Canada: Ontario Court Of Appeal Speaks To Policyholder Rights On An Insurance Company Demutualization

On May 22, 2014, the Ontario Court of Appeal released its decision in Mandeville v The Manufacturers Life Insurance Company, a unanimous decision of Gillese, Blair and Strathy, JJA., written by Gillese JA. In the decision, the Court determined that the defendant/ respondent ("Manulife") was not negligent in failing to protect the right to demutualization benefits of certain class action plaintiff participating policyholders of Manulife when their policies were transferred to another insurer prior to Manulife's demutualization. Given the imminent release of Regulations permitting the demutualization of federally incorporated property and casualty insurance companies ("P&C Companies"), what this decision has to say about the nature of a mutual policyholder's ownership interests, and the duty of care of an insurer to protect such interests, becomes increasingly important.

Insurance companies come in two basic ownership forms, stock companies, organized much like a standard business corporation and owned by their shareholders, and mutual companies. In a mutual company, there are no shareholders and a certain class or classes of policyholders (in life insurance companies, generally referred to as "participating policyholders", and in P&C Companies as "mutual policyholders") are conferred governance rights through a combination of contract rights (in the policy of insurance), the by-laws of the insurer, and statute (which may be federal or provincial, depending on where the insurance company is incorporated). These governance rights include the right to vote at policyholder meetings, and are accompanied by the possibility of receiving policy dividends (in the case of a life insurance company) or premium refunds or rebates (in the case of a P&C Company). In the case of a "demutualization" of the mutual company, policyholders are generally assumed to have the right to receive "demutualization benefits". Some mutual companies (both life insurers and P&C Companies) are "pure mutuals" meaning that all the policies that they issue are participating policies or mutual policies, having these governance and ownership rights. Other mutual companies also issue cash policies, possessing only a contract right to insurance, but no governance or ownership rights.

A "demutualization" is the process by which a mutual insurance company coverts itself into a stock company. This is done by way of the cancellation of the governance (voting) and other ownership rights of the participating or mutual policyholders and the issuance of shares of the new stock company to the policyholders, or to a new financial holding company, which in exchange issues its voting shares to the policyholders. The assets of the insurance company, including accumulated surplus from years or decades of retained profits while in mutual form, are unaffected by this process, and remain in the insurance company. It is only the value of the ownership interest, and rights to returns from that ownership interest, that may be transferred by the policyholders or terminated through the demutualization transaction. After the demutualization, the transformed company is a private or public share corporation and in the latter case its shares may be listed on a stock exchange. Generally, the policyholder owners of these shares can trade them and monetize their share demutualization benefits. In some circumstances, some or all of the shares of the insurer being demutualized are sold by way of a pre-arranged sponsor agreement to a single sponsor, who pays cash and/or its shares to acquire control of the demutualizing insurer. This cash and/ or shares are then transferred to the demutualizing insurer's policyholders, forming their demutualization benefits. This structure is generally referred to as a "sponsored demutualization".

In 1991, the federal Insurance Companies Act (the "ICA") was passed and contemplated that a federal mutual insurance company could demutualize, subject to the rules and procedures set out in Regulations to be passed under the ICA. In March 1999, Regulations (the Mutual Company (Life Insurance) Conversion Regulations) were passed under the ICA, setting rules for the demutualization of federally incorporated life insurers, and providing that only voting policyholders of a demutualizing life insurer would be entitled to receive demutualization benefits. No demutualization Regulations have yet been passed setting the procedures for the demutualization of federal P&C Companies.

Manulife is a federal life insurer, and in January, 1998, 14 months before the enactment of the Regulations under the ICA for the demutualization of federal life insurers, it announced its intention to demutualize. Its demutualization became effective in September of 1999, and through that demutualization, approximately $9 billion of demutualization benefits were transferred to its voting policyholders in the form of common shares of Manulife, which were listed on the Toronto Stock Exchange.

The class action plaintiffs in the Mandeville action were some 8,000 residents of Barbados who had owned participating policies of Manulife, whose policies had been transferred to a Barbadian insurer by way of an assumption reassurance transaction in December of 1996. Through this transaction, the policy liability of these participating policies had been assumed by the Barbadian insurer and the policyholders had ceased to hold any insurance policy of Manulife. Accordingly, they were not entitled to receive any demutualization benefits when Manulife demutualized almost three years later.

The class action was commenced on behalf of these policyholders, alleging that Manulife had been in breach of its fiduciary duties in not having made provision for them when their policies were transferred (to ensure that they would receive demutualization benefits), or alternatively, that Manulife had been negligent in not doing so, resulting in the loss of approximately $82 million in demutualization benefits that would have been received by these policyholders. The negligence claim was alleged on the basis that Manulife knew it was likely going to demutualize when it transferred the Barbados policies, and that it should have structured the transfer in a way that permitted the class action policyholders to receive demutualization benefits.

