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.

The facts of this case are nearly identical to the facts in the following case from Texas, Associated Electric & Gas Insurance Services, Limited v. Border Steel Rolling Mills, Inc., 2005 WL 3068787 (W.D. Tex.). In both cases, an injured party sought recoupment from an excess insurance carrier after an insured tortfeasor experienced bankruptcy. The Molina court denied recovery based on the plain meaning of an insurance policy similar to the one at issue in the Border Steel case. The Border court declared that the leading case on the issue is the Molina decision and that that decision provided persuasive guidance as to the correct interpretation of the insurance policy. The correct interpretation is that an excess insurance policy provider is not obligated to provide indemnity when an underlying insurance carrier becomes insolvent. In this case, Border Steel became insolvent and since it had a self-insured retention of $500,000, there was no way it could satisfy the underlying SIR obligation. Therefore, based on the insuring agreement language of the excess policy, the excess insurance policy would not be triggered. There would be no drop down action required in this instance.

More directly to the point was a New York case wherein the court rejected the argument that, as a result of the primary insurer's insolvency, the excess insurer could then be substituted for the underlying carrier. Prince Carpentry, Inc. v. Cosmopolitan Mutual Insurance Company, 479 N.Y.S.2d 284 (N.Y. Sup. Ct. 1984) held that the excess policy was triggered by the exhaustion of the primary policy limits only by reason of losses paid thereunder. The excess insurer was not insuring against the insolvency of the primary insurer.

A California court of appeals affirmed a trial court's opinion that the excess insurer had no duty to drop down and take the place of the insolvent primary carrier in Span, Inc. v. Associated International Insurance Company, 277 Cal. Rptr. 828 (Cal. App. 2d Dist. 1991). In that case, the appeals court found that the excess insurer had no duty to provide first dollar coverage upon the insolvency of the primary insurer because that is not what the language of the policy required. The excess policy provided coverage in the event of reduction or exhaustion of an underlying policy “by reason of losses paid.” The court said that this language showed “unambiguous contemplation of exhaustion of the underlying insurance only by payment.” In other words, only the payment of the underlying limits of liability would trigger the excess insurer's insuring agreement; insolvency of the primary carrier was excluded, indirectly but unambiguously, as a means of exhaustion of the underlying policy limits.

In Wurth v. Ideal Mutual Insurance Company, 34 Ohio App.3d 325 (Ohio App. 1987), an Ohio court of appeals said the fact that an insurer affords excess liability does not in and of itself impose upon that insurer the risk of a primary's insolvency. To so hold would impose a burden on the excess insurer to scrutinize the financial stability of every primary insurer and place the risk of loss on the excess carrier instead of the insured. This would be unjust and would be a rewriting of the excess insurer's contractual undertaking. Furthermore, the court decided, the unambiguous language of the excess policy precluded that policy from dropping down to the primary level upon the insolvency of the primary insurer. The court would not order the excess liability to drop down when the policy itself declared it would not do so.

This case was mentioned in another case from Ohio , although the outcome was not the same. In Rushdan v. Baringer, 2001 WL 1002255 ( Ohio App. 8 Dist), the Ohio Insurance Guaranty Association (OIGA) appealed the decision of a common pleas court that Rushdan was entitled to recover an additional sum of money under the terms of an excess or umbrella policy that had been issued to Baringer; this was based on a medical malpractice claim. Baringer had a primary liability policy and an excess policy issued by Physicians Insurance Exchange Mutual, but after this company was declared insolvent, the OIGA assumed the defense of the claims against Baringer. OIGA stipulated that the value of Rushdan's claims totaled $1,300,000.00, but in accordance with statutory limits, OIGA only paid $300,000 to Rushdan; Rushdan sued to recover more based on the coverage provided under the excess liability policy. OIGA argued that Rushdan was not entitled to recover under the excess policy because she only received $300,000 and not the full $1 million limit under the primary policy.

