South-Western Legal Studies in Business

Fraternal Organization May Require Arbitration of Insurance Disputes
Description Appeals court held that life insurance policies issued by fraternal organizations, which are governed by a Model Fraternal Code rather than state insurance law, had the right to change their policies to require that all disputes be resolved by arbitration.
Topic Insurance
Key Words Arbitration; Policy Changes; Fraternal Organizations; Regulations
C A S E   S U M M A R Y
Facts Aid Association for Lutherans (AAL) is a fraternal non-profit benefit society that provides life insurance for its members. In Wisconsin, as in other states, AAL is regulated by laws based on the Model Fraternal Code rather than the laws that apply to commercial insurance companies. When plaintiffs purchased their policies, AAL’s bylaws did not prescribe a means for resolving disputes, meaning they could go to litigation. The directors amended the bylaws to include a mandatory arbitration provision as the sole means of resolving disputes. Several policyholders sued, contending this change in the insurance policies was fraud. The trial court upheld the arbitration clause and compelled arbitration; the policyholders appealed.

Affirmed. Agreements between a fraternal benefit society and its members include the society’s bylaws, as well as any subsequent amendments, provided they do not destroy or diminish benefits promised in the policy. The policies were open-ended contracts that explicitly bound the members to subsequent changes in bylaws by the society’s board. Since the arbitration requirement did not reduce policy benefits, the requirement is legal.

Citation Hawkins v. Aid Association for Lutherans, 338 F.3d 801 (7th Cir., 2003)

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