Title: Gilchrist v. Gonsor

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as Gilchrist v. Gonsor, 104 Ohio St.3d 599, 2004-Ohio-7103.] 
 
 
GILCHRIST, APPELLEE, v. GONSOR; UNITED STATES FIDELITY & GUARANTY 
COMPANY ET AL., APPELLANTS. 
[Cite as Gilchrist v. Gonsor, 104 Ohio St.3d 599, 2004-Ohio-7103.] 
Insurance – Motor vehicles – Former R.C. 3937.18 – Uninsured- and 
underinsured-motorist insurance — “Fronting” policies – Former R.C. 
3937.18 applies to fronting policies. 
(Nos. 2003-1081 and 2003-1092 — Submitted May 25, 2004 — Decided 
December 30, 2004.) 
APPEAL from and CERTIFIED by the Court of Appeals for Cuyahoga 
County, No. 80944, 2003-Ohio-2297. 
__________________ 
SYLLABUS OF THE COURT 
The uninsured- and underinsured-motorist provisions of former R.C. 3937.18 
apply to fronting policies. 
__________________ 
 
PFEIFER, J. 
{¶ 1} The issue in this case is whether insurance policies with a 
deductible that matches the limit of liability, known as fronting policies, are 
subject to the provisions of former R.C. 3937.18.  We hold that they are subject to 
those provisions and affirm the judgment of the court of appeals. 
{¶ 2} On August 19, 2000, Michael Gilchrist was injured when struck by 
a vehicle driven by Arthur Gonsor.  At the time he was injured, Gilchrist was in 
the course and scope of his employment with United Rentals, Inc. (“URI”).  
Gilchrist filed a claim against United States Fidelity & Guaranty Company (“USF 
& G”), URI’s insurer, for underinsured-motorist coverage.  An endorsement to the 
declarations page of the relevant USF & G policy states that the policy covers 
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“[a]utos for which certification of financial responsibility is required in states 
where [URI] is not qualified for self-insurance.”  The trial court granted summary 
judgment in favor of Gilchrist, finding that URI was not self-insured and that 
certification of financial responsibility is required in Ohio.  The court of appeals 
upheld the trial court’s grant of summary judgment. 
{¶ 3} The cause is now before the court upon the acceptance of a 
discretionary appeal and upon our determination that a conflict exists. 
{¶ 4} A term of the agreement between URI and USF & G states that 
liability and uninsured- and underinsured-motorist (“UM”) coverage is provided 
in states where certification of financial responsibility is required and where URI 
is not qualified for self-insurance.  Certification of financial responsibility is 
required in Ohio.  R.C. 4509.101(A).  We must now determine whether URI was 
self-insured in Ohio. 
{¶ 5} URI and USF & G entered into an agreement, which is titled and 
referred to throughout as a commercial insurance policy.  The policy includes a 
section titled “Business Auto Coverage.”  Thus, URI was insured by USF & G. 
{¶ 6} USF & G contends that, even though URI purchased an 
automobile insurance policy, URI was self-insured in the practical sense because 
the deductible amount of the policy and the liability limits of the policy are the 
same, $1,000,000.  In support,  USF & G cites Grange Mut. Cas. Co. v. Refiners 
Transport & Terminal Corp. (1986), 21 Ohio St.3d 47, 49, 21 OBR 331, 487 
N.E.2d 310.  In Grange, we considered “whether an employer, who meets Ohio’s 
financial responsibility laws other than by purchasing a contract of insurance, 
must comply with the requirements * * * contained in R.C. 3937.18 * * *.”  Id. at 
48, 21 OBR 331, 487 N.E.2d 310.  The employer in Grange had complied with 
state financial-responsibility requirements by purchasing a financial-responsibility 
bond and excess insurance coverage.  We stated that this particular form of 
coverage did not make the employer self-insured “in the legal sense contemplated 
January Term, 2004 
3 
by R.C. 4509.45(D) [now (A)(5)] and 4509.72.”  Id., 21 Ohio St.3d at 49, 21 OBR 
331, 487 N.E.2d 310.  We held, however, that the employer was self-insured “in 
the practical sense in that [the employer] was ultimately responsible under the 
terms of its bond either to a claimant or the bonding company in the event the 
bond company paid any judgment claim.”  Id. 
{¶ 7} Grange is inapplicable in this case because URI did not meet 
Ohio’s financial responsibility law “other than by purchasing a contract of 
liability insurance.”  URI purchased an insurance policy.  In contrast, the 
employer in Grange purchased a financial responsibility bond, which qualifies as 
proof of financial responsibility under R.C. 4509.45(A)(3).  Nothing in the record 
indicates that URI took any measures, other than purchasing the fronting policy 
from USF & G, to establish proof of financial responsibility.  Under R.C. 
4509.45(A)(1) through (5),  an employer may prove financial responsibility by 
means of a financial-responsibility identification card, a certificate of insurance, a 
bond, a certificate of deposit of money or securities, or a certificate of self-
insurance.  The fact that there is no evidence that URI obtained a certificate of 
self-insurance pursuant to R.C. 4509.45(A)(5) is of particular importance because 
only those with “sufficient financial ability to pay judgments against [them]” are 
able to obtain such a certificate.  R.C. 4509.72(B).  Allowing fronting policies to 
substitute for certificates of self-insurance would subvert the “sufficient financial 
ability” requirement of R.C. 4509.72(B).  We conclude that URI was not self-
insured in the practical sense within the meaning of Grange. 
{¶ 8} The version of R.C. 3937.18 applicable to this case is determined 
by the date the policy was issued.  Wolfe v. Wolfe (2000), 88 Ohio St.3d 246, 250, 
725 N.E.2d 261.  The relevant policy in this case was issued on January 1, 2000.  
The version of R.C. 3937.18(A) effective on that date provided that “[n]o 
automobile liability or motor vehicle liability policy * * * shall be delivered or 
issued for delivery in this state * * * unless both [uninsured and underinsured] 
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coverages are offered to persons insured under the policy * * *.”  148 Ohio Laws, 
Part IV, 8577. 
{¶ 9} URI met its statutory duty to provide proof of financial 
responsibility by purchasing a contract of insurance.  Accordingly, USF & G, its 
insurer, is subject to the provisions of former R.C. 3937.18.  The language of 
former R.C. 3937.18(A) was unambiguous.  It mandated that “[n]o automobile 
liability or motor vehicle liability policy * * * shall be delivered or issued for 
delivery in this state * * * unless [UM coverage is] offered to persons under the 
policy * * *.”  148 Ohio Laws, Part IV, 8577. 
{¶ 10} We hold that the uninsured- and underinsured-motorist coverage 
provisions of former R.C. 3937.18 apply to fronting policies and affirm the 
judgment of the court of appeals. 
Judgment affirmed. 
 
