The essence of the “mutual” concept is generally well understood, and indeed disarmingly simple.
It is derived from the fact that a group of people, through co-operation, are better able to act for their mutual benefit than if acting alone.
From this simple but central tenet, comes the overarching objective of mutuality: namely, that mutuals seek to benefit their members rather than maximise profit.
As such, a mutual can be readily defined as an enterprise owned by the members, providing a variety of services to the members for the sole benefit of the members.
Even though the mutual concept is widely understood, it is given almost no recognition in the Australian financial and legal systems. The Corporations Act does not contain a definition of what a “mutual” is, nor does it state what the principles of a “mutual” organisation might be. It makes no provision for the creation of mutual companies.
However, insurance mutuals have historically taken the form of companies limited by guarantee. These are defined in section 9 of the Corporations Act as “a company formed on the principle of having the liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up”.
Neither the Insurance Act 1973 (Cth), the Life Insurance Act 1995 (Cth), the Insurance Act 1902 (NSW), the Australian Prudential Regulation Authority (APRA) Act 1998 (Cth), the Australian Securities and Investments Commission (ASIC) Act 2001 (Cth), or any other associated insurance industry legislation contains a definition of “mutual” or “mutual insurance company”.
The New Shorter Oxford English Dictionary includes in its definition of “mutual”: “designating a building society, insurance company, etc, owned by its members and dividing some or all of its profits between them”.
In the United States however, where insurance mutuals are more common and widespread, Courts have gone some way further to defining the legal elements of a mutual. In National Chiropractice Insurance Co v United States, 494 F 2nd 332, 333 (1974), Court of Appeals, Eight Circuit, Chief Justice Stevenson said:
“The characteristics of a mutual insurance companies are…
(1) common equitable ownership of the assets by members;
(2) the right of policyholders to be members and the exclusion of others and to choose management;
(3) the sole business purpose of supplying insurance at cost; and
(4) the right of members to the return of premiums which are in excess of the amount needed to cover losses and expenses”.
Similarly, in Fidelity & Casualty Co. v Metropolitan Life Insurance Company, 42 Misc 2d 616, 248 NYS 2d 559 (NY Sup. Ct. 1963) the Court stated:
“Since a mutual company is operated wholly for the benefit of its policy holders, it functions to provide insurance at cost rather than to amass profits in the ordinary business sense. While the initial premium paid by the policy holder usually represents a somewhat inflated estimate of the cost of the policy, at the end of the year when such cost is actually ascertained, the Company is required to return to its policyholders the excess premium, that is, the amount in excess of the company’ actual cost. Such return is accomplished by means of a distribution of the “divisible surplus” in accordance with the mandate of (New York Insurance Law)” (at page 566).
However, courts in England and Australia have been more guarded in their consideration of mutuals. In Faulconbridge v National Employers Mutual General Insurance Association  1 Lloyd's List Law Reports 17, Lord Upjohn attempted to identify the defining characteristics of a mutual insurance association. He considered there to be two essential elements:
This case was cited with approval by Santow J in the Supreme Court of NSW in NRMA Limited (Application of); NRMA Insurance Limited (Application of) (1999) 33 ACSR 595 at 630J.
The pronouncements from both English and Australian courts on whether or not mutual companies are required to act in accordance with different legal principles to those applicable to non-mutual companies, are somewhat inconsistent with the underlying concept of mutuality.
In NRMA Limited (Application of); NRMA Insurance Limited (Application of) (1999) 33 ACSR 595, Santow J examined the relevant case law, and concluded as follows (at 631):
“There has been no clear articulation to the Court by any objector of any separate or special legal obligations of a mutual company or owed by its directors to members. An exhaustive review of the cases in Australia and the United Kingdom, reveal no authority for the suggestion that mutual companies and their directors have an obligation to provide mutual benefits to members whether in the form of “mutual pricing”, rebates or in some other form. Nor is there any authority for the suggestion that mutuals should be run, in effect, as non-profit organisations. Absent any prohibition in its constitution, there is no legal bar to a company limited by guarantee earning and distributing profits (Re NFU Development Trust Limited  1 WLR 1548; Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447”.
On the issue of whether the duties of directors of a mutual company are different to those of non-mutuals, Santow J. concluded as follows (NRMA Limited (Application of); NRMA Insurance Limited (Application of) (1999) 33 ACSR 595 at 632):
“No authority has been cited for the assertion that the directors of Insurance owe any duty to its members requiring them to price policies on a concessional basis or give premium rebates. No cases have been found either within Australia or overseas, which suggest that the duties imposed on a mutual company are any different to directors of non-mutual companies.”
It is self-evident from the above that the “mutual” concept, and mutual insurance companies in particular, have a long way to go in being recognized and protected by the Australian legal system.
Those committed to the mutual ideal would probably agree that there is a strong case for parliamentary intervention and legal reform.