The Tenth Circuit, applying Oklahoma law, held that the insolvency of a primary insurer, Home Insurance Co., did not require two umbrella insurers to “drop down” and provide defense and indemnity coverage to an asbestos defendant.    

Montello, Inc. (“Montello”), a distributor of products used in the oil-drilling industry, distributed a product containing asbestos from 1966 to 1985.  The Home Insurance Company (“Home”) issued primary coverage to Montello from 1975 to 1984.  Home was declared insolvent in 2003, without ever paying any claims on Montello’s behalf.  Canal Insurance Company and Houston General Insurance Company issued umbrella policies that provided insurance above the Home policies.

Montello argued that, because Home was insolvent, the umbrella insurers were required to “drop down” and provide primary coverage for the underlying actions.  The umbrella insurers refused.  The district court agreed with the umbrella insurers and Montello appealed.  The Tenth Circuit affirmed the district court’s ruling on numerous grounds.

First, the court held that the umbrella insurers had no duty to indemnify Montello for defense and indemnity costs under the “coverage section” of the umbrella policies.  The “coverage section” provided that “The company will indemnify the insured for all sums which the insured shall become legally obligated to pay as damages and expenses … by reason of liability … because of … personal injury caused by… an occurrence which takes place during the policy period ….”  Montello argued that as a result of Home’s insolvency, Montello had incurred expenses and may become legally obligated to pay damages.  Thus, the umbrella insurers had a duty to indemnify under the “coverage section.”  The court disagreed, because the “coverage section” only provided insurance for an “occurrence which takes place during the policy period.”  “Occurrence” was defined as “an accident which takes place during the policy period … which causes personal injury….”  According to the court, “the insolvency of the underlying insurer is not an occurrence as defined in the contract…Montello may be incurring defense expenses and may be legally obligated to pay damages, however, those expenses do not arise from an ‘occurrence’ as defined in the contract.”

Second, the court held that the “excess clause” of the umbrella policies was not triggered.  The excess clause provided that the umbrella insurers were only liable when the underlying insurer’s limits were reduced by payment of loss or “if the insurance afforded by such underlying insurance is inapplicable to the occurrence, the amount stated in the declarations as the retained limit.”  The court found that Home’s inability to pay was, by definition, not the payment of a loss.  In addition, Home’s inability to pay did not render the underlying insurance “inapplicable.”  According to the court, Home’s policies provided coverage for asbestos related claims, making them “applicable” to the occurrence.  Thus, “Home’s insolvency is not an occurrence to which the underlying policy is inapplicable because it is not an occurrence at all.”

The court also rejected Montello’s “reasonable expectations” argument, because that doctrine only applies to ambiguous language and there was nothing ambiguous about the provisions at issue.  The court did not directly address whether Montello could “pay the gap” created by Home’s insolvency and look to its umbrella insurers thereafter.  Canal ins. Co. v. Montello, Inc., No. 14-5039 (10^th Cir. November 27, 2015).