Insolvency of a primary insurer represents a tremendous cause for concern for the next layer of excess and umbrella insurers. The Court of Appeals for the Tenth Circuit issued an important and favorable ruling for excess and umbrella insurers last month in Canal Insurance Company v. Montello, Inc., Civil Action No. 14-5039, 2015 U.S. Lexis 20625 (10th Cir. Nov. 27, 2015).
The insured, Montello, Inc., a distributor of oil-drilling products, distributed a “viscofier” – a mud drilling liquid agent – containing asbestos from 1966 to 1985. Individuals sued claiming injuries from asbestos exposure. Montello’s primary insurer from 1975 through 1984 was The Home Insurance Company, which was declared insolvent in 2003. Nothing was paid by Home for the asbestos claims.
Canal was an excess and umbrella insurer during part of the relevant time period and filed a declaratory judgment action against Montello seeking a ruling that it had no duty to defend or indemnify Montello. Montello counterclaimed and filed third-party complaints against Houston General Insurance Company, another excess insurer, and Continental Casualty Company, an umbrella insurer for Montello.
The Tenth Circuit ruled in favor of the insurers affirming summary judgment. Canal and Houston General had no obligation to drop down to defend or indemnify Montello when Home went insolvent. The Tenth Circuit’s reasoning as to Canal was a simple interpretation of Canal’s insuring agreement. Specifically, the court rejected Montello’s argument that Home’s insolvency was an “occurrence” for which the umbrella policies provided coverage. In addition, the Excess Clause of the Canal policy provided that the only way the policy’s coverage is triggered is when the primary insurer’s limits are exhausted by payment of loss. Because Home was insolvent, it made no payments exhausting the limits of its policies. The court stated that without a provision in the excess policies expressly stating that they would provide coverage in the event of a primary insurer’s insolvency, no coverage under the excess policies was afforded. Finally, the Tenth Circuit rejected Montello’s argument that the excess policies’ other insurance clause obligated Canal to step in when the primary insurer became insolvent. Other insurance provisions address concurrent policies at the same level of coverage, and not primary and excess policies providing coverage at different levels.
The Tenth Circuit’s ruling is important to excess and umbrella insurers. Significant claim exposure, such as in asbestos claims, that threaten the financial viability of primary insurers will, in turn, impact the next layer of insurance. Montello serves as a significant authority for excess insurers to use in attempts to beat back the push for drop down coverage when a primary insurer is insolvent.