THE SECRET RIP-OFF HOW POLICYHOLDERS GET CHEATED
Herb Denenberg Column For September 20, 1999
Americans now own $39 trillion dollars worth of financial assets. Yes, $39 trillion with a "t." What if someone decided to suddenly take all of that wealth away without compensation? That is unthinkable, you say. Well, think again, because something just as ridiculous has already happened in Pennsylvania and will continue to happen unless something is done by the state legislature.
The ongoing confiscation will only run into the billions, but it is one of the most underreported outrages of our time.
It comes to you courtesy of our legislature, which passed this confiscatory legislation in the final hours of a session, without hearing and without debate, and with virtually no dissent.
Perhaps a warning should go out in the land to this effect: Pennsylvanians, your money, your rights, and your welfare are not safe while our legislature is in session and while Governor Ridge is signing its work into law.
What is this legislative rip-off referred to above? It is a bill which authorizes Pennsylvania mutual insurance companies to become stock insurance companies without paying the policyholders the value of the company, which they have historically owned.
It takes ownership and control away from the mutual policyholders and turns all that over to the new owners of the stock of the company left after the old company is demutualized and converted into a stock company. The bill was passed in 1995, but the destruction of the rights of mutual policyholders continues to this date.
Let's say you are a policyholder in a big mutual insurance company. Take your choice as an example: Prudential, Metropolitan, New York Life, Northwestern, and any of hundreds more. You are the owner of that company by virtue of being a policyholder. The policyholder is to a mutual company as the stockholder is to a stock corporation.
The policyholders own the company and are entitled to control the company and are entitled to its surplus (assets minus liabilities) in the event of a liquidation and in other special cases.
Now that's the way it has always been and that's the way it is now in many places. For example, as this is being written, the newspapers are announcing that John Hancock is demutualizing, converting to a stock company, and in the process will pay billions of dollars to policyholders. But John Hancock is not a Pennsylvania mutual -- it is domiciled in Massachusetts. So it cannot rob its policyholders, as is permitted in the great Commonwealth of Pennsylvania.
Mutuals all over the country are demutualizing, and that means multi-billions will be paid to policyholders for their ownership interest.
But not in Pennsylvania. The law passed in 1995 permits mutual companies to convert to stock companies, and not pay their policyholders one cent. The law that permits this kind of demutualization is being challenged in the courts and some of the companies that have attempted demutualization have been hauled into court, and the whole process is being challenged as it should be.
In states with legislatures that are not rubber-stamping what insurance industry lobbyists ask for, the Pennsylvania-style rip-off-sanctioning law has been rejected. For example, there was an attempt to introduce Pennsylvania style legislation in New York, and it was rejected as "inherently unfair to policyholders." That rejection of the Pennsylvania approach means when Metropolitan demutualizes (as it is now doing) it will have to distribute its multi-billion surplus to its policyholders. The same for many major mutuals all over the country and in Canada eying demutualizing.
Belatedly, some members of the Pennsylvania legislature are trying to abolish this piece of legislation that sanctions what is in effect confiscation of the mutual policyholders' ownership of their company.
House Bill 1460 would force mutual companies to pay off their policyholders. The bill says that if there is to be a demutualization, the company must pay each policyholder the value of their ownership interest. The bill was introduced by Rep. Connie Williams (D. 149th Legislative District) and others.
She is setting up hearings on this legislation and the whole demutualization fiasco. I've been invited to testify and I've accepted with enthusiasm. My testimony will echo what I've said in the past and what I've said in this column: The law of Pennsylvania, as now written on this subject, is one of the monumental rip-offs of all time. I've also been given the opportunity to elaborate on my views as an expert witness in one of the cases filed against an attempted Pennsylvania demutualization.
Unfortunately, any observer of the scene can't attach to much hope to a legislative solution. The fact that the rip-off legislation passed without hearing, without debate, and with virtually no dissent suggests that the Pennsylvania legislature is not likely to rise up suddenly and protect the policyholder interests.
But there is one hopeful note. In a decision that came down on September 17, 1999, Philadelphia Common Pleas Judge Stephen E. Levin struck down the attempted demutualization of Provident Mutual, one of Pennsylvania's largest insurance companies. Judge Levin held that Provident "unfairly" explained the plan to demutualize to its policyholders, and prevented them from making an "informed" vote. So Provident will have to go back to square one, and explain the disadvantages as well as advantages of demutualization before the matter is voted on. The beauty of the ruling is that when policyholders understand the issues, they will reject demutualization. Why should they give away their rights for nothing, which is what the Pennsylvania-style demutualization does.
The only thing that can save the demutualization is policyholder apathy. But if they pay attention, they will vote against the demutualization and defeat it. As a Provident Mutual policyholder, I plan on voting against the demutualization plan.
(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.).