“An unanticipated drop down that was not contemplated when issuing an excess policy is an anathema to an excess insurer,” writes Colin B. Willmott of Goldberg Segalla’s Global Insurance Services Practice Group in Law360 in a piece that analyzes a recent decision involving excess insurers’ obligations for coverage when an underlying primary insurer becomes insolvent. “When an excess insurer is required to drop down and pay those losses before they exceed the level at which excess coverage was designed to kick in, the excess insurer has lost the benefit of the bargain it struck with its insured.”
In the article, Colin looks at a recent Tenth Circuit Court of Appeals decision in Canal Insurance Co. v. Montello Inc. regarding drop down commitments — and excess insurers have reason to be optimistic. “While the risk of drop down continues to exist, insurers can take comfort in the fact that requiring an excess insurer to drop down when primary insurance is insolvent is clearly a minority view,” they write. “The list of cases and jurisdictions that have rejected policyholders’ attempts to force a drop down is long.”
However, “…policyholders have been forced to resort to arguments based on increasingly creative interpretations of the governing policy language to argue that excess policies should drop down.” In Montello, the court dismissed each of those arguments, making it yet another case in a growing list that rejects such drop down.
“The rationale for rejecting drop down has a strong foundation in the core concept of excess insurance,” writes Colin. “Forcing an excess insurer to drop down would run contrary to the bargained-for contract between the policyholders and excess insurer.”