Opinion ID: 1288711
Heading Depth: 1
Heading Rank: 7

Heading: requirement of meaningful offer in sale of fronting policy

Text: Plaintiff asserts the Legislature has not exempted an insurer which sells a fronting policy from making a meaningful offer of UIM coverage to a commercial insured. Old Republic, relying on foreign authority, argues it should not be required to make a meaningful offer of UIM coverage when selling a fronting policy to a commercial insured which wishes to reject all optional coverages. Old Republic further asserts Section 38-77-160 does not apply to its fronting policy because that policy was not insurance which involved a transfer of risk to Old Republic. Fronting policies and related forms of partial self-insurance have become prevalent since the 1980s due to increases in insurance premiums. A fronting policy, of which there are various forms, is one or more steps removed from true self-insurance. It has been defined as a legal risk management device, typically used by large corporations operating in multiple states, in which the corporation pays a discounted premium to an insurer. The insurer maintains licensing and filing capabilities in a particular state or states, and issues an insurance policy covering the corporation in order to comply with the insurance laws and regulations of each state. The corporation retains at least part of the risks covered under the fronting policy. One such means of retaining the risk, as seen in the present case, is by a deductible which equals the policy's liability limits. The insured usually is left to administer all claims, although the insurer may reserve this authority to itself in some instances. [3] The insured agrees to reimburse the insurer for all payments it must make. See MacDonald v. Pacific Employers Ins. Co., 264 F.Supp.2d 576, 581-83 (N.D.Ohio 2002); Lafferty v. Reliance Ins. Co., 109 F.Supp.2d 837, 844-46 (S.D.Ohio 2000); Aerojet-General Corp. v. Transport Indem. Co., 17 Cal.4th 38, 70 Cal.Rptr.2d 118, 948 P.2d 909, 914 n. 3 (1997); Mark W. Flory & Angela Lui Walsh, Know Thy Self-Insurance (and Thy Primary and Excess Insurance), 36 Tort & Ins. L.J. 1005, 1006-07 (2001); Rory A. Goode, Self-Insurance as Insurance in Liability Policy Other Insurance Provisions, 56 Wash. & Lee L.Rev. 1245, 1257 (1999); William T. Barker, Combining Insurance and Self Insurance: Issues for Handling Claims, 61 Def. Couns. J. 352, 353 (1994); 1 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d §§ 10:1 to 10:3 (1997) (discussing self-insurance). Some courts and commentators have stated that insureds who purchase fronting policies are in the practical sense self-insured because such policies involve no transfer of risk from the insured to the insurer. We disagree with the premise there is no transfer of risk in such policies. In a fronting policy, [t]he insurer functions purely as a surety for the insured's ability to pay claims, and the benefit extends only to third parties in situations in which the policy holder is unable to pay a liability owed to a third party. Goode, supra at 1257; see also Barker, supra at 353 (stating same principle). Thus, Old Republic has assumed the risk  which it presumably has found acceptable based on Penske's net worth and financial capacity  that it will have to pay a claim if Penske becomes insolvent. We find persuasive the views expressed in Gilchrist v. Gonsor, 104 Ohio St.3d 599, 821 N.E.2d 154 (2004). In that case, decided on facts similar to the present case, an employee was injured in an on-the-job vehicle wreck caused by another motorist. The employee sought coverage under his employer's uninsured motorist (UM) policy, which was a fronting policy in which the employer's deductible equaled the policy's liability limit of $1 million. The Ohio Supreme Court explained that the employer, in purchasing an insurance fronting policy, was not self-insured because it had not obtained a certificate of self-insurance under the statutory process. Instead, the employer had established proof of financial responsibility as statutorily required by purchasing a contract of insurance  the fronting policy. Under the statute then in effect, a vehicle liability policy could not be issued or delivered in Ohio unless UM coverage was offered to the policyholder. The court held this provision applied to fronting policies. Id. at 156-57; see also Couch on Insurance 3d § 10:1 (self-insurers in many states are required to comply with procedures to obtain a certificate of self insurance, and the reason for strictly enforcing such requirements is to protect the public). A concurring justice further explained the court's reasoning. [The employer] and [the insurer] seek to describe their contract of insurance for one purpose and as something else for another purpose.... 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 [Ohio law]. Gilchrist, 821 N.E.2d at 156-57 (Moyer, C.J., concurring). Furthermore, it is clear that [the insurer] exposed itself to at least some risk. The fact [the insurer] 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 [Ohio law]. Id. In South Carolina, `[i]nsurance' means a contract whereby one undertakes to indemnify another or pay a specified amount upon determinable contingencies. S.C.Code Ann. § 38-1-20(19) (Supp.2004). A `[p]olicy' means a contract of insurance. S.C.Code Ann. § 38-1-20(30) (Supp. 2004). `[A]utomobile insurance' means automobile bodily injury and property damage liability insurance, including [a list of various forms of vehicle-related coverage] ... as provided by this chapter written or offered by automobile insurers. S.C.Code Ann. § 38-77-30(1) (2002). In the context of automobile insurance, a person or corporation in South Carolina is required to provide proof of financial responsibility for potential accidents in order to legally operate a motor vehicle. Such financial responsibility may consist of an insurance policy or surety bond with the required or optional coverages. S.C.Code Ann. §§ 56-10-10 to -40 and 56-10-210 to -280 (1991 & Supp.2004) (requiring proof of insurance or other acceptable security in order to register motor vehicle and establishing fines and criminal penalties for failure to do so); S.C.Code Ann. §§ 38-77-140, -150, and -160 (2002) (establishing requirements of mandatory minimum insurance limits, mandatory uninsured motorist coverage, and requiring automobile insurers to offer additional uninsured and underinsured motorist coverage, respectively). A person, if eligible under statutory requirements, may register an uninsured motor vehicle by paying a $550 fee to the state Department of Motor Vehicles (DMV). S.C.Code Ann. §§ 56-10-510 to -540 (Supp.2004). A company or person who has more than twenty-five motor vehicles registered in his name may qualify as a self-insurer by meeting the statutory requirements and obtaining a certificate of self-insurance from the DMV. S.C.Code Ann. §§ 56-9-60 and 56-10-510 (Supp.2004). Penske complied with the financial responsibility requirements by purchasing an insurance policy, not by seeking approval of a surety bond or obtaining a certificate of self-insurance from DMV as allowed by statute. Old Republic sold Penske a policy of automobile insurance as those terms are statutorily defined, i.e., it sold Penske a contract of insurance which provided automobile bodily injury and property damage liability insurance. The fact Penske is required under the policy to subsequently reimburse Old Republic for claims paid up to the policy limits does not change the fact that Old Republic agreed to indemnify Penske, particularly since Old Republic has assumed the risk of Penske's insolvency, however slight. [4] Moreover, the fact Penske purchased a so-called fronting policy does not transform Penske into a self-insured entity entitled to avoid the requirements of South Carolina law. The Legislature has not defined such policies as a form of self-insurance; nor has the Legislature established an exception for fronting policies from UIM-related requirements. Therefore, the laws of this state apply with equal force to such policies. Neither Old Republic nor Penske, while acting legitimately in their corporate self-interest to spend less money on insurance, are allowed to avoid statutory insurance requirements and unilaterally bestow upon Penske the classification of a self-insured entity. Accordingly, we answer Question 3 yes, automobile insurance carriers in South Carolina are required to make a meaningful offer of optional UIM coverage when selling a fronting policy in which the insured's deductible limits equal the liability limits.