By D. Andrew Portinga – Experienced Federal Court Litigator at Miller Johnson
“FRONTING” INSURANCE POLICIES. The Sixth Circuit recently issued an interesting opinion on “fronting” policies. The Court ruled that a fronting policy is not “available” insurance for the purposes of an “other insurance” clause. I know, fascinating stuff.
What is a “fronting” policy? It’s a policy where the amount of the deductible equals the policy limits. In essence, any amounts paid by the insurer get billed back to the policyholder. Basically, the insurer fronts the money, but the policyholder is, in reality, self-insured.
Why would any business buy a “fronting” policy? Many states have financial responsibility statutes, which require a company to show that it is insured against certain losses. A fronting policy allows a business to satisfy that requirement. If the business were to become insolvent, the insurer would be on the hook for any insured loss. Otherwise, the policyholder bears the loss.
The issue in Alticor Glob. Holdings, Inc. v. Am. Int’l Spec. Ins. was how a “fronting policy” is treated in connection with an “other insurance” clause. “Other insurance” clauses address which policy has to pay first when more than one policy covers a loss. Sometime, the “other insurance” clause will say that the policy is “excess of any other valid and collectible insurance available to [the insured].”
So if a fronting policy is “available” to the insurer, then an excess carrier doesn’t have to do anything until the underlying policy is exhausted. But if the fronting policy is not “available” to the policyholder, then the excess carrier has a duty to defend and indemnify the policyholder against covered claims.
The Sixth Circuit ruled, in a 2-1 decision, that a fronting policy was not “valid and collectible insurance available to [the insured].” The majority held that the term “available” is ambiguous, and, construed in favor of the policyholder, means actually available and not just theoretically available. Because the policyholder didn’t have the right to actually collect from the fronting insurer, and because the policyholder was always liable to the insurer for any amounts paid out under the fronting policy, the majority held that the fronting insurance was not “available to the insured.” As a result, the excess carrier was on the hook for the policyholder’s defense and settlement expenses. The dissent, applying a textualist analysis, disagreed, and held that the fronting policy was both “valid and collectible” and “available” to the policyholder.
The case is Alticor Glob. Holdings, Inc. v. Am. Int’l Spec. Ins., Case No. 22-1631, 22-1641, 22-1679 (6th Cir. Aug. 23, 2024). Congrats to my friends at Warner, Norcross & Judd—Jason Byrne, Matthew Nelson, and Ed Bardelli—on this win.
