The Question at Hand
Imagine your primary insurer declares insolvency while handling your claim. The policy still technically covers your loss, but there's no money to back it. Does your excess carrier have to step in and pay from the first dollar?
This question is crucial to understanding how insurance towers function. When you layer coverage, you're assuming who pays what and when. The Colorado Supreme Court's recent ruling highlights the importance of these assumptions.
The case involved A.R. Wilfley & Sons, a pump manufacturer facing asbestos claims. Reliance Insurance Company held the primary layer, while Federal Insurance Company, part of Chubb, provided excess coverage. When Reliance went insolvent, Wilfley argued that the claims were now "not covered" under the primary policies, thus triggering Federal's obligation to provide first-dollar defense and indemnity.
Federal disagreed, and the court sided with them.
This ruling aligns Colorado with federal appellate courts in the Fifth, Tenth, and Eleventh Circuits, as well as California's appellate court. Yet, the debate continues because the stakes are high and policy language can be ambiguous.
The Case for Drop-Down Obligations
The argument for requiring excess carriers to step in is based on practical realities. When you buy insurance, you're seeking protection against loss, not just a promise on paper. If your primary insurer fails, you're left exposed through no fault of your own. You paid for full coverage, and the tower should function as a unit.
Proponents argue that if a claim is covered by an insolvent policy, is it really covered at all? The difference between "covered in scope" and "covered in practice" seems trivial when facing a large judgment. You chose insurers based on their ratings at the time, but market conditions changed. Should you bear that risk alone?
There's also an equity argument. Excess carriers know primary insurers can fail and price their policies accordingly. When they draft language stating they'll respond to claims "not covered" by underlying policies, they create ambiguity. Courts should resolve this ambiguity in favor of the policyholder, who didn't draft the contract.
From a risk management perspective, forcing drop-down obligations could create the right incentives. Excess carriers might monitor the financial health of primary carriers more closely and push for stronger insurer selection criteria.
The Case Against Drop-Down Obligations
The counterargument is that insurance contracts allocate specific risks for specific premiums. Excess carriers price their policies based on attachment points, not the creditworthiness of every insurer below them. Forcing them to drop down turns them into financial guarantors of your primary carrier choices, a risk they never underwrote.
The Colorado Supreme Court focused on this distinction. The Federal policies used "collectible" for unscheduled insurers but "covered" for scheduled carriers like Reliance. If those terms meant the same thing, the collectibility language would be redundant. Courts don't interpret contracts to make provisions meaningless.
You control which primary insurers you select. When you choose a carrier, you're making a credit decision. If that carrier fails, you've experienced the downside of your own selection risk. Shifting that risk to the excess carrier rewrites the deal.
This position also argues that market function depends on clear risk boundaries. Excess carriers can't price uncertainty about whether they're insuring the loss or the solvency of carriers they don't control. If drop-down becomes the default, excess premiums rise for everyone, or carriers exit the market entirely.
The court noted that Wilfley had relied on a 1989 Colorado Court of Appeals decision that found drop-down obligations based on equity, not contract language. The Supreme Court overruled that precedent, emphasizing that equity can't override clear contract terms.
Practical Implications for Your Team
In practice, most coverage counsel advise clients to assume excess carriers won't drop down unless explicitly stated in the policy. The trend across jurisdictions supports this view. When building an insurance tower, you're buying defined layers, not a pooled guarantee.
This means your primary carrier selection is crucial. You can't treat it as a commodity purchase based solely on price. Financial strength ratings matter. Consider A.M. Best ratings, reserve reviews, and reinsurance quality. Some risk managers now include primary-insurer solvency monitoring as part of their annual insurance review.
Pay attention to "collectibility" provisions in excess policies. If your excess carrier uses that term, clarify what it means. Does it apply only to unscheduled insurers? Does it require the underlying policy to be both in-scope and financially accessible? Get it in writing during placement negotiations, not during a claim.
Another emerging practice is building redundancy into your tower. If you're facing long-tail exposures like asbestos or environmental liability, consider splitting primary layers across multiple carriers or adding a buffer layer between primary and excess. It costs more upfront but reduces single-point-of-failure risk.
Our Take
The Colorado Supreme Court made the right call. Excess insurance isn't a backstop for primary-insurer credit risk. It's a defined layer that responds when underlying coverage is exhausted or falls outside its scope. Treating insolvency as equivalent to non-coverage would fundamentally alter the risk transfer mechanism that makes insurance towers work.
That said, the ruling places more responsibility on you as the insurance buyer. You can't assume the tower will function seamlessly if a carrier fails. Your due diligence on primary insurers matters as much as your coverage terms. Review financial strength annually, not just at renewal. If a primary carrier's rating drops, consider whether you need to replace them before a claim hits.
The tradeoff is real. Clearer contract interpretation means more predictable pricing and more stable markets. But it also means you bear more of the insurer-selection risk. That's not unfair, it's just explicit. You're better off knowing where the boundaries are than discovering them mid-claim.
