In Canal Insurance Company v. Montello, Inc., No. 14-5039, 2015 WL 7597429 (10th Cir. Nov. 27, 2015), the US Court of Appeals for the Tenth Circuit, applying Oklahoma law, affirmed summary judgment in favor of excess liability carriers with respect to a “drop down” issue. Specifically, the appellate court ruled that the excess policies did not drop down as a result of the primary insurer’s insolvency. Id. at *6. The court also found that the policyholder did not meet its burden to prove the terms of its missing insurance policy. Id. at *7.
The dispute arose when the policyholder was sued for injuries arising out of exposure to asbestos in the policyholder’s products. Id. at *1. The primary insurer was declared insolvent before paying any claims. Id. One of the policyholder’s excess insurers filed a declaratory judgment action asserting it had no duty to defend or indemnify the policyholder. Id. The policyholder counterclaimed, seeking a contrary declaration and alleging breach of contract. Id. The policyholder eventually asserted the same claims against two other excess insurers. All three excess insurers moved for summary judgment. Id.
The Tenth Circuit noted that the issue had not been directly addressed under Oklahoma law. Id. at *2. After canvassing decisions from other jurisdictions in an effort to predict what Oklahoma courts would do—notably cases from the Fifth Circuit, Fourth Circuit, and the Court of Appeals of Ohio, id.at *3—the appellate court determined that the primary insurer’s insolvency did not constitute an “occurrence,” defined as an accident taking place during the policy period, under the relevant policies. Id. at *2. Agreeing with the district court, the Tenth Circuit held that the excess insurers did not insure the insolvency of the policyholder’s primary insurer; therefore, the excess coverage would not drop down. Id. at *6. The court explained that the policies’ excess clauses were not triggered because the underlying insurer’s limits were not reduced by payment of “loss,” as required by the policies’ terms. Id. at *3. The court cited to cases from the Fourth and Fifth Circuits as support for the view that an underlying insurer’s inability to pay is not considered payment of loss. Id. The court rejected the policyholder’s argument that, due to the primary insurer’s insolvency, the underlying limits of liability referenced in the excess policies were no longer applicable because there was nothing left to exhaust. Id. The court also rejected the policyholder’s position that because the policy did not expressly prevent drop down coverage, the inverse must be true, i.e., insolvency must trigger the excess insurers’ drop down obligation. Id. The Tenth Circuit also relied on Fifth Circuit case law to find that courts commonly hold that excess insurers have no obligation to drop down even if the contract does not expressly prohibit it. Id.
The Tenth Circuit also rejected the policyholder’s argument that the underlying insurer’s insolvency rendered the underlying insurance “invalid” and “uncollectible,” and thus triggered coverage under the policies’ “Other Insurance” clauses. Id. at *4. The court held that the “isolated use” of these words, which were found in the Other Insurance clauses, was “not enough to transmogrify the policy into one guaranteeing the solvency of whatever primary insurer the insured might choose.” Id.(internal quotations omitted). Similarly, the court rejected the policyholder’s request that the court apply the reasonable expectations doctrine, because the court did not consider the policies to be ambiguous. Id. at *6. The court noted, however, that even if it had determined that an ambiguity existed, Oklahoma law would likely comport with the clear majority rule that an excess insurer is not required to drop down merely because a primary insurer becomes insolvent. Id. at *6. The court explained that “[a] reasonable person in the position of the insured would have understood the contract to provide excess and umbrella coverage, not coverage insuring the insolvency of the primary insurer.” Id.
With respect to whether a policy existed at all, the appellate court held that the district court properly found that the policyholder failed to sustain its burden to establish the terms of its lost policy. Id. at *7. The appellate court was unpersuaded by the policyholder’s expert, because he admitted that there were multiple carrier forms available at the time of underwriting and the missing policy could have been modified to add or limit coverage. Id.
Finally, the Tenth Circuit upheld the district court’s dismissal of the case due to a lack of justiciable controversy. Id. at *8. The court explained that because the excess policies did not drop down simply due to the insolvency of the primary insurer, the “issues are hypothetical until the underlying primary insurance is exhausted by payment of loss . . . [which] is the point at which the excess insurance attaches.” Id.
Montello is significant because the Tenth Circuit predicted that Oklahoma law would align with the majority view that an excess insurer’s obligations do not “drop down” merely because of the insolvency of a primary insurer. The Tenth Circuit’s decision is well-researched and thoroughly reasoned on multiple grounds, and thus may be extended to other courts located within that circuit. Additionally, the Tenth Circuit has helpfully reaffirmed that the burden of proof remains on the policyholder to establish the terms of a lost policy, and that a policyholder’s expert cannot overcome this burden when there are too many unknowns associated with multiple forms used during the time of underwriting.