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Entities that are "self-insured" or "practically self-insured", pursuant to Grange Mut. Ins. Co. v. Refiners Transport (1986), 21 Ohio St.3d 47, are not required to comply with R.C. 3937.18. Therefore, corporations which carry policies with substantial self-insured retentions, or which have separate reimbursement agreements with their insurers, will argue that they are not required to comply with the technical requirements of offering and rejecting UDM coverage. See Lafferty v. Reliance Ins. 109 F.Supp.2d 837 (SD Ohio ED, 7-17-2000).
Here are some of the common situations in which this argument arises:
In each of these cases, the insurer may argue that the named insured employer is a self-insured entity (at least up to the amount of the deductible) and that
The first point is that the holding in Refiners Transport is very narrow. The corporate insured in Refiners Transport "met state financial responsibility requirements for its truck fleet by utilizing a hybrid program consisting of a financial responsibility bond for the first $100,000 of loss coupled with excess insurance coverage, none of which contained uninsured motorist coverage." Refiners Transport, at 47. The Ohio Supreme Court held that "the uninsured motorist provisions of R.C. 3937.18 do not apply to either self-insurers or financial responsibility bond principals." Refiners Transport, at 51.
Hence, the Court identified two ways to qualify as self-insured for purposes of being exempt from the requirements of R.C. 3937.18. First, the self-insured entity may obtain a certificate of self-insurance. Second, the entity may obtain a proper financial responsibility bond. Either of these methods are valid ways to prove financial responsibility under Ohio law without purchasing an insurance policy.
Refiners Transport does not apply to any of the common situations listed above. Indeed, relatively few companies appear to have obtained certificates of self-insurance or financial responsibility bonds. Instead, corporate employers have simply entered into side agreements to reimburse their insurance company, in the amount of the self-insured retention, in the event of a claim. Although, this may be a perfectly legitimate financial arrangement to reduce premiums, it is not an approved method for demonstrating proof of financial responsibility.
In combating the self-insured defense, the attorney for plaintiff should establish that the insured entity does not have a certificate of self-insurance or a financial responsibility bond. This can generally be accomplished by stipulation. If not, then a deposition of a representative of the insured company may need to be taken. In the alternative, it may be possible to obtain an affidavit from the Department of Insurance to confirm that a particular corporation does not have a certificate of self-insurance on file.
Once the plaintiff establishes that the employer does not have a financial responsibility bond or a certificate of self-insurance, it will be apparent to the court that the corporation has no means of proving financial responsibility unless the "fronting agreement" is, in fact, an automobile insurance policy subject to the UDM statute. The following Common Pleas decisions should be helpful in showing that these "fronting agreements" do not exempt the insurer from complying with R.C. 3937.18.
Eby v. Zurich (November 30, 2001), Cuyahoga C.P. No. 408279, unreported.
The employer policy provided $1 million of liability coverage. The policy also provided a 100% deductible. However, the corporation attempted to reject UDM coverage. In examining the forms used to reject coverage, however, the court concluded that the attempt to reject coverage failed in light of the standards set by the Ohio Supreme Court in Linko.
The insurer argued that the "policy" was merely a "fronting agreement" which is a form of self-insurance. As such, even if the rejection was not effective under R.C. 3937.18, it was not necessary for the self-insurance agreement to comply with the statute.
The Court rejected the insurers argument, holding as follows:
"In order to qualify as a self-insurance program in Ohio, R.C. 4509.72 requires that the person (which includes a company) hold a certificate of self-insurance. This certificate demonstrates that the person or company has financial responsibility for liability. R.C. 4509.72(B).
"In Grange Mut. Cas. Co. v. Refiners Transport and Terminal Corp. (1988), 21 Ohio St. 3d 47, the Supreme Court of Ohio held that not only do the requirements of 3937.18 not apply to self insurers, they also do not apply to financial responsibility bond principals. Id. at 51
"The Court has reviewed the Business Auto Coverage Deductible Endorsement, attached to Parker's motion to intervene. Even assuming, arguendo, that this endorsement was an effective "fronting policy", this court still finds that the Zurich policy is bound by the terms of R.C. 3937.18, no matter what amount Parker agreed to pay Zurich as a deductible. Plaintiffs correctly point out that the rejection form to policy 01, the renewal policy, clearly contemplates Parker's obligation to comply with R.C. 3937.18. * * *
"Ohio courts are split as to whether a fronting policy constitutes, for all intents and purposes, self-insurance, while permitting the policyholder to avoid the mandates of R.C. 3936.18. In this case Parker specifically seeks to avoid the requirements of filing a certificate of self-insurance with the State of Ohio, while yet enjoying one of the benefits of a certified self-insurance that is, being exempt from Ohio law regarding UM/UIM coverage. In essence, Parker obtained insurance from Zurich, but now want (sic) to be declared by this Court to be self-insured.
"Accordingly, this Court finds that Parker is not self-insured the he "practical sense"; therefore, Defendants are bound by the requirements of 3937.18, the uninsured/underinsured motorist coverage statute."
Hodnichak v Gray (December 14, 2001), Summit C.P. No. 1999-09-3844, unreported.
The test is whether it reads like an insurance policy. A reimbursement agreement is not enough to make the insured a "self-insured in the practical sense". Adopts Caylor and Roberts v. State Farm. If it is not a certificate of self insurance or a bond, then it is not self-insured. p. 5.
Pope v. National Union Fire Ins. Co., Summit C.P. No. 1999 11 4676, unreported, (1-10-2001 Magistrate decision; 3-13-2001 Magistrate decision; and 6-18-2001 Order Adopting Both Decisions): 1-10-01 Decision.
If a self-insured offers UDM coverage, even though it may not be required to do so, it is obligated to comply with the statutory requirements for doing so. Additionally, an improper rejection when signed (pre-H.B. 261) is not transformed into a valid rejection in subsequent, post H.B. 261 policies.
Roberts v State Farm (June 7, 2001) Montgomery C.P. No. 00-CV-0886, unreported.
The plaintiff was employed by Emery. Emery is the named insured on a policy issued by National Union. Emery's rejection of coverage failed to satisfy the Linko requirements. (No premium stated). Emery set up Emery Insurance Co Ltd. to reimburse National Union for the first $500,000 of loss via a "facultative reinsurance agreement" between Emery and National Union. Under these facts, the court held that Emery is not self-insured "in the practical sense". Held: "[T]hese 'devices' [are] to provide Emery the use of National Union's filings and claims service, but they do not paralyze or mute the walking and quacking duck of insurance coverage". p. 11. (This holding is somewhat limited in that it emphasizes that Emery bears no risk. The risk is assumed by Emery Insurance or National Union. But the court does note that Emery does not qualify under R.C. 4509.45(E) or 4509.72 as self-insured. p. 9).
Caylor v Pacific Employers (August 3, 2001), Miami C.P. No. 99-400, unreported.
A corporate policy with a deductible equal to the limit of liability is not a self-insured fronting agreement.
Glen
R. Pritchard, Esq.
Updated 02/16/02