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Court Ruling Underscores Importance of Precise Language in Pool Governing Documents

  

The Michigan Court of Appeals recently analyzed a risk pool’s governing documents, dividend practices and self-governance in . Although the case is Michigan law, there are several aspects of it that deserve attention from all pools.

The Michigan County Road Commission Self-Insurance Pool (MCRCSIP) is a member of AGRiP. Like most pools, MCRCSIP’s governing documents determine what happens when a member withdraws, particularly in relation to the accumulated surplus equity that might have otherwise been paid to them in the form of dividends. On that point, MCRCSIP’s documents explicitly state a withdrawing member forfeits its surplus equity when it leaves, without exception.

Several years ago, a few of MCRCSIP’s members were dissolved and their powers transferred to other units of government that were not members of MCRCSIP. The new units of government demanded the surplus equity to which the dissolved members thought they were entitled. MCRCSIP refused, and the new units filed suit in state court. MCRCSIP won at the trial court level, but the Michigan Court of Appeals reversed the decision.

After several years’ worth of appellate litigation, the dispute returned to the Michigan Court of Appeals, which issued a decision this July. In it, the Court analyzed MCRCSIP’s governing documents and determined they say exactly what MCRCSIP interprets them to mean – i.e., withdrawing members forfeit surplus equity. However, the court subsequently invalidated the forfeiture provisions in MCRCSIP’s governing documents, saying they were against public policy.

In making its decision, the Court considered legislative history to determine the “forfeiture called for in the withdrawal policy [directly undermined] the public purposes that the Pool is required to serve.”

The Court also considered Michigan’s Uniform Trade Practices Act, which may be similar to trade practice rules in other states, stating the Act “disfavors self-insurers conditioning refunds of surplus insurance premiums on continued participation in the self-insurance pool.” MCRCSIP is not an insurance company and is not subject to the Act.

MCRCSIP is appealing to the Michigan Supreme Court because it wants to preserve the integrity of its governing documents and the ability of its members to self-govern.

Regardless of this dispute’s ultimate outcome, the appellate findings underscore the importance of precise language in a pool’s governing documents about surplus equity, dividends, rate credits or stabilization, and withdrawal. Such policies and practices can be instrumental in maintaining long-term membership stability and allowing a pool to meet the underlying public purpose of intergovernmental cooperation. It is important a pool’s governing body affirm (and members understand) application of key parameters such as how the pool handles surplus equity and membership withdrawal.

If you have any questions about the evolution of this case, please contact .

WORKS CITED

Michigan State, Court of Appeals. County of Ingham, et al v. Michigan County Road Commission Self-Insurance Pool. 25 July 2019. https://law.justia.com/cases/michigan/court-of-appeals-published/2019/334077.html. Accessed 28 August 2019.

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