Police Retirees Have No Rights To ‘Demutualization” Proceeds

In 1951, Prudential issued a group life insurance policy to the Port Authority Of New York and New Jersey for the benefit of its employees. Each of the Port Authority’s unions (the Port Authority Police Benevolent Association, Inc., Port Authority Police Detectives Endowment Association, Port Authority Police Sergeants Benevolent Association, and the Port Authority Police Lieutenants Benevolent Association) negotiated a life insurance benefit for its employees, the terms of which were contained in a memorandum of agreement between the union and the Port Authority. In accordance with the agreements, active employees were not required to contribute to payment of premiums on the policy.

Upon retirement, life insurance coverage for non-disabled former employees could be continued, but only upon payment of premiums by the retired employee. Coverage for disabled retired employees was continued through premium payments by the Port Authority.

In 2001, Prudential announced that it would convert its structure from a mutual to a stock insurance company. As a result, the owner of the Port Authority’s policy became entitled to receive “demutualization proceeds” in the form of Prudential stock with a cash value of approximately $13.3 million.

The Port Authority decided to voluntarily pay the $13.3 million to active Port Authority employees, which at the time numbered approximately 4,100 union members and 2,600 non-union members. Because the Port Authority was prohibited by law from conferring a direct benefit on union members, it determined to distribute those members’ proceeds as a lump sum to their unions, leaving to the unions a determination whether the proceeds would then be allocated per capita or by longevity. The Port Authority calculated how much each union would receive based on the number of employees in the union and their longevity of employment. In order to receive the funds, the unions had to agree to the Port Authority’s calculations. Additionally, the Port Authority provided a list to each union of the active employees who were entitled to the payout. The list included approximately 20 members of the PBA who had retired after December 31, 2001 but before the proceeds were received from Prudential. Distributions to non-represented employees were made directly by the Port Authority and were based on longevity of service.

A group of retirees sued the Port Authority and the unions, contending that they should have been entitled to a share of the demutualization proceeds. A New Jersey appeals court dismissed the lawsuit.

The Court found that “while the defendants may have negotiated on behalf of all employees to ensure that they had a continuing right to coverage through employment and into retirement, i.e., death benefits for a beneficiary, under the life insurance policy, the Court finds that there was no negotiated ‘benefit’ to the demutualization proceeds. There was no contractual right to those proceeds expressly or impliedly in the Memorandum of Agreement or any other document provided to this Court.

“Further, the Court notes that the policyholder, the Port Authority, made the determination to voluntarily distribute the demutualization proceeds through the unions to active employees and to active non-unionized employees. The decision was not made by the unions. Moreover, case law established that there was ‘no duty on the part of the union to represent the interests of retired members when negotiating with employers or other third parties.’ We reject that claim that the unions owed the retirees a fiduciary duty, as the result of their control over the demutualization proceeds, to protect their interests in those proceeds. Such a duty is beyond the scope of any duty undertaken by the unions as representatives of their employee-members.”

Ward v. Port Authority Police Benev. Ass’n, Inc., 2012 WL 2052106 (N.J. Super. A.D. 2012).

Note: “Demutualization” is the process by which a customer-owned mutual insurance company changes form to become a standard company issuing stock.