RESNICK and F.E. SWEENEY, JJ., concur. 
 
MOYER, C.J., concurs separately. 
 
LUNDBERG STRATTON, O’CONNOR and O’DONNELL, JJ., dissent. 
__________________ 
 
MOYER, C.J., concurring. 
{¶ 11} I agree with the majority’s analysis and conclusion that the 
UM/UIM coverage provisions of former R.C. 3937.18 apply to the insurance 
policy in this case.1 Owners and operators of motor vehicles in Ohio must 
maintain and file proof of financial responsibility. R.C. 4509.101(A)(1); R.C. 
4509.45. As the majority states, R.C. 4509.45(A)(1) through (5) provides that 
such proof may be shown by means of a financial responsibility identification 
card, a certificate of insurance, a bond, a certificate of deposit of money or 
securities, or a certificate of self-insurance. URI determined that compliance other 
                                                 
1.  In 2001, the General Assembly repealed the mandatory-offering component of R.C. 3937.18. 
2001 Am.Sub.S.B. No. 97. This decision therefore has limited application.  
January Term, 2004 
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than by the purchase of insurance was either not feasible or too costly. USF & G 
in fact expressed in its brief that “a pure self-insurance program was fraught with 
administrative and legal complications and significant costs.” Thus, in an effort to 
minimize costs, URI chose to purchase from USF & G an insurance policy that 
approximated self-insurance. Regardless of the ultimate distribution of risk, URI 
was able to comply with state law by filing a certificate of insurance. URI and 
USF & G seek to describe their contract as insurance for one purpose and as 
something else for another purpose. They now assert that the contract is not a 
contract for the provision of insurance coverage. It is not consistent to argue that 
the contract is an insurance policy for purposes of complying with Ohio’s 
financial responsibility requirement and that the same policy is not one of 
insurance in order to avoid the mandatory UM/UIM offering under former R.C. 
3937.18. 
{¶ 12} Moreover, the policy provides that “[b]ankruptcy or insolvency of 
[URI] * * * will not relieve [USF & G] of any obligations under this Coverage 
Form.” USF & G contends that the Automobile Self-Funded Retention 
Endorsement2 negates this provision so that URI retains 100 percent of the risk of 
loss. Although the policy does not explicitly state that the fronting provisions 
have no effect on USF & G’s obligation to pay claims in the event that URI files 
for bankruptcy or becomes insolvent, we are guided by the longstanding rule that 
ambiguities in insurance policies are to be construed strictly against the insurer. 
Faruque v. Provident Life & Acc. Ins. Co. (1987), 31 Ohio St.3d 34, 31 OBR 83, 
508 N.E.2d 949, syllabus.3 After resolving any uncertainty against USF & G, it is 
                                                 
