Opinion ID: 1802432
Heading Depth: 3
Heading Rank: 1

Heading: Whether the LMCC Catastrophe Policy provides drop down coverage to Caldwell to fill the gap in coverage caused by Legion's insolvency.

Text: ¶ 13. In characterizing the relative positions of the parties, the trial court aptly stated, we are asked to declare the winner in a game of grammatical tug-of-war between an excess insurer and an insured over whether an excess insurance policy `drops down' in place of a policy issued by a now-insolvent primary insurer. Caldwell argues that the Catastrophe Policy is ambiguous and should be construed against the drafter and in favor of the insured. LMCC argues that the Catastrophe Policy unambiguously precludes drop down coverage. ¶ 14. Under North Carolina law, when policy language is unambiguous, there is a `duty to construe and enforce insurance policies as written, without rewriting the contract or disregarding the express language used.' Eatman Leasing, Inc. v. Empire Fire & Marine Ins. Co., 145 N.C.App. 278, 281, 550 S.E.2d 271, 273 (2001) (quoting Fidelity Bankers Life Ins. Co. v. Dortch, 318 N.C. 378, 380, 348 S.E.2d 794, 796 (1986)). However, judicial construction is necessary `[w]here the language used in the policy is ambiguous and reasonably susceptible to more than one interpretation.' Eatman Leasing, 550 S.E.2d at 273 (quoting Allstate Ins. Co. v. Runyon Chatterton, 135 N.C.App. 92, 94, 518 S.E.2d 814, 816 (1999)). Any ambiguity in an insurance policy as to whether certain provisions impose liability should be resolved in favor of the insured. Williams v. Nationwide Mut. Ins. Co., 269 N.C. 235, 238, 152 S.E.2d 102, 105 (1967). Furthermore, exclusions from liability are not favored, and are to be strictly construed against the insurer. Eatman, 145 N.C.App. at 281, 550 S.E.2d at 273. We will discuss and analyze the disputed provisions separately.
¶ 15. The parties dispute whether the term sums actually payable refers to the limit of $1,000,000 under Legion's policy or to the actual amount Legion was able to pay, which was zero due to insolvency. The provision states: [LMCC] will pay only the amount in excess of the sums actually payable under the terms of the `underlying insurance.' No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under Supplementary Payments. In the event the duty of the underlying insurer to defend the insured against a `suit' ceases solely because the applicable limit of insurance is used up in the payment of judgments, then we shall assume the duty for such defense. (Emphasis added). ¶ 16. Caldwell argues that the term sums actually payable is ambiguous and should be liberally construed in its favor. On the other hand, LMCC argues that the phrase sums actually payable should be read in the context of the entire policy, and when doing so, the phrase unambiguously provides coverage only in excess of the primary insurer's coverage. The trial court agreed with LMCC, stating, it follows that in reading the entire policy the Court finds that the meaning of [the term `sums actually payable'] is clearly qualified at Section V, part 9, `Underlying Insurance' to preclude any form of `drop down' coverage from the insurance policy issued by [LMCC]. Section V, part 9 of the policy, dealing with Commercial Catastrophe Liability Conditions and Underlying Insurance states that [i]n the event of bankruptcy, insolvency or financial impairment of the insurance company that issued the `underlying insurance,' [LMCC] shall be liable under Coverage A only to the extent we would otherwise have been liable.  (Emphasis added). ¶ 17. In construing the terms of an insurance policy, the North Carolina Supreme Court has stated [w]here the immediate context in which words are used is not clearly indicative of the meaning intended, resort may be had to other portions of the policy and all clauses of it are to be construed, if possible, so as to bring them into harmony. Wachovia Bank & Trust Co. v. Westchester Fire Ins. Co., 276 N.C. 348, 355, 172 S.E.2d 518, 522 (1970). Furthermore, [e]ach word is deemed to have been put into the policy for a purpose and will be given effect, if that can be done by any reasonable construction in accordance with the foregoing principles. Id. ¶ 18. The North Carolina Court of Appeals has addressed similar disputes regarding whether an excess insurer had an obligation to provide drop down coverage when the primary insurer became insolvent. [5] In Newton v. U.S. Fire Ins. Co., 98 N.C.App. 619, 623, 391 S.E.2d 837, 838-39 (1990), the North Carolina Court of Appeals examined a trial court's finding that an excess insurer's umbrella policy dropped down to primary coverage. [6] Caldwell contends that Newton is not applicable because it is factually distinguishable and did not attempt to define the term sums actually payable. However, we have found no case that deals with the term sums actually payable, and therefore, we rely on cases which analyze the use of similar terms in determining whether an excess insurer is required to drop down when the primary insurer becomes insolvent. ¶ 19. Although the facts of Newton differ slightly, [7] the North Carolina court's analysis is clearly applicable to this case. There, the court found that the excess insurer was not obligated to cover any claim unless the claim was greater than the $500,000 policy limit of the primary insurer, regardless of whether or not that $500,000 was collectible. Id. at 840. Although there was no gap in coverage, the Newton court noted the