Advisories & Insights

Four Corners, Eight Corners, and Fronting Turned Upside-Down

April, 2021
By Lloyd Bernstein, Clinton T. Lipscomb

It just got easier for Oregon insurers to obtain contribution from their fellow insurance companies, and harder for co-insurers to dispute that obligation. Fronting agreements also no longer shield insurers from their obligations under the policies they issue. 

On March 25, 2021, the Supreme Court of Oregon issued its decision in Allianz Global Risks US Ins. Co. v. Ace Prop. & Cas. Ins. Co., resolving a seven-year-old contribution dispute. Between 1976 and 1982, various insurance companies issued CGL and excess policies to the truck manufacturer Freightliner and its parent company Con-Way. Freightliner also obtained CGL coverage from Allianz in 1981. The next year, Daimler-Benz AG purchased Freightliner and rolled it into a Daimler subsidiary, which Allianz continued to cover from 1981 to 1986. Separately, Daimler also purchased a policy from Allianz to insure against future claims for Freightliner's historical conduct. 

And those claims came in droves. When Allianz filed its complaint for contribution in 2014, it had paid out more than $24 million in defense costs and judgments related to Freightliner's historical operations. Freightliner's previous insurers had all refused to defend Daimler from these claims or to contribute funds to Allianz. The Supreme Court of Oregon ultimately found in favor of Allianz on several issues and remanded the matter to the trial court. These rulings have important implications for Oregon insurers. 

As an initial matter, the court's ruling means that claims for contribution in Oregon must be decided as a matter of law, not by a jury. It found that contribution is an equitable remedy flowing from co-insurers' duties to defend and indemnify, and those duties arise solely from language contained within the "four corners" of the policy and of the plaintiff's complaint (hence the "eight-corners" rule). Determining whether an insurer owes these duties implicates the long-settled Oregon rule that insurance policies are interpreted as a matter of law. So, because it falls to the courts to decide whether co-insurers were required to defend or indemnify their policyholder, trial courts are effectively barred from passing the question of contribution to a jury. 

Relatedly, the court found that insurers who owe contribution cannot escape their obligation through indemnity by their policyholder. In Allianz, the co-insurers had entered into side or "fronting" agreements with Freightliner's previous parent company, Con-Way, requiring Con-Way to indemnify the co-insurers for all claims brought under the policies. Based on these side agreements, the co-insurers argued, they did not owe contribution to Allianz. 

The court rejected this position on three grounds. First, the side agreements were extrinsic evidence and could not be considered under the "eight-corners" rule. Second, because the right to contribution is held by insurers themselves, not by policyholders, it is a distinct obligation from any indemnification the policyholder owes to co-insurers. And finally, a company that is required by law to obtain insurance has no legal authority to "self-insure" by purchasing the requisite coverage and then indemnifying the insurers. The policies contained provisions approved by regulators, and a private agreement does not eliminate an insurer's obligations under those provisions. Although the court did not ban fronting agreements outright, it held that indemnified insurers still have to fulfill their duties under the policy as an initial matter, and can seek repayment from the policyholder separately. 

(An important caveat: some of the claims at issue in Allianz stemmed from the Oregon Environmental Cleanup Assistance Act. The OECAA does not permit an insurance company to seek contribution from other insurers that have entered into good-faith settlements with the insured. This was not the case before the Allianz court, but the OECAA presents a noteworthy statutory exception to the broad finding in favor of equitable contribution.) 

Finally, the court effectively placed the insurer seeking contribution in the shoes of the insured for the purpose of resolving ambiguous policy terms. Expanding on the principle that ambiguity in an insurance policy is construed in favor of the policyholder, the court also found that, when one insurer seeks contribution from another, ambiguity is resolved against the drafter. In other words, ambiguous policy terms operate in favor of the insurance company seeking contribution. 

The Allianz ruling presents a mixed bag for Oregon insurers. While it eases the task of insurers seeking contribution, it sets up additional roadblocks for insurers who contend they do not owe that contribution. It eliminates an insurer's opportunity to present the issue of contribution to a jury. It also prohibits consideration of side agreements and other documents that might demonstrate the intent of the parties to modify or eliminate a duty relevant to contribution. Further, to the extent a policyholder is required to carry insurance, and to the extent the terms of the policy are governed by law or regulation, the Allianz decision indicates that the parties cannot modify or eliminate those terms through private contracts. This final point could have significant knock-on effects for insurers. At a minimum, it prevents insurance companies from relying on fronting agreements as a shield to initial liability for contribution. Indemnified insurers now have to pay first and seek repayment from the policyholder second. This is likely to increase disputes between insurers and their policyholders, and in the case of policyholders that become insolvent, it seems the insurer will be left holding the bag. Time will tell whether the Allianz decision also paves the way for Oregon to prohibit fronting agreements entirely.

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