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January 19, 2016 Practice Points

Excess Insurer Not Required to Drop Down Following Insolvency of Primary Insurer

The Montello case is an example of how courts will not rewrite excess liability insurance policies to provide coverage that the parties to the contract did not intend would be provided and for which a premium was not paid

by Michael McCormack

The Tenth Circuit Court of Appeals recently held that an excess liability insurer is not required to drop down and provide indemnity or defense coverage to an insured when the primary insurer becomes insolvent and is not able to honor its obligations under the primary insurance policy. Canal Ins. Co. v. Montello, Inc. , 2015 WL 7597429, 2015 U.S. App. LEXIS 20625 (10th Cir. Nov. 27, 2015).

The issue addressed by the Montello court may arise in toxic tort lawsuits involving alleged exposure to asbestos or other toxins spanning many years and multiple liability insurance policies. Montello, a distributor of products used in the oil-drilling industries, distributed a product which contained asbestos during the years 1966 to 1985. After it was sued by a number of individuals claiming injuries caused by exposure to asbestos, Montello sought coverage under various business liability policies it purchased from various insurers over a period of time. During a portion of the period of time in which the exposure to asbestos occurred, Montello had purchased liability insurance from The Home Insurance Company. Home Insurance was declared insolvent in 2003 and had not paid out any claims for bodily injury on behalf of Montello at the time it was declared insolvent.

During the exposure period, Montello had also purchased excess insurance from Canal Insurance Company. In response to the asbestos claims filed against Montello, Canal filed suit against Montello contending that it had no duty to defend or indemnify Montello in the asbestos lawsuits because it was an excess carrier that was only obligated to pay after any insurance coverage available under the primary insurance policies issued to Montello was exhausted. Canal claimed its obligations under the excess policy were not triggered because the underlying insurance policy issued by the insolvent insurer had not been exhausted.

The excess liability policy required the insurer to indemnify Montello for all sums which Montello “shall become legally obligated to pay as damages and expenses . . . within the term ‘ultimate net loss’ . . .” because of personal injury, property damage or advertising liability arising from an occurrence. The term “ultimate net loss” under the policy included any amounts for which the insured was liable above the applicable limits of any underlying insurance. If there was no applicable underlying insurance, then the excess insurer was required to pay amounts above a retained limit stated in the excess liability policy.

The court determined that the claim for coverage under the excess policy did not involve an occurrence. In the court’s view, the liability for which Montello sought coverage under the excess policy was caused by the primary insurer’s insolvency rather than an occurrence or accident as required by the policy. The court therefore concluded that the insolvency of the primary insurer was not an occurrence. It is not clear from the decision whether there was any argument by the insured that the lawsuits which gave rise to the claims for insurance coverage alleged occurrences that triggered the insuring clause. Arguably, the occurrence to which the excess insurance clause applied was the same occurrence to which the primary insurance applied— a lawsuit alleging exposure to asbestos that resulted in personal injury. The insured’s liability for damages arose from the claimed exposure to asbestos, not the primary insurer’s insolvency, and the primary policy was merely a source of payment for any damages for which the insured was liable.

Even if the Montello court had found that the claim for coverage under the excess policy arose from an occurrence, the court still concluded that coverage was not triggered because Montello did not incur liability above the applicable limits of the underlying insurance policy. The court rejected the insured’s argument that because the primary insurer was insolvent there were no applicable limits of underlying insurance for Montello to exhaust in order to trigger coverage under the excess policy.

The excess insurer’s indemnity obligation could also be triggered if the underlying insurance was inapplicable to the occurrence. The court concluded, however, that the primary liability policy provided coverage for asbestos related claims and therefore was applicable, although no payments were made because of the insurer’s insolvency. This portion of the court’s decision is inconsistent with the court’s previous determination that the primary insurer’s insolvency was the event for which coverage was claimed when it determined there was no occurrence to which the excess policy was required to respond. When analyzing the issue of whether the underlying insurance was “inapplicable to the occurrence”, however, the court focused on the asbestos exposure as the event which constituted an occurrence.

The excess liability policies in Montello were excess “over any other valid and collectible insurance available to the insured.” The court rejected the insured’s argument that the excess policy was not excess to any other insurance and should provide primary coverage because the insolvency of the primary insurer rendered the primary insurance uncollectable and unavailable. Since excess insurers generally have no obligation to the insured until the primary insurance limits are exhausted, the court was not willing to impose an obligation on the insurer which did not exist in the policy.

The court also determined that the excess insurer was not obligated to defend the insured under a defense coverage endorsement that required the insurer to defend any suit seeking damages for personal injuries, property damage, or advertising liability “if there is no underlying insurer obligated to do so.” The court rejected the insured’s argument that when the primary insurer was declared insolvent, the court effectively cancelled the primary contract of insurance and any obligations under the contract.

The Montello case is an example of how courts will not rewrite excess liability insurance policies to provide coverage that the parties to the contract did not intend would be provided and for which a premium was not paid. It is also an example of how a corporate insured may sustain financial obligations it did not intend to incur if the insurer from whom primary coverage was purchased is not able to pay claims.

Keywords: excess liability insurance, primary insurance, insolvency, bankruptcy, other insurance clause, occurrence, asbestos coverage

Michael McCormack is with O’Sullivan McCormack Jensen & Bliss PC, Wethersfield, Connecticut.

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