The appeals court noted that Rushdan had a legitimate claim and that she would have been paid the limits of the primary policy and the excess policy except for the bankruptcy of the primary carrier. The court found that OIGA assumed the place of the insolvent primary carrier and was, by statute, to provide insurance coverage to compensate valid claims. This was a valid claim and both parties had stipulated that the reasonable settlement value exceeded the primary policy limits. It was true that based on the Wurth decision, excess insurance does not drop down unless the contract of insurance provides for this action. However, the court pointed out that Rushdan was entitled to the policy limits of both the primary policy and the excess policy and but for the insolvency of the primary insurer, these sums would have been paid. By statute, OIGA assumed the obligations of the insolvent insurer to provide coverage for a covered claim. Merely because OIGA is monetarily limited by statute as to the amount it will pay on a covered claim should not render meaningless the fact that Rushdan was entitled to coverage under the excess policy. The court found that OIGA could not use the primary carrier's insolvency to shield its obligation to pay a covered claim under the excess policy.

In North Carolina Insurance Guaranty Association v. Century Indemnity Company, 444 S.E.2d 464 (N.C. App. 1994), the North Carolina Supreme Court declared that the fundamental purpose of excess insurance is to protect the insured against excess liability claims and not to insure against the underlying insurer's insolvency.

In Highlands Insurance Company v. Gerber Products Company, 702 F. Supp. 109 (D. Md. 1988), a U.S. District Court said that “excess carriers ordinarily are not required to provide drop down coverage in the event of the insolvency of an underlying insurer. An exception to this general rule exists only where an insurer has used language in its policy which creates a genuine ambiguity as to scope of coverage.” This thinking was reiterated in another case from the U.S. District Court, McGirt v. Royal Insurance Company of America , 399 F.Supp.2d 655 (D. Md. 2005).

In this case, a self-insured interstate motor carrier's driver and the driver of a passenger vehicle that was struck by the carrier's tractor-trailer filed a declaratory judgment action asking the court to force the excess insurer to defend and indemnify the carrier's driver as to any and all claims for injuries and damages. The court said that in accordance with the Highlands decision, an insurance policy is to be read like any contract and the words that it contains are to be given their ordinary meaning. The policy in question declared that the insolvency, bankruptcy, receivership, or any refusal or inability to pay of the insured or any insurer would not operate to increase the excess insurer's liability; this unambiguous language explicitly precludes any conclusion that the bankruptcy of the insured or the primary insurer forced the excess insurer to drop down and defend or indemnify the driver.

It should be noted that the court did find that the excess insurer was required to indemnify the driver, but this was based on the regulatory minimum requirements set up by MCS-90. MCS-90 made the excess carrier independently liable as a surety. The excess insurer was not required to step into the shoes of the insured or the primary insurer and there was no duty to defend based on the policy language; however, the MCS-90 endorsement, required of interstate motor carriers by federal law, did mean that the excess insurer was liable for up to $1 million as a surety.

It was exactly the type of loophole the Federal court found in the Highlands case that led other courts to hold that the obligations of the insolvent primary insurer were imposed upon excess insurers.

Donald B. MacNeil, Inc. v. Interstate Fire and Casualty Company, 477 N.E.2d 1322 (Ill. App. Ct. 1985) was an Illinois case in which an appellate court looked to the policy and found ambiguous language. In this case, the excess insurer's liability applied in excess of the “amount recoverable” under the underlying insurance. The insured claimed the amount recoverable was zero since the primary carrier was insolvent; the excess insurer said the amount recoverable was the face value of the primary policy regardless of the insolvency of the primary insurer. The court, after analyzing the policy, decided that the words “amount recoverable” were ambiguous and that the excess carrier had to drop down and assume the duties of the primary carrier since any description of underlying insurance that is subject to more than one interpretation includes the risk of the primary carrier's insolvency.

