Every so often, a case comes along that, while steeped in legal complexity, offers a rare window into the structure and operation of the insurance industry itself. Erie Indemnity Company v. Stephenson 1 is one of those cases. I am not going to wade into the technical holding about claim preclusion or injunctions. That’s not the point of this post. What matters for those of us who work with, against, or alongside insurers is what the case reveals about reciprocal insurance exchanges and their sometimes misunderstood nature.
The Reciprocal Insurance Concept
The opinion opens with a fascinating history lesson: reciprocal insurance traces back to 1881, when a group of New York merchants decided to insure each other against fire losses. That idea that “every insured is an insurer, and every insurer is an insured,” is the defining feature of reciprocal exchanges.
Unlike traditional stock or mutual insurers, a reciprocal isn’t a corporation. It is an unincorporated association of “subscribers” who exchange contracts of insurance with each other through a common managing agent known as an attorney-in-fact. Each subscriber signs a power of attorney authorizing that attorney-in-fact to issue policies, collect premiums, settle claims, and handle operations. The subscribers are, in effect, insuring one another, but they do so through this shared management arrangement.
The attorney-in-fact’s compensation comes from each subscriber’s consent in the subscriber’s agreement. That compensation is typically a fixed percentage of premiums, rather than a share of surplus. The surplus, when there is one, belongs to the subscribers, not the manager.
Erie Insurance as a Case Study
The Erie Insurance Group is perhaps the best-known example of a reciprocal insurer. Founded in 1925 by H.O. Hirt, Erie consists of the Erie Insurance Exchange, the reciprocal itself, and its attorney-in-fact, Erie Indemnity Company, a publicly traded corporation that manages the Exchange’s operations.
Each policyholder at Erie Insurance Exchange signs a subscriber’s agreement appointing Erie Indemnity as attorney-in-fact and authorizing it to retain up to 25 percent of premiums as a management fee. For decades, that arrangement worked smoothly. But beginning in the 1990s, Erie Indemnity’s board began setting the fee at the maximum 25 percent, and policyholder challenges followed—raising fundamental questions about the fiduciary duties owed by an attorney-in-fact to its subscribers.
Those disputes, Ritz, 1 and now Stephenson, show the tension built into this model. The attorney-in-fact is a separate legal entity, often with its own shareholders and profit motives, while the subscribers rely on it to manage their collective insurance pool faithfully and fairly. When the attorney-in-fact raises its fees or diverts revenue streams, the subscribers may see that as self-dealing at their expense.
Most policyholders have no idea whether their insurer is a reciprocal exchange, a mutual, or a stock company. Most lawyers never pause to ask. Yet that structure determines who ultimately bears the risks, who owns the surplus, and who controls the decisions.
Reciprocals, by design, were meant to eliminate the profit motive of a corporate intermediary. As one early scholar put it, they were designed “to spread the risk of insurable perils at the lowest possible cost.” But as the Erie saga shows, when the attorney-in-fact becomes a powerful corporation in its own right, that original spirit can erode.
The lesson is that the structure of an insurance company matters. The promises of “policyholder-owned” or “mutual benefit” insurance depend on governance, transparency, and accountability. These values must be continually enforced if the reciprocal ideal is to mean anything, and this necessitates regulation to ensure their enforcement.
Thought for the Day
“The first duty of society is justice.”
—Alexander Hamilton
1 Erie Indemnity Co. v. Stephenson, No. 24-1443, — F.4th —, 2025 WL 2909012 (3rd Cir. Oct. 14, 2025).
2 Ritz v. Erie Indemnity Co., No. 2019 WL 438086 (W.D. Pa. Feb. 4, 2019).