such portion of the loss as was actually
in excess of the limits of those policies."
Id. The court weighed the implications of
construing the exhaustion clause "[t]o
require an absolute collection of the
primary insurance to its full limit," finding
that such interpretation would often result
in "delay, promote litigation, and prevent
an adjustment of disputes, which is both
convenient and commendable." Id.
A more recent California appellate
case held that Zeig did not apply where
an excess policy had specific clauses
regarding full payment by the primary
layer of insurance prior to the triggering
of the excess carrier's obligations.
Qualcomm, Inc. v. Certain Underwriters at
Lloyd's, London. 161 Cal. App. 4th 184,
199 (2008). The court there found that
Zeig and its progeny contained "the policy
rationale favoring the efficient settlement
of disputes between insurers and insureds,
a rationale that in our view cannot
supersede plain and unambiguous policy
language [citations omitted]." Id.
Insolvency of the primary layer
of insurance can certainly affect the
ability of tort claimants to collect
proceeds, thereby impacting exhaustion
of underlying policy limits. A Seventh
Circuit case followed an Illinois state
court decision in noting that "in cases of
insolvency, the retained limit language
means that an excess insurer is not
obliged to pay costs that would otherwise
be borne by the insolvent insurer, but
instead is only responsible for providing
coverage in excess of the underlying
policy limits. Premcor USA, Inc. v. Am.
Home Assur. Co., 400 F.3d 523 (7th
Circuit 2005) citing Donald B. MacNeal,
Inc. v. Interstate Fire & Casualty Co.,
477 N.E.2d at 1325 (quoting Molina v.
U.S. Fire Ins. Co., 574 F.2d 1176, 1178
(4th Cir. 1978)). This holding aligns
with the Zeig decision in that excess
coverage, depending on the specific policy
language, only requires the excess carrier
to pay anything above the primary layer's
coverage amount, but not to "drop down"
and cover from the first dollar owed.
dangerously, some courts have liberally
interpreted excess policy language with
the terms "collectible" or "recoverable"
to require the excess insurer to drop
down in the event of the primary insurer's
insolvency and cover from dollar one
of the primary policy. In a widely
publicized Massachusetts Supreme Court
case, the court resolved an ambiguity
resulting from the aforementioned
terms in favor of the insured, requiring
an excess carrier to "drop down" to
indemnify an insolvent primary insurer.
Gulezian v. Lincoln Ins. Co., 399 Mass.
606, 611-612 (1987). Importantly, the
court there also noted that "[i]t seems
likely that the [excess carrier] did
not contemplate the insolvency of a
scheduled underlying insurer in drafting
its policy. The phenomenon of the
insolvency of an insurer is not, however,
so rare as to excuse that omission of
attention to detail." Thus, the court does
place some burden on the excess carrier
to write policies with some care to avoid
ambiguities resulting in an unintended
coverage requirement. See also Reserve
Ins. Co. v. Pisciotta, 640 P.2d 764, 772
(Cal. 1982); MacNeal, supra; Lechner
v. Scharrer, 145 Wis. 2d 667 (1988).
There are a number of courts across the
country that have agreed in principle
with Gulezian and its progeny and have
found drop down coverage to exist under
similar circumstances.
The idea behind these rulings is that
when the excess carrier uses such terms
as "collectible" or "recoverable" in
describing the lower limit in its excess
policies, from the insured's point of the
view, the excess carrier will only provide
excess coverage when the primary
limit is collectible or recoverable, but
presumably will provide primary or drop
down coverage when it is not collectible
or recoverable. While the excess
policies containing this language do not
specifically say that, courts have held
that as an excess carrier, it is imperative
to avoid any ambiguity that might lead
the insured to believe there could be
primary or "drop down" coverage by
insolvency. See also Morbark Industries
v. Western Employers Insurance, 170
Michigan App. 603, 429 N.W.2d 213
(Mich. Ct. App. 1988).
Other courts have found exactly the
contrary. In a Seventh Circuit ruling,
the court concluded that the excess
carrier "did not contract to bear the risk
of the primary carrier's insolvency, nor
do its premiums reflect the cost that the
assumption of this risk would entail."
Zurich Ins. Co. v. Heil Co., 815 F.2d
1122, 1126. In Radiator Specialty Co. v.
First State Ins. Co., the court similarly
held that "[i]t would simply make no
sense to hold that an `excess' insurer
should be liable as a primary insurer
due to a primary insolvency. This would
impose a liability on the `excess' insurer
which is not bargained for in its premium
that is based on the lesser risk which an
excess carrier agrees to assume." 651 F.
Supp. 439, 442 (1987).
While state and federal decisions
remain split and incongruous on the
issue depending on the federal circuit
or the state jurisdiction, it is clear
that most courts rely heavily on an
interpretation of the policy language
itself to determine the outcome in these
declaratory judgment actions. As such, it
is imperative that excess carriers employ
policy language that will protect them
from having to subsume the risk and cost
of the underlying policy and to avoid
drop down coverage from dollar one.
There is no doubt that insolvencies of
primary carriers and self-insured entities
are not only possible but probable in this
economic environment. Excess carriers
who continue to incorporate ambiguous
language in their policies on the lower
limit of coverage open themselves up
to insurance coverage litigation as well
as possible indemnity exposure for
large sums not contemplated by their
premiums.