This case was cited in a decision from the Seventh Circuit Court of Appeals, and although the outcome of that case was different from the MacNeil decision, the point made is that the language of the excess policy can drive the decision. The case is Premcor USA, Inc. v. American Home Assurance Company, 400 F.3d 523 (7th Cir. 2005). The court of appeals in this case held that the umbrella insurer was required to cover the insured's costs in defending wrongful death actions, but only in excess of limits of the underlying liability, regardless of the underlying insurer's insolvency. In this case, an endorsement to the umbrella policy provided that the liability of the excess insurer would not be increased by the inability of the insured or the underlying insurer to pay, whether by reasons of insolvency, bankruptcy, or otherwise. This language was deemed to be critical in determining when the umbrella insurer's obligation to provide coverage began. Premcor wanted the MacNeil decision to control its case, but the appeals court said that this insurer's policy offered the guidance that was lacking in the MacNeil case. The policy language clearly did not call for the umbrella insurer in this case to drop down and pay all defense costs. The proper interpretation of the policy language is that American Home Assurance was only to cover costs in excess of the limits of the underlying policy. Therefore, American Home was not required to pay the defense costs that Premcor incurred in the underlying litigation.

In a case that was similar to MacNeil, an excess insurer challenged the decision of the United States District Court in Washington that had granted an insolvent insurer's motion for summary judgment, and had declared that the excess insurer was liable to provide coverage in place of the primary carrier. The case is Federal Insurance Company v. Scarsella Brothers, Inc., 931 F.2d 599 (9th Cir. 1991). The circuit court upheld the district court's ruling. The court found that because the excess insurer agreed to provide coverage in excess of the underlying insurance that was exhausted, the excess insurer assumed the risk of the primary carrier's insolvency and was obligated to drop down to cover the liability. This was due to the fact that, in the excess policy, the term “exhausted” was not defined. This meant that the policy provision was fairly susceptible to two different but reasonable interpretations and so, the policy was ambiguous. This ambiguity over the meaning of the term “exhausted” required the policy to be interpreted against the excess insurer.

A case from the district court in Massachusetts cited the Federal Insurance case, but here again, the outcome was different due to the policy language. In Barrett v. Chin, 843 F.Supp. 783 (D. Mass. 1994), the district court held that the language in the Federal policy clearly indicated that the policy did not drop down to provide coverage and that liability commenced only when all underlying insurance was exhausted. The court noted that, under Massachusetts law, if the excess insurance policy was found to be ambiguous, it would drop down to provide coverage; however, that was not the case here.

In two other cases, the excess carriers, pursuant to court-construed ambiguous language in their policies, were decreed to have a duty to indemnify the insureds by dropping down to replace the insolvent primary insurers. These cases are: Bernard v. Royal Insurance Company, 586 So. 2d 607 (La. Ct. App. 1991), a Louisiana appeals court case, and Coca Cola Bottling Company v. Columbia Casualty Insurance Company, 14 Cal. Rptr. 2d 643 (Cal. App. 1992), a California appeals court case.

In summary, the ambiguity of policy terms now forms the strongest basis upon which to support the drop down idea. Where the excess carrier had to drop down and take the place of the primary carrier, liability was found because the excess policy contained terms like “amount recoverable” or “amount collectible”, or talked only about “exhaustion of limits.” These are terms that courts could construe as being ambiguous. Conversely, where policy terms refer to a fixed amount of primary coverage or declare that exhaustion of underlying insurance is only by payment of claims, courts limit liability of the excess insurer to the amount in excess of the specified underlying limit; in other words, no drop down.

Therefore, excess insurers need to insert explicit language into excess liability policies, even going so far as to state the intent not to drop down when primary insurers become insolvent. This should be done, even though a majority of courts today refuse to order drop down, so that policy ambiguity can not be used to force an excess carrier into becoming the guarantor of the solvency of the primary insurer. That is not the purpose of excess insurance.