GIM9010 - Mutual insurance: what is mutuality?

The essential characteristic of a mutual business is that those who contribute to a common fund as part of a scheme for their mutual benefit must be the same persons as those who are entitled to participate in any surplus that arises from the operation of the scheme. For a general discussion of mutuality, see the Business Income Manual (BIM24000+) and the CT Manual (CTM40955+).

One of the most well-known descriptions of the mutual principle is that given by Lord Macmillan in Municipal Mutual Insurance Ltd v Hills (16TC430) at page 448:

‘…the cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial.’’

For mutuality to exist there needs to be an identity between contributors and participators as a class. However, individuals may leave the mutual group without actually sharing in the profits from the business to which they contributed, and may join it and share in profits made at an earlier time. Nor need there be an exact relationship between the liability to contribute and the entitlement to participate, only a “reasonable relationship”. Lord Wilberforce explained in the case of Fletcher (1972) AC414 (page 423):

‘…it may not be an essential condition of mutuality that contribution to the funds and rights in it should be equal: but if mutuality is to have any meaning there must a reasonable relationship, contemplated or in result, between what a member contributes and what, with due allowance for interim benefits of enjoyment, he may expect or be entitled to draw from the fund: between his liabilities and his rights.’’