Assume, for example, an insured has, in two consecutive years, a $1,000 primary policy and a $1,000 excess policy. Also assume that the primary insurer in the first year is insolvent and the excess insurer for that year refuses to “drop down,” invoking its loss payable provision. If a $2,000 claim triggers both coverage years, and due to the unavailability of the primary policy in the first year, both the primary and excess carrier in the second year pay the claim, the remaining excess carrier cannot complain about having to pay the next claim that comes through the door despite the insured having paid no claim itself. After all, had the underlying primary policy been collectable, the insured could have exhausted both primary policies, leaving both its excess policies intact (and on deck to pay future claims). Instead, the excess carrier in the second year had to fulfill the first year’s obligations, paying earlier than it should have. The excess carrier in the first year, on the other hand, is asked to pay at the very same time regardless of the underlying carrier’s insolvency—after $1,000 the underlying policy should have paid was paid. In fact, in jurisdictions like Texas, where an insured may pick one policy year to pay the entirety of a claim, the excess carrier in the first year was spared the possibility of having to pay the entire $2,000 claim from its policy year (as the other excess carrier was forced to do).
In short, primary insurer insolvency does not automatically require the insured to pay is own way. In some instances, an insurer’s insistence that the insured pay claims itself may in fact be a demand the underlying limits be paid twice: once by other insurers and once by the insured. For an excess carrier, functionally doubling one’s underlying limits is nothing short of a windfall.