Drop Down of Excess Coverage If the Primary Insurer Becomes Insolvent
Although insolvency of an insurer may be considered a relatively rare event, the effect of such insolvencies on policyholders can be substantial. Most jurisdictions have insurance guaranty associations that will provide some coverage in place of an insolvent insurer, but such coverage usually is limited as to the amount and type of reimbursement of losses that will be available. Affected policyholders should consider whether an excess insurer has an obligation to "drop down" and take the place of an insolvent primary insurer.
In considering whether an excess insurer has an obligation to "drop down" into the shoes of the insolvent primary insurer, language of the excess policy normally will control any determination (although any ambiguities normally will be construed in a policyholder's favor). Courts in the majority of jurisdictions considering the policy language have decided that excess insurers are not obligated to fill the shoes of insolvent underlying insurers.
Language in the declaration of coverage section of the excess policy usually provides for payment of amounts of liability in excess of "underlying insurance" or "collectible underlying insurance." Whether underlying insurance is "collectible" may create an ambiguity that the courts could resolve by concluding that insurance is not "collectible" from an insurer that has become insolvent and that excess insurance has become primary insurance.
Excess policies usually require maintenance of underlying insurance, and excess insurers presumably would argue that coverage by their policies should not be required if the underlying insurer becomes insolvent and is not available to pay underlying limits. From the insured's point of view, an additional ambiguity may arise from considering whether the underlying insurance was sufficiently maintained at least until the insolvency of the underlying insurer was declared and in any event was sufficiently maintained by the insured given that the insolvency could not have been foreseen by the insured.
Instances in which excess insurers have been required to drop down are limited. However, in the event of an insurer's insolvency, the insured should examine the particular language of any available excess policy in light of judicial precedent before concluding that drop down coverage should not be sought. Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.
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