Every now and then, 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 type of instances. I’m not going to wade into the technical holding about declare preclusion or injunctions. That’s not the purpose of this submit. What issues for these of us who work with, in opposition to, or alongside insurers is what the case reveals about reciprocal insurance coverage exchanges and their generally misunderstood nature.
The Reciprocal Insurance coverage Idea
The opinion opens with an interesting historical past lesson: reciprocal insurance coverage traces again to 1881, when a gaggle of New York retailers determined to insure one another in opposition to fireplace losses. That concept that “each insured is an insurer, and each insurer is an insured,” is the defining function of reciprocal exchanges.
Not like conventional inventory or mutual insurers, a reciprocal isn’t a company. It’s an unincorporated affiliation of “subscribers” who change contracts of insurance coverage with one another by way of a standard managing agent generally known as an attorney-in-fact. Every subscriber indicators an influence of lawyer authorizing that attorney-in-fact to problem insurance policies, gather 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 usually a hard and fast proportion of premiums, somewhat 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 Research
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 p.c of premiums as a administration payment. For many years, that association labored easily. However starting within the Nineties, Erie Indemnity’s board started setting the payment on the most 25 p.c, and policyholder challenges adopted—elevating basic questions concerning 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, typically 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 don’t 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 finally bears the dangers, who owns the excess, and who controls the selections.
Reciprocals, by design, have been meant to remove 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 robust company in its personal proper, that unique 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 depend upon governance, transparency, and accountability. These values should be frequently enforced if the reciprocal excellent is to imply something, and this necessitates regulation to make sure their enforcement.
Thought for the Day
“The primary obligation 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).