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Excess Insurance Dropdown Question
Excess liability comes into play not until all other valid insurance is exhausted. If the primary limits have not been exhausted, but rather, are not available due to the insolvency of the primary carrier, is the excess insurer required to fill the void?
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How Insolvency of Primary Carrier Affects Excess Coverage
Summary: By definition and longstanding principle, excess liability insurance comes into play not until all other valid insurance has been exhausted in paying a loss. However, if the primary limits have not been exhausted due to payment of claims, but rather, are not available to apply to existing claims due to the insolvency of the primary carrier, is the excess insurer required to fill the void and drop down to pay the sums that the insured has become legally obligated to pay? This article explores the current legal thinking on the subject.
Topics covered:Legal decisions against drop downLegal decisions in favor of drop downConclusion
Legal Decisions against Drop Down
Legal opinion is split rather simply into those courts that favor drop down and those that do not. The overwhelming majority opinion is that the insolvency of the primary carrier does not mean that the insured’s excess carrier has to drop down to primary coverage. The following cases support that opinion.
One of the first decisions to go against the drop down idea was Moline v. U.S. Fire Insurance Company, 574 F.2d 1176 (4th Cir. 1978). The court of appeals in West Virginia stated that the excess carrier had agreed to pay only the ultimate net loss in excess of the retained limit and the retained limit was the primary policy amount. The terms of the excess policy referred to a fixed amount of primary insurance; this fixed amount had not been exhausted by reason of losses paid thereunder; therefore, the liability of the excess insurer was limited, the court decided, and would not be extended to the primary level of coverage.
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