• Federal Court in Oklahoma Holds No "Drop-Down" Coverage under Excess and Umbrella Policies for Insured When Primary Insurer Becomes Insolvent
  • February 10, 2014 | Author: George B. Hall
  • Law Firm: Phelps Dunbar LLP - New Orleans Office
  • A federal court in Oklahoma held that neither excess nor umbrella insurers had a duty to "drop down" in coverage where a primary insurer proved insolvent. Each insurer's policy provided coverage only for an "occurrence" for which no primary insurance coverage was available or for coverage only once primary insurance coverage was exhausted by an occurrence, and the the court concluded that the insolvency of a primary insurer did not constitute an occurrence under the definitions of the policies. Canal Ins. Co. v. Montello, Inc., 2013 WL 6732658 (N.D. Okla. Dec. 19, 2013).

    The insured was a manufacturer facing liability in litigation over asbestos exposure from asbestos in its products. During the years at issue, the insured had CGL insurance with a primary insurer which became insolvent prior to full payment of its limits. The insured also maintained several excess and umbrella policies with various insurers and sought a declaratory judgment that those insurers had a duty to "drop down" in place of the insolvent primary insurer and to defend or indemnify the insured. On an Erie guess, the district court held on summary judgment motion, as a matter of first impression, that Oklahoma courts would find with the majority of courts that when a primary insurer becomes insolvent, an excess insurer is not required to assume the primary insurer's obligations.

    The holding was also based on Oklahoma rulings that an excess insurer's obligations are not triggered until primary coverage has been exhausted. The court looked to the language of each excess and umbrella policy. It held that the excess policies did not contemplate payment until those policies listed in the Schedule of Underlying Policies were exhausted; and that the underlying policies were "deemed to be in force and written without special restrictive endorsements," such that regardless of actual status, the excess policies were to be enforced as if the primary insurance was in force. As to the umbrella policies, the court found an intent to trigger umbrella coverage in excess of a retained limit only in cases where the primary policy does not provide coverage. The court held that no duty to defend could exist where the claims were not ones for which the excess or umbrella policies provided coverage and there was an underlying insurer obligated to defend.