The U.S. Tenth Circuit Court of Appeals upheld a district court’s judgment in favor of several excess insurers finding that no duty exists under Oklahoma law for excess insurers to defend or indemnify an insured whose primary insurer is insolvent. Canal Ins. v. Montello, Inc., 2015 WL 7597429 (10th Cir. Nov. 27, 2015).
Several excess insurers filed a declaratory judgment action seeking a determination that no coverage existed where an insured’s primary insurer was insolvent. The district court ruled that the excess insurers had no duty to drop down and defend or indemnify the insured. Under Oklahoma law, a primary insurer has the primary duty to defend and indemnify the insured unless a policy provides otherwise. The excess policies provided that “the company will indemnify the insured for all sums which the insured shall become legally obligated to pay as damages and expenses, all as hereinafter defined as included within the term ultimate net loss.” The insured argued that as a result of the primary insurer’s insolvency it had incurred expenses and would become legally obligated to pay damages. The Tenth Circuit found the excess policies provided a defense only when “(1) the defense involves a claim for which the [excess insurer] Policies provide coverage; and (2) there is no underlying insurer obligated to defend,” and held an excess insurer’s duty to defend simply does not arise as a result of the primary insurer’s inability to defend.
The Tenth Circuit further found that the excess policies were triggered only where the primary insurer’s limits are reduced by “payment of loss” and that insolvency or the primary insurer’s inability to pay was not a “payment of loss.” The policies also cover “risks that the underlying policy does not cover,” and the Tenth Circuit held that the primary insurance must be inapplicable, not just unavailable.