A federal appeals court has reopened a high-stakes fight over management fees and fiduciary duties at Erie Insurance Group’s reciprocal exchange.
On Oct. 14, the US Court of Appeals for the Third Circuit issued a decision in Erie Indemnity Company v. Stephenson, a case that addresses ongoing disputes over management fees within Erie Insurance Group’s reciprocal insurance exchange.
Erie Insurance Group operates as a reciprocal insurance exchange, where policyholders – referred to as “subscribers” – insure one another. Erie Indemnity Company acts as the attorney-in-fact, managing the exchange’s business and affairs. Under the Subscriber’s Agreement, Erie Indemnity is authorized to retain up to 25% of all premiums as a management fee.
Historically, the management fee was not a source of litigation. However, beginning in 1991, Erie Indemnity’s board began voting to retain the maximum 25% fee, and by 2006, this became the standard practice. The company also started retaining other fees, such as those for installment plans and late payments, which had previously been treated as revenue for the benefit of subscribers.
These changes led to lawsuits from subscribers, including the Beltz and Ritz cases, challenging Erie Indemnity’s retention of fees and alleging breaches of fiduciary duty. The courts in those cases dismissed the claims, primarily due to statutes of limitations and claim preclusion.
In 2021, a new group of subscribers – Troy Stephenson, Christina Stephenson, and Steven Barnett – filed claims in Pennsylvania state court. They alleged that Erie Indemnity breached its fiduciary duty by setting the management fee at 25% for 2019 and 2020, and by not establishing procedures to resolve conflicts of interest between subscribers and the company’s controlling shareholders during those years.
Erie Indemnity sought to enjoin the Stephenson plaintiffs from proceeding, arguing that prior federal court judgments in the Beltz and Ritz cases precluded the new claims. The District Court granted a preliminary injunction, agreeing with Erie Indemnity’s claim preclusion argument.
On Oct. 14, the Third Circuit vacated the preliminary injunction. The appellate court held that the prior federal judgments did not preclude the Stephenson plaintiffs’ claims because those claims were based on events – specifically, management fee decisions in 2019 and 2020 – that occurred after the earlier lawsuits. The court explained that claim preclusion does not bar claims based on events that postdate the initial complaint. The court also found that issue preclusion did not apply, as the issues in the Stephenson case were not identical to those in the prior cases.
The decision allows the Stephenson plaintiffs to proceed with their breach-of-fiduciary-duty claims in state court. The case highlights the ongoing scrutiny of management fee practices and fiduciary duties in reciprocal insurance exchanges. The Subscriber’s Agreement, which permits Erie Indemnity to retain up to 25% of premiums as a management fee, was central to the dispute, though the court did not rule on the appropriateness of the fee itself.
The Third Circuit’s ruling underscores that policyholders may bring new claims based on recent actions by an attorney-in-fact, even when similar issues have been litigated in the past. The case now returns to state court for further proceedings.
