On occasion, a case comes alongside that, whereas steeped in authorized complexity, presents a uncommon window into the construction and operation of the insurance coverage business itself. Erie Indemnity Firm v. Stephenson 1 is a kind of instances. I’m not going to wade into the technical holding about declare preclusion or injunctions. That’s not the purpose of this put up. What issues for these of us who work with, towards, or alongside insurers is what the case reveals about reciprocal insurance coverage exchanges and their typically misunderstood nature.
The Reciprocal Insurance coverage Idea
The opinion opens with a captivating historical past lesson: reciprocal insurance coverage traces again to 1881, when a bunch of New York retailers determined to insure one another towards fireplace losses. That concept that “each insured is an insurer, and each insurer is an insured,” is the defining characteristic of reciprocal exchanges.
In contrast to conventional inventory or mutual insurers, a reciprocal isn’t an organization. It’s an unincorporated affiliation of “subscribers” who change contracts of insurance coverage with one another by way of a typical managing agent generally known as an attorney-in-fact. Every subscriber indicators an influence of legal professional authorizing that attorney-in-fact to challenge insurance policies, acquire premiums, settle claims, and deal with operations. The subscribers are, in impact, insuring each other, however they accomplish that by way of this shared administration association.
The attorney-in-fact’s compensation comes from every subscriber’s consent within the subscriber’s settlement. That compensation is often a set proportion of premiums, reasonably than a share of surplus. The excess, when there may be one, belongs to the subscribers, not the supervisor.
Erie Insurance coverage as a Case Examine
The Erie Insurance coverage Group is maybe the best-known instance of a reciprocal insurer. Based in 1925 by H.O. Hirt, Erie consists of the Erie Insurance coverage Alternate, the reciprocal itself, and its attorney-in-fact, Erie Indemnity Firm, a publicly traded company that manages the Alternate’s operations.
Every policyholder at Erie Insurance coverage Alternate indicators a subscriber’s settlement appointing Erie Indemnity as attorney-in-fact and authorizing it to retain as much as 25 % of premiums as a administration charge. For many years, that association labored easily. However starting within the Nineteen Nineties, Erie Indemnity’s board started setting the charge on the most 25 %, and policyholder challenges adopted—elevating elementary questions in regards to the fiduciary duties owed by an attorney-in-fact to its subscribers.
These disputes, Ritz, 1 and now Stephenson, present the stress constructed into this mannequin. The attorney-in-fact is a separate authorized entity, usually with its personal shareholders and revenue motives, whereas the subscribers depend on it to handle their collective insurance coverage pool faithfully and pretty. When the attorney-in-fact raises its charges or diverts income streams, the subscribers might even see that as self-dealing at their expense.
Most policyholders do not know whether or not their insurer is a reciprocal change, a mutual, or a inventory firm. Most attorneys by no means pause to ask. But that construction determines who in the end bears the dangers, who owns the excess, and who controls the choices.
Reciprocals, by design, have been meant to get rid of the revenue motive of a company middleman. As one early scholar put it, they have been designed “to unfold the chance of insurable perils on the lowest attainable value.” However because the Erie saga exhibits, when the attorney-in-fact turns into a strong company in its personal proper, that authentic spirit can erode.
The lesson is that the construction of an insurance coverage firm issues. The guarantees of “policyholder-owned” or “mutual profit” insurance coverage rely upon governance, transparency, and accountability. These values have to be regularly enforced if the reciprocal superb is to imply something, and this necessitates regulation to make sure their enforcement.
Thought for the Day
“The primary responsibility of society is justice.”
—Alexander Hamilton
1 Erie Indemnity Co. v. Stephenson, No. 24-1443, — F.4th —, 2025 WL 2909012 (3rd Cir. Oct. 14, 2025).
2 Ritz v. Erie Indemnity Co., No. 2019 WL 438086 (W.D. Pa. Feb. 4, 2019).