2  This is the endorsement that contains the fronting provisions.  
3.  At oral argument counsel for USF & G initially said that USF & G “would have to step in and 
do that [cover the loss in the event of URI’s insolvency or bankruptcy].” However, counsel later 
stated that he did not want to concede that USF & G would be liable, although he did acknowledge 
that it was a legitimate issue.  
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clear that USF & G exposed itself to at least some risk. The fact that USF & G 
carried some risk of loss further verifies that the arrangement in this case was an 
insurance policy and is therefore subject to the previous decisions of this court 
that create liability for UM/UIM coverage pursuant to former R.C. 3937.18. 
{¶ 13} For the foregoing reasons, I concur in the decision of the majority. 
__________________ 
 
LUNDBERG STRATTON, J., dissenting. 
{¶ 14} I respectfully dissent.  Because United Rentals, Inc. (“URI”) bore 
the ultimate responsibility for the risk of loss, I believe that its “fronting policy” 
was self-insurance in the practical sense.  Therefore, we should apply the rationale 
of Grange Mut. Cas. Co. v. Refiners Transport & Terminal Corp. (1986), 21 Ohio 
St.3d 47, 21 OBR 331, 487 N.E.2d 310, and reverse the judgment of the court of 
appeals. 
{¶ 15} The majority concludes in a two-sentence analysis: “URI and USF 
& G entered into an agreement, which is titled and referred to throughout as a 
commercial insurance policy. * * * Thus, URI was insured by USF & G.”  But a 
closer look at the agreement and the relationship between the parties discloses an 
unconventional business arrangement that is atypical of the usual insurer-insured 
relationship. 
{¶ 16} URI is an international corporation that owns more than 500,000 
rental items, including numerous motor vehicles, which it must adequately insure 
from loss.  Based in part on the size of its business and the enormous cost of 
insurance, URI selected a “fronting policy” as a means of risk management.  The 
term “fronting” is an insurance term indicating that an entity is renting an 
insurance company’s licensing and filing capabilities.  McCollum v. Continental 
Ins. Co. (Apr. 9, 1993), Lucas App. No. L-92-141, 1993 WL 382455, *3. 
{¶ 17} Large businesses that operate in multiple states and/or countries 
commonly use an arrangement called a “fronting policy” or “fronting program” in 
January Term, 2004 
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which the business pays a greatly discounted premium to an insurance company 
with insurance licensing and filing capabilities in particular states.  In exchange, 
the company receives an insurance policy that complies with the financial- 
responsibility laws of each state in which the business is required to maintain 
proof of financial responsibility.  See Mark W. Flory & Angela Lui Walsh, Know 
Thy Self-Insurance (and Thy Primary and Excess Insurance) (2001), 36 Tort & 
Ins.L.J. 1005, 1006-1007.  The business bears all the risk because it has a 
deductible that matches the policy’s limits while merely using the insurer’s 
licensing and filing capabilities.  Here, URI had $1 million of coverage, but 
agreed to be responsible for all claims.  The insurer would never have to pay a 
claim.  This approach is beneficial and cost-effective for a large company such as 
URI because it permits the company, for all practical purposes, to self-insure 
losses up to the amount of the deductible without having to meet the formal legal 
requirements for qualifying as a self-insurer in jurisdictions where it does 
business.  Therefore, a fronting policy differs from the traditional insurance 
policy. 
{¶ 18} We have held that the uninsured-motorist provisions of R.C. 
3937.18 do not apply to self-insurers.  Grange Mut. Cas. Co. v. Refiners 
Transport & Terminal Corp., 21 Ohio St.3d 47, 21 OBR 331, 487 N.E.2d 310, 
syllabus.  This principle should be applied to a fronting policy.  However, the 