At first instance, Justice Newbould of the Ontario Superior Court of Justice found that a prima facie duty of care existed in favour of the plaintiffs based on the foreseeability of loss and proximity, because he accepted that there was at least a reasonable likelihood in late 1996 (when the Barbados transaction took place) that demutualization would occur in Manulife. However, he found no fiduciary duty was owed to policyholders to protect their right to participate in a future demutualization, and he refused for policy reasons to recognize that Manulife owed the class plaintiffs a duty of care to protect against their pure economic loss. The action was accordingly dismissed (Mandeville v The Manufacturers Life Insurance Company, 2012 ONSC 4316; 6 B.L.R. (5th) 175).

The plaintiffs appealed, on the basis only of the allegation of negligence of Manulife by failing to protect their rights to demutualization benefits at the time of the transfer transaction.

The Court of Appeal concluded that the sole question raised on the appeal was whether Manulife owed the class members a duty of care under the circumstances. In answering this question, the Court first looked to determine the nature of the right affected by the alleged negligence (whether it constituted a proprietary right to receive demutualization benefits), or whether the claim was in respect of pure economic loss. In analyzing this issue, Justice Gillese stated:

"I accept that in normal parlance, immediately prior to the transfer to LOB, it could be said that the class members, in conjunction with Manulife's other participating policyholders, were the owners of Manulife ... It was the participating policyholders who had the right to vote and to receive the company's surplus, by means of annual dividends. Those are the rights of ownership." "The Question is not whether the participating policyholders can or should be described as the owners of a mutual insurance company. Rather, the question is whether at the time of transfer to LOB, the class members had a legally recognized right or interest in respect of a possible demutualization of Manulife. In my view, they did not."

"Because Manulife had no right to demutualize in 1996 (because Regulations to permit such demutualization had not yet been passed), the appellants could have no right to share in the benefits of demutualization. In short, as no right to share in demutualization benefits had been conferred by contract, legislation or regulations, the class members could not have had a right to, or interest in, something that did not exist and was not legally possible. At its highest, what the class members had immediately before their policies were transferred to LOB was the hope or mere expectancy that if and when Manulife were allowed to demutualize and did demutualize, their then-existing rights as participating policyholders would entitle them to receive the benefits of that demutualization. A hope or mere expectation is not a legally enforceable right or interest, however".

"When the 1999 Regulations came into effect, Manulife's participating policyholders gained a contingent interest in the value of Manulife on demutualization. This interest was contingent on a number of events, including Manulife's board approving the plan of demutualization, the policyholders approving the plan of demutualization, and the Minister approving the plan. Nonetheless, as a contingent interest, it is recognized by law."

The Court thus concluded that the alleged negligence was not in relation to damage to a recognized proprietary interest, and constituted a claim for pure economic loss. As such, and applying existing Canadian jurisprudence on the special examination of proximity needed for the recognition of a duty of care in relation to pure economic loss (Martel Building Ltd. v Canada [2000] 2 S.C.R. 860; Canadian National Railway Co. v Norsk Pacific Steamship Co. [1992] 1 S.C.R. 1021), the Court concluded that "the relationship between the class members and Manulife was not sufficiently proximate that a prima facie duty of care arose." The Court also indicated that even if it had concluded that a prima facie duty of care existed (the first part of the test for a claim for pure economic loss), there might be policy considerations weighing against the imposition of a duty of care and thus liability (the second part of this test). These include "the spectre of indeterminate liability" and encouraging a "multiplicity of inappropriate lawsuits." The Court stated that these "inappropriate lawsuits" might include claims for economic loss by policyholders of mutual insurance companies that decided not to demutualize, or more generally, a failure to meet a mere expectancy of any other corporate benefit.

As mentioned above, this decision may have special implications for policyholders of federally incorporated P&C Companies, where there are currently no Regulations permitting demutualization, but an expectation that such Regulations are going to be released later in 2014.

This case states that property rights of policyholders (presumably mutual or cash) in demutualization benefits in fact only comes into being when Regulations are passed that permit a demutualization to occur. Presumably, this also means that such right to benefits only comes into being in the manner set out in the Regulations. It has been suggested that the Department of Finance believes that the benefits of a demutualization of a federal P&C Company should be shared more broadly among cash policyholders (where the P&C Company is not a pure mutual and has both mutual and cash policyholders), although it has yet to be seen how this sharing will be brought into effect. It thus appears that legal entitlement to demutualization benefits is to be judged on the basis of the content of these Regulations, and neither mutual nor cash policyholders have any legal rights to demutualization benefit entitlement before the Regulations are passed or in greater amounts than is contemplated by the Regulations.

It also appears from this case that there would be no basis for a tort claim in negligence against a mutual insurer or its directors if the mutual insurer elects not to demutualize. Such a claim would be for pure economic loss, and would thus not fit within the proximity analysis set out in this case, or would raise the policy considerations against "indeterminate liability" or a "multiplicity of inappropriate lawsuits", that would not allow such litigation to proceed successfully.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.