In an adversary proceeding brought by a liquidating company to determine the availability of coverage under the debtor's insurance policies, the United States District Court for the District of Delaware has held that the insolvency of an underlying insurer did not affect an excess carrier's obligation for claims within its own layer of coverage. In re Integrated Health Services, Inc., 2007 WL 2687593 (D. Del. Sept. 12, 2007). Although the adversary proceeding was initially filed in bankruptcy court, it was consensually withdrawn to the district court.
The excess policy stated that coverage is available "only after all underlying insurance has been exhausted by payment of the limits of such insurance" and that coverage was not triggered when "any underlying insurance does not pay a loss for reasons other than exhaustion of an aggregate limit of insurance." The policy further provided that when underlying insurance is "unavailable due to bankruptcy or insolvency of an underlying insurer . . . then the insurance afforded by this policy shall apply in the same manner as if such underlying insurance and limits of liability had been in effect, available, so maintained and unchanged."
The excess carrier argued that its policy was not triggered since the primary layer was not exhausted by actual payment due to the underlying carrier's insolvency. The court found that the excess carrier's interpretation would require reading out of the policy the provision that the bankruptcy or insolvency of any underlying insurer does not affect the excess insurer's obligations within its own layer of coverage. The court therefore ruled that while the excess carrier is not obligated to drop down to cover unpaid claims within the underlying layers of coverage, the underlying insurer's insolvency has no effect on the excess carrier's obligation to pay claims within its own layer of coverage.