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 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 an enchanting historical past lesson: reciprocal insurance coverage traces again to 1881, when a gaggle 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 function of reciprocal exchanges.
Not like conventional inventory or mutual insurers, a reciprocal isn’t an organization. It’s an unincorporated affiliation of “subscribers” who trade contracts of insurance coverage with one another by means of a standard managing agent referred to as an attorney-in-fact. Every subscriber indicators an influence of lawyer authorizing that attorney-in-fact to concern insurance policies, acquire premiums, settle claims, and deal with operations. The subscribers are, in impact, insuring each other, however they achieve this by means 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 share of premiums, quite 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 probably 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 price. For many years, that association labored easily. However starting within the Nineteen Nineties, Erie Indemnity’s board started setting the price on the most 25 %, 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 strain 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 may even see that as self-dealing at their expense.
Most policyholders do not know whether or not their insurer is a reciprocal trade, a mutual, or a inventory firm. Most legal professionals 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 selections.
Reciprocals, by design, had been meant to get rid of the revenue motive of a company middleman. As one early scholar put it, they had been designed “to unfold the chance of insurable perils on the lowest doable value.” However because the Erie saga exhibits, when the attorney-in-fact turns into a strong 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 rely upon governance, transparency, and accountability. These values should be frequently enforced if the reciprocal splendid 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).
