Colorado Supreme Cout Finds Excess/Umbrella Insurer Not Required to “Drop Down” Due Solely to Underlying Primary Carrier’s Insolvency

In A.R. Wilfley & Sons Inc. v. National Union Fire Insurance Company of Pittsburgh, the Colorado Supreme Court answered a certified question of whether umbrella/excess insurers are required to “drop down” and provide “first dollar” defense and indemnity for occurrences that are “not covered” by the underlying primary insurer due solely to its insolvency. The court answered that question in the negative.

The underlying actions at issue arose from A.R. Wilfley & Sons’ manufacturing of pumps for mining operations, which led to ongoing personal injury asbestos litigation. During the litigation, one primary insurer’s general liability policies were exhausted through payment of claims and settlements. An additional primary insurer — Reliance Insurance Co.— also issued general liability policies but subsequently became insolvent and therefore was unable to pay for Wilfley’s ongoing defense costs, leaving Wilfley with no other primary insurance.

Federal Insurance Co. issued three umbrella/excess policies to Wilfley that attached above Reliance’s insolvent primary policies. The umbrella/excess policies provided coverage for: (1) claims that exceed the underlying limits of the scheduled underlying policies; and (2) occurrences “not covered” by the scheduled underlying primary policies. With respect to the duty to defend, the umbrella/excess policies stated: “With respect to any occurrence not covered by the underlying policies listed in the schedule of underlying insurance, or any other underlying insurance collectible by the insured, but covered by the terms and conditions of this policy, the Company shall, in addition to the amount of ultimate net loss payable: (1) defend any suit against the insured . . . ; (2) pay all expenses incurred by the Company, all costs taxed against the insured in any such suit and all interest on the entire amount of any judgment therein which accrues after entry of the judgment.”

The dispute centered on the interpretation of the phrase “any occurrence not covered by the underlying policies.” Wilfley argued that its claims were “not covered” because the benefits available under the underlying Reliance policies were not “collectible” and, therefore, that Federal Insurance should “drop down” to provide primary coverage that was otherwise unavailable. Federal Insurance argued that the primary’s insolvency does not require an umbrella/excess insurer to drop down and become the first line of defense “simply because the primary carrier could no longer bear the load its policies assigned to it.” The federal district court certified the question to the Colorado Supreme Court, which agreed with Federal Insurance.

In its analysis, the court noted that the nationwide authorities pointed “in an unmistakable direction”: the insolvency of a primary insurer does not alter an umbrella/excess insurer’s obligations, and therefore Federal Insurance had neither a duty to defend nor indemnify any underlying claim until all underlying primary limits were exhausted by Wilfley. The court found that given the “unambiguous policy language,” it was clear that “an umbrella/excess insurer does not become the primary insurer’s stopgap — or inherit its obligations — simply because the primary insurer becomes insolvent.” In so holding, the court overruled a prior decision in Deisch & Marion, P.C. v. International Insurance Co. to the extent it was inconsistent with the court’s opinion. Deisch had appeared to support the insured’s position that uncollectibility triggers umbrella/excess coverage, but the court found Deisch's analysis was in dictum because the case was actually decided on other grounds. Further, the court noted that the language in the Federal Insurance policies specify that they are triggered based on underlying “coverage,” not collectibility. The court explained that under the Federal Insurance policies, the issue of whether an occurrence is covered by a scheduled underlying insurer is distinct from whether coverage is collectible from an unscheduled underlying insurer. The court found the Federal Insurance policies only addressed “collectibility” in reference to unscheduled underlying insurance, not the scheduled underlying Reliance policies. The court also noted that the condition requiring Wilfley to maintain underlying insurance in full force reinforces the court’s holding.

Accordingly, the court found — consistent with caselaw across various jurisdictions, including the Fifth Circuit, Eleventh Circuit, California appellate courts, and the Tenth Circuit (including Scott’s Liquid Gold, predicting Colorado law) — that the umbrella/excess policies at issue were only triggered once all underlying limits were properly exhausted, or by occurrences that are “not covered” by underlying primary insurance because the occurrences do not implicate the terms of coverage provided by the primary policies, rather due to the primary insurer’s inability to pay.