Country Mutual sued by policyholders for not sharing its profits

A lawsuit brought by Country Mutual Insurance Co. policyholders alleging the insurer is hoarding profits was sent back to Illinois state court this week by a federal appeals court.

Country Mutual policyholders claim the insurer is in breach of contract as a mutual insurance company by not providing insurance at cost and returning surplus premiums to policyholders. The company collected an "excess surplus of over $3.5 billion," court documents say.

"The plaintiff policyholders attribute the excess surplus accumulation to Country Mutual’s directors and officers seeking to enrich themselves with excessive compensation and related benefits, in violation of fiduciary duties and other legal obligations applicable to policies issued by a mutual insurance company," the U.S. Court of Appeals for the Seventh Circuit wrote in its summary of the case.

Plaintiffs Angela M. Sudholt, Kyhl A. Sudholt, Kara Jones, and Benjamin Jones filed a class-action lawsuit in 2022 in the St. Clair County Circuit Court against the Country Mutual, its officers and its directors, citing breach of contract.

The lawsuit makes a straightforward argument: that since a mutual insurance company is owned by the policyholders rather than stockholders, it has an obligation to provide insurance to policyholders at cost. And any excess in premiums paid that exceed the cost of providing insurance should be returned to the policyholders.

Country Mutual seeks out federal court

Country Mutual petitioned the court to move the lawsuit to federal court under the Class Action Fairness Act of 2005.

CAFA is designed to reduce "forum shopping" by plaintiffs in friendly state courts by extending federal diversity jurisdiction to class actions where there is not "complete diversity," thereby giving federal subject-matter jurisdiction over a broader set of class actions.

Plaintiffs countered with an appeal to keep the case in state court, arguing that it satisfied one of the three exceptions to CAFA: the internal-affairs exception, the home-state controversy exception, and the local controversy exception

The plaintiffs named 46 current and former board directors and executives as individual defendants, including Robert Bateman, a Massachusetts citizen. The fact that Bateman was not a citizen of Illinois, the federal district court in southern Illinois ruled that the class action did not qualify as a home-state controversy.

The Seventh Circuit three-judge panel disagreed.

"The complaint identifies [Bateman] as the company’s chief financial officer for two years of the decade-long surplus accumulation, but it does not otherwise say much about him," the panel wrote. "There is no allegation, for example, that Mr. Bateman played a particular or significant role in the alleged accumulation of excess surplus. In these circumstances ... we cannot conclude that Mr. Bateman is a primary defendant within the meaning of CAFA’s home-state controversy exception."

Internal affairs also applies

The appeals court panel also ruled that the internal-affairs exception also applies to the Country Mutual lawsuit due to the level of management decisions that were taking place..

"[T]he complaint leaves us of the firm conviction that each of the plaintiffs’ four claims turns upon common allegations that Country Mutual and its directors and officers managed the company to benefit themselves at the expense of the policyholder members—in violation of the fiduciary obligations governing the affairs of an Illinois mutual insurance company."

Country Financial is a group of insurance and financial services companies with customers in 19 states. The group of companies offers a range of insurance and financial products and services, including auto, home, life, farm, commercial insurance, retirement planning, investment management and trust services.

The corporate headquarters are in Bloomington, Illinois.

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.