The directors of Allied Group, then a subsidiary of Allied Mutual, offered to sell 21 percent of the company's stock publicly. When the $16.4 million raised through the sale went directly to Allied Group's subsidiaries, rather than to Allied Mutual, it began a process that would essentially lead to the demutualization of the company, without compensation to policyholders.

The Iowa Supreme Court gave policyholders the legal right to challenge whether Allied could demutualize without seeking policyholder approval or compensating them.

"We're delighted with the ruling. It reaffirmed the rights of policyholders," says Thomas Waterman, one of the attorneys suing Allied.

Allied Mutual evolved into Allied Insurance, a property and casualty company later acquired by Nationwide. Allied executives claim they acted in the best interests of policyholders. Jason Adkins, a Boston-based attorney involved in the case, thinks otherwise.

According to Adkins, the insurance company and a half dozen trade organizations believed regardless of the facts of the case, the policyholders had no right to question the stock sale or what happened to the proceeds.

"It was a disgraceful display of disregard for the policyholders," says Adkins. "The decision just states the obvious. Mutual companies must act in good faith and loyalty to the policyholders, and if they don't they can be sued."

Adkins says the Iowa ruling will be influential, because courts in other states are likely to refer to the case in their own decisions. Adkins says this ruling will give policyholders more power in challenging how mutual companies change their corporate structure.