In Alticor Global Holdings Inc. v. American International Specialty Lines Ins. Co., Nos. 22-1631/22-1641/22-1679 (6th Cir. Aug. 23, 2024) (unpublished), the Sixth Circuit held that “fronting policies” are not “available” insurance for purposes of an “other insurance” clause.

Admittedly, the issue does not come up too often.  But since there is not an abundance of case law addressing it, and the decision is from a federal appeals court, and has a competing dissent, I decided to include it as one of the year’s top ten coverage cases. 

At issue was coverage for Amway, from American International Specialty Lines Company, for copyright-infringement litigation brought against the company that Amway settled.  The case involves tens of millions of dollars.  Not surprisingly, there is a lot going on here and a number of issues, including the potential applicability of certain exclusions.  But I’m focusing here solely on the opinion’s discussion of fronting policies. 

An American International Specialty policy issued to Amway provided coverage for up to $25 million for claims alleging wrongful acts—including copyright infringement—on Internet media.  Importantly, the American International Specialty policy stated that “such insurance as is provided by this policy shall be excess of any other valid and collectible insurance available to you.”

Amway also had a decade of policies, issued by ACE, providing coverage up to $2 million for “personal and advertising injury liability,” which included copyright infringement, and up to $4 million aggregate.  However, these policies were “fronting policies,” which the court described as a policy where the deductible matches the policy limits.  “Fronting,” the court said, “is the use of an insurer to issue paper—that is, an insurance policy—on behalf of a self-insured organization without the intention of bearing any of the risk.”  [The court noted that ACE was not a party in the case and took no action, such as intervening or filing an amicus brief.]

The court further elaborated on the meaning of a fronting policy: “The term ‘fronting’ refers to situations in which the business pays a greatly discounted premium to an insurance company with insurance licensing and filing capabilities in particular states in exchange for 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. Practically speaking, the business is renting an insurance company’s licensing and filing capabilities, which is often economically advantageous for the business. In typical fronting policies, the deductible matches the limit of liability, such that the business bears the entire risk of loss.”  (internal quotes omitted).

American International Specialty, pointing to the provision that its policy “shall be excess of any other valid and collectible insurance available to you [Amway],” argued that any coverage obligation was excess of the limits of the ACE policies.  It was not disputed that such policies were “valid.”  Nor was it disputed that they would be obligated to pay, before the American International Specialty policy, if it were a “‘usual’ kind of general liability policy.”   

Thus, for it to be “other insurance,” the fronting policies must be “collectible insurance available to [Amway].”  The Sixth Circuit concluded that the fronting policies were not “available” to Amway:

“Under Michigan insurance law, ‘the term ‘available’ is ambiguous,’ and, ‘when construed in favor of the insured,’ means ‘actually available or accessible, or that which is reasonably available, as opposed to that which is theoretically or hypothetically available.’ . . .  And as the district court ably explained, the ACE policies at best present hypothetical availability, for their fronting nature inherently means Amway cannot collect insurance proceeds from ACE: ‘Amway bears responsibility for all the costs under the ACE Policies. The Policies are only theoretically or hypothetically available since they allow Amway to essentially rent an insurance company’s licensing and filing capabilities. Furthermore, the deductible matches the coverage limit, and Amway must either reimburse ACE for any money spent under the Policies or ACE assumes no responsibility to pay defense or indemnity costs.’”

A dissenting judge saw it differently, providing a lengthy discussion why the ACE policies were “available” to Amway.  In part, the court stated that “Amway may still collect payments from them in the first place, even if it must fully reimburse ACE.” 

If you have this issue, you will certainly want to read the lengthy dissent in detail, consider the specific policy language, and examine how the competing opinions differed on both the role of certain Michigan case law and decisions from other jurisdictions that have addressed the fronting--“other insurance” issue.