Health insurance companies are not only beholden to their policyholders. There is a mistress in the background to whom health insurance companies also claim loyalty: their stockholders, and their bottom line. Of course many health insurance companies would suggest that the relationship is more akin to bigamy. Can a company not practice “big love?” Can it not be possible that the health insurance industry has found the secret to being able to serve two masters equitably?
First of all, there is no ignoring the fact that most insurance companies do in fact have a fiduciary duty to their shareholders. Under law, all officers of a corporation have two duties – a duty of care, and a duty of loyalty – to uphold. The duty of care refers to the officers’ responsibility not to act negligently in the performance of their duties. The duty of loyalty requires that they place the interests of the corporation – and its shareholders – above their own interests. [xi] Any officer that without thought for the corporation’s future or out of interest only for him or herself drove the business into bankruptcy would be guilty of breaching both their duty of care and their duty of loyalty.
But a corporation’s duty toward its stockholders may not be nearly as strong as an insurance company’s duties toward its policyholders. There are many examples in law of corporations overriding the concerns and desires of their stockholders – and their stock prices – to pursue more important aims for the corporation. Consider just a few examples.
First, it is in no way out of the ordinary for directors of a company to make decisions that unambiguously favor those to whom money is owed, but negatively impact stock prices. When a corporation files for bankruptcy, for example, the value of equity in the business is almost immediately destroyed, to the benefit of creditors. [xii] In this case, the duty owed the shareholders is overridden in favor of those who hold the corporation’s debt.
Second, “in a recapitalization, the board can, by creating a shell corporation with a new financial structure and then merging the old firm into the shell, eliminate a particular class of stock.” [xiii] This in no way benefits the stockholders, but can benefit the firm itself.
A third case in point is the case of Shlensky vs. Wrigley, having to do with the installation of lights at Chicago’s Wrigley field to permit the playing of night games. The plaintiff argued that by not installing lights (which at this point existed at every other major ballpark), the value of the Chicago Cubs baseball team was not being maximized. Those on the board of the company who defended the inaction admitted that their decision not to install lights probably hurt stock prices. They based their decision to keep the park dark on the preferences of Wrigley’s majority owner, who believed fervently that baseball was a daytime game. The board was not in the least bothered by the fact that their decision to leave Wrigley in the dark did not maximize stock value. [xiv]
In light of these and other examples, defending the notion that directors owe their duty solely to shareholders seems harder to defend today. [xv] Shareholders, in other words, are a fickle mistress. Yet many health insurance companies seem to be more devoted to this mistress than those to whom they are legally “married,” their policyholders. Note, too, that all of these examples are of regular businesses. Insurance companies, as has been pointed out, must operate differently. Their policyholders are more than mere “customers” or “clients.” They are entrustors to whom a fiduciary duty is owed.
By Chris Ryan and Charles St. Onge