Insurance Companies § 57. The statute provides that "subscribers of this state may exchange reciprocal or interinsurance contracts with other subscribers of this state or of another state or country to provide indemnity among those subscribers for a loss for which insurance coverage may be obtained under other law." Tex. Ins.Code Ann. § 942.002(a).

A "subscriber" is defined as "an individual, partnership, or corporation who, through an attorney in fact, enters into a reciprocal or interinsurance contract." Id. § 942.001(4). A "reciprocal or interinsurance contract" is defined as "an insurance policy or other contract that provides indemnity among a group of subscribers for certain losses," id. § 942.001(3), and the statute provides that such a contract may be executed by an attorney in fact appointed by the subscribers of an exchange, id. § 942.051.

The statute requires subscribers, through an attorney in fact, to file a declaration specifying the name of the proposed exchange, the kinds of insurance to be provided, a copy of the power of attorney or other authorization of the attorney in fact, the location of the exchange's offices, and an affidavit stating that the capital and surplus is the bona fide property of the exchange and that the information in the declaration is true. Id. § 942.053. The statute imposes financial requirements on exchanges relating to the maintenance of sufficient unencumbered surplus and reserves. Id. § 942.155. "The primary purpose of [such requirements are] to provide policyholder security in the event of adverse or catastrophic loss experience." Reinmuth, supra, at 119.

B. The USAA Bylaws, Subscriber Agreements, and Insurance Policies

The USAA bylaws state that USAA "is a reciprocal interinsurance exchange," and that "[t]he purpose of USAA is to provide insurance coverages and other financial products and services and engage in other activities for the benefit of its members, associates and their families as shall be determined by the board of directors." The bylaws provide that members are entitled to voting rights that may be exercised to elect members of the board of directors at the USAA annual meeting, and that:

[t]he business management and affairs of USAA shall be under the discretion and control of the board of directors ... and the board of...