Iowa Supreme Court Resurrects Allied Suits

Controversy that once swirled around the management of Allied Mutual Insurance Company may seem like a distant memory that all but faded soon after Nationwide Mutual Insurance Company finalized a deal to buy Allied Group in 1998.

However, the Supreme Court of Iowa has given Allied Mutual policyholders new life in a battle to recoup $1 billion in assets they say belongs to them.

On May 31, the Iowa Supreme Court reversed a lower court ruling that had dismissed five derivative claims and three class-action claims that were part of a suit originally filed as a derivative suit in December 1997 by a policyholder, Mary Rieff.

The suit against individual directors and officers of Allied Mutual and Allied Group was amended as a class action in June 1998, centering on an allegation that a “de facto demutualization” had occurred through a series of restructuring transactions that took place from 1985 to 1993.

A derivative action is one in which shareholders of a company sue on behalf of the company, alleging that a companys directors have harmed the company through their acts and omissions. The Iowa Supreme Court ruled that policyholders, like shareholders of a stock company, have standing to assert derivative claims against their mutual company.

“It means that policyholders are not nobodies,” said Jason Adkins, an attorney for Adkins & Kelston in Boston who is one of the lawyers representing the plaintiffs. “It cements common sense and law in one place,” he added, giving his take on the broader implications of the decision and suggesting that mutual company managements can no longer argue before regulators that policyholders do not have rights.

The court also ruled that “policyholders pled sufficient facts to create a question as to whether [Allied] Mutual did demutualize,” finding that dismissal of the “de facto conversion” class action claim by an Iowa district court in 1999 was inappropriate.

Mr. Adkins said that plaintiffs will reinstate their case seeking $1 billion in damages, alleging that assets were “surreptitiously” transferred from Allied Mutual to Allied Group, a stock company once 100 percent owned by the mutual, but which ultimately became the dominant company.

According to the history of the case presented in the Iowa Supreme Court decision, the policyholder plaintiffs alleged that defendants exchanged assets of more than $900 million at the time of the original petition for a consideration of only $126 million.

Allied issued only a brief media statement in response to the Iowa Supreme Court ruling. “The case will be returned to the lower courts to hear evidence on the allegations in the complaint. Allied will continue its commitment to the best interests of its policyholders,” the statement said.

The Iowa Supreme Courts reversal allows all five derivative claims and two of the three class-action claims to be returned to lower courts. A final class-action claim, alleging intentional interference with advantageous business and contractual relationships, should be properly pled as a derivative claim, the Supreme Court said.

When Nationwide bought Allied Group in a $1.7 billion deal that was finalized in October 1998, Allied Mutual and Nationwide Mutual were combined in a merger of the two mutual companies.

The lawsuit, which predated the purchase and merger transaction, came at the same time as a much-reported battle raged between management of Allied and David Schiff, the publisher of an insurance newsletter. At the time, Mr. Schiff also alleged that inappropriate transactions had taken place for which policyholders had not been compensated.

The publishers crusade against Allied Mutual included his unsuccessful bid for a seat on Allied Mutuals board of directors in early 1998.


Reproduced from National Underwriter Edition, June 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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