(a) Underlying limit — an amount equal to the limits of liability indicated beside the underlying insurance listed in the schedule of underlying insurance, plus the applicable limits of any other underlying insurance collectible by the insured;
(b) Retained limit—The amount specified... as the result of all occurrences not covered by said underlying insurance...
The defense provision of the policies stated:
(b) With respect to any occurrence not covered by the underlying policies listed in the schedule of underlying insurance, or any other underlying insurance collectible by the insured, but covered by the terms and conditions of this policy the Company shall, in addition to the amount of ultimate net loss payable;
(1) defend any suit against the insured...;
(2) pay all expenses incurred by the Company, all costs taxed against the insured in any such suit and all interest on the entire amount of any judgment therein which accrues after entry of the judgment...

Wilfley argued that because benefits under the Reliance policies had become uncollectible, its claims were "not covered" by those policies, so Federal had to drop down and provide the primary coverage. Federal countered that "not covered" means whether an occurrence falls within the scope of the underlying policies, not whether the primary insurer can pay.

After exhausting Great Northern's limits, Wilfley tendered the asbestos suit to Federal. Federal agreed to defend under a full reservation of rights, preserving its ability to deny coverage later and seek repayment of defense costs.

Federal did indeed later decline coverage. Wilfley sued in the U.S. District Court for the District of Colorado, alleging breach of contract, seeking declaratory relief, invoking estoppel, and asserting common law insurance bad faith. Federal counterclaimed for declaratory relief and monetary damages and moved for judgment on the pleadings.

The U.S. District Court for the District of Colorado certified a question to the Colorado Supreme Court asking if an underlying insurer becomes insolvent, "is the excess umbrella carrier obligated to 'step into the shoes' of the insolvent carrier by providing first-dollar indemnity and defense costs to the insured that otherwise would have been paid by the insolvent carrier?"

Colorado Supreme Court

Wilfley argued that "covered" under the Federal policies encompassed collectability, meaning that if a claim is not collectible, such as when an insurer goes insolvent, it is also "not covered." Wilfley believed that since Reliance went insolvent, claims against it were not collectible, so Federal should drop down and provide that coverage.

The court disagreed, finding that "collectible" modified Federal's obligations with respect only to unscheduled underlying insurance, citing three policy provisions in support. First, the "defense" provision distinguished between claims covered by scheduled underlying insurance and insurance collectible from unscheduled insurers.

The policy stated Federal would provide a defense for claims "not covered by the underlying policies listed in the schedule of underlying insurance, or any other underlying insurance collectible by the insured, but covered by the terms and conditions of this policy." The Reliance policy was scheduled, differentiating it from "other underlying insurance collectible."

The second provision, the "underlying limit" provision, defined the insured's underlying limit as, "an amount equal to the limits of liability indicated beside the underlying insurance listed in the schedule of underlying insurance, plus the applicable limits of any other underlying insurance collectible by the insured." Again, this provision differentiated between underlying scheduled insurance and other underlying insurance collectible.

Finally, the "other insurance" provision only references collectability in relation to insurance available from unscheduled underlying carriers. The court found that the provisions were deliberately drafted in that way to explain what coverage is provided. The court stated the policies "repeatedly used 'covered' to describe occurrences falling within the scope of the scheduled underlying insurance and 'collectible' to describe insurance available from unscheduled insurers."

The court also pointed to the policies' "Maintenance of Underlying Insurance" condition, which required Wilfley to keep the scheduled underlying policies in full effect. The condition showed the insurer's intent, stating that if Wilfley failed to maintain the underlying insurance, Federal's liability is limited to what it would have been if Wilfley complied with the condition.

The court also looked to other decisions by federal and state courts, which consistently found that "not covered" meant occurrences falling outside of a policy's scope of coverage and not an underlying insurer's inability to pay a covered claim.

Wilfley pointed to Deisch & Marion, P.C. v. International Ins. Co., a 1989 case where a Colorado Court of Appeals required an umbrella/excess insurer to defend after the primary coverage was uncollectible due to insolvency.

The Supreme Court disagreed with the ruling and overruled it to the extent that it conflicted with the current ruling. The court stated, "The division offered no justification for allowing non-collectability to transform an occurrence covered by a scheduled underlying policy into one 'not covered' by that policy. What's more, it appears to have welded coverage and collectability into a single concept."

Editor's Note

In response to the certified question, "If an underlying insurer becomes insolvent is the excess umbrella carrier obligated to 'step into the shoes' of the insolvent carrier by providing first-dollar indemnity and defense costs to the insured that otherwise would have been paid by the insolvent carrier?", the court answered in the negative.

The court held that Federal was not required to step into the shoes of a scheduled, insolvent underlying carrier and indemnify Wilfley or provide defense costs for the asbestos suits. The suits were covered by Reliance's scheduled policies, and Reliance's insolvency did not turn them into "not covered" occurrences, so Federal's policies are not triggered. "Not covered" as used in the policies addressed the scope of coverage and not the collectability of payment for a covered occurrence.

Read More:
Court Determines No-Fault Auto Carrier Takes Priority Over Guaranty Association