majority distinguishes Grange because in that case, Refiners Transport & 
Terminal Corp. had purchased a financial-responsibility bond as proof of its 
financial responsibility under R.C. 4509.45(A)(3), whereas URI had an insurance 
policy.  But as the dissenting judge below stated, “[t]hat is a distinction without 
meaning.”  I agree.  Both are merely tools that prove financial responsibility.  
Both are forms of “self-insurance” in that the company, not the surety or the 
insurance company, is responsible for payment of any loss. 
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{¶ 19} The majority ignores the fact that the court’s analysis of self-
insurance in Grange focused on who bore the ultimate responsibility for the risk 
of loss.  The court concluded that, whether a bond principal or a self-insurer, for 
purposes of the uninsured- and underinsured-motorists provisions of R.C. 
3937.18, Refiners was self-insured “in the practical sense” because it was 
“ultimately responsible” for payment of claims.  (Emphasis added.)  Id., 21 Ohio 
St.3d at 49, 21 OBR 331, 487 N.E.2d 310. 
{¶ 20} Technically, USF & G issued an insurance policy to URI that 
satisfied URI’s proof of financial responsibility under R.C. 4509.45(A).  USF & 
G appeared to be the insurer, yet under the terms of the agreement, USF & G bore 
no obligation to defend or settle claims and no risk of loss.  For all practical 
purposes, URI was the primary insurer ultimately responsible to a claimant.  
Consequently, it logically follows that, with no transfer of risk from an insured to 
an insurer, there is no need for an offer of, or a decision to accept or reject, 
UM/UIM coverage.  As we said in Grange, if R.C. 3937.18 applied to self-
insurers, “it would result in the absurd ‘situation where one has the right to reject 
an offer of insurance to one’s self * * *.’ ”  Id. at 49, 21 OBR 331, 487 N.E.2d 
310, quoting the court below. 
{¶ 21} A fronting policy as the functional equivalent of self-insurance is 
not a novel concept.  In Chicago Ins. Co. v. Travelers Ins. Co. (Ky.App. 1997), 
967 S.W.2d 35, the court described a Travelers policy issued to Walgreen 
Company as essentially a “fronting policy” by which Walgreen was self-insured 
because the policy had matching $1 million deductible and coverage limits.  In 
Air Liquide Am. Corp. v. Continental Cas. Co. (C.A.10, 2000), 217 F.3d 1272, 
1274, the court concluded that a CIGNA policy issued to Air Liquide was not a 
typical liability policy because the company’s deductible matched the policy 
limits.  Air Liquide was responsible for its own losses.  In Playtex FP, Inc. v. 
Columbia Cas. Co. (Del.Super.1991), 609 A.2d 1087, 1091, the court 
January Term, 2004 
9 
acknowledged that the company used a fronting agreement to accomplish self-
insurance.  See, also, Tribune Co. v. Allstate Ins. Co. (1999), 306 Ill.App.3d 779, 
782, 239 Ill.Dec. 818, 715 N.E.2d 263. 
{¶ 22} The majority’s analysis focuses on the agreement’s label.  But the 
substance of the agreement between URI and USF & G indicates that it was 
merely a fronting policy that is a form of self-insurance in the practical sense, 
with URI ultimately responsible for payment of claims.  Consequently, the 
uninsured- and underinsured-motorist provisions of former R.C. 3937.18 do not 
apply. 
{¶ 23} I dissent and would reverse the judgment of the court of appeals. 
 
O’CONNOR and O’DONNELL, JJ., concur in the foregoing dissenting 
opinion. 
__________________ 
 
Lowe, Eklund, Wakefield & Mulvihill Co., L.P.A., and Mark L. 
Wakefield, for appellee. 
 
Davis & Young, Thomas W. Wright, Richard M. Garner and Patrick M. 
Roche, for appellants United States Fidelity & Guaranty Company and St. Paul 
Fire & Marine Insurance Company. 
 
Janik & Dorman, Steven G. Janik and Matthew J. Grimm, urging reversal 
for amicus curiae Member Companies of the American International Group, Inc. 
 
Connelly, Jackson & Collier, L.L.P., and Anthony E. Turley, urging 
affirmance for amicus curiae Ohio Academy of Trial Lawyers. 
______________________