possibility of a `gap' in coverage that may occur when a primary carrier becomes insolvent since the statutory cap on NCIGA's liability here is $300,000. Id. at 839. Accordingly, the court found that U.S. Fire was entitled to summary judgment. Id. at 840. ¶ 20. Four years later, the North Carolina Court of Appeals faced a similar situation in North Carolina Ins. Guar. Ass'n v. Century Indem. Co., 115 N.C.App. 175, 444 S.E.2d 464 (1994). A dispute arose between NCIGA and Century Indemnity Co. (Century) as to whether Century's commercial umbrella policy [8] was required to drop down and become the primary liability insurance as a result of the primary insurer's insolvency. Id. at 467. NCIGA argued that the phrase amount recoverable meant that amount actually recoverable and collectible from the primary insurer. . . . Because [the primary insurer was] now insolvent, no amount [was] recoverable from the primary insurer. Id. at 469. Therefore, NCIGA argued, Century was required to drop down and provide primary coverage. Id. ¶ 21. The court reasoned that the amount recoverable phrase, read in connection with the loss payable condition, [9] made it clear that a loss arising from an occurrence is not payable by . . . Century unless the limit of the underlying insurance is exhausted by payment, coming either from the insured or from the insured's underlying carrier. Id. at 470. In addition to finding the language of the policy unambiguously to preclude drop down coverage, the court stated that the fundamental purpose of excess insurance is to protect the insured against excess liability claims, not to insure against the underlying insurer's insolvency. Id. ¶ 22. Though there are some differences in the language of the various insurance contracts in Newton and Century, this Court finds the reasoning in both cases applicable to this case. We find that the disputed term sums actually payable is unambiguous, particularly when read in connection with the Underlying Insurance provision. Furthermore, North Carolina law provides that where words are not clear in their immediate context, other clauses may be used to bring the policy into harmony. Wachovia Bank, 172 S.E.2d at 522. ¶ 23. An equally convincing argument is found in looking at the entire phrase in the contract provision of the Catastrophe Policy, where LMCC contracted to pay only the amount in excess of the sums actually payable under the terms  of the Legion policy. (Emphasis added). There is only one amount payable under the terms of the Legion policy, and that is the policy limit of $1,000,000. LMCC points out that Caldwell improperly divorces the phrase `sums actually payable' from the remainder of the sentence. LMCC correctly notes that the sentence, taken as a whole, refers to what amount is covered pursuant to the Legion policy, not what Legion is capable of paying. Caldwell, on the other hand, argues that LMCC should pay the amount in excess of what was actually paid, rather than the amount payable under the terms of the policy. This interpretation would require rewriting the terms of the insurance contract. ¶ 24. Furthermore, the clause in Section V, part 9 of the policy clearly defines LMCC's obligation should the underlying insurer become insolvent. It provides that, in the event of insolvency, LMCC will be liable only to the extent we would otherwise have been liable. Taken together, the policy terms evidence that the Catastrophe Policy was not required to drop down and provide primary coverage due to Legion's insolvency. Therefore, we conclude that the Catastrophe Policy, by its plain language, covered only losses in excess of $1,000,000.
¶ 25. Caldwell alleges that LMCC's failure to use a loss payable clause, such as the one used in Century, [10] evidences that LMCC's coverage should drop down and fill the gap caused by Legion's insolvency. Other than its position that the Underlying Insurance provision adequately conveys that the Catastrophe Policy precludes drop down coverage, LMCC did not specifically respond to this argument. Caldwell claims that, pursuant to North Carolina Rule of Appellate Procedure 28(a), LMCC's failure to respond requires that this Court accept its position. ¶ 26. We first point out that Rule 28(a) is a procedural rule which has no application in this case. When we are required to apply the law of another state, we apply its substantive law, but we continue to rely on our own procedural rules. Zurich Am. Ins. Co. v. Goodwin, 920 So.2d 427, 433 (Miss.2006). ¶ 27. LMCC clearly argues that the contract, read as a whole (including its Underlying Insurance provision), is dispositive of Caldwell's claim. Additionally, Caldwell cites no authority which mandates that a loss payable clause must be included in an excess insurer's policy in order to preclude drop down coverage. Furthermore, the Underlying Insurance provision in the Catastrophe Policy adequately addresses LMCC's obligations in the event the underlying insurer becomes insolvent. The provision states that [i]n the event of bankruptcy, insolvency or financial impairment of the insurance company that issued the `underlying insurance,' [LMCC] shall be liable under Coverage A only to the extent we would otherwise have been liable. While Caldwell argues that the phrase, to the extent we would otherwise have been liable, is ambiguous, we disagree, and find Caldwell's argument to be without merit. ¶ 28. Under Coverage A, LMCC is liable for the amount in excess of the sums actually payable under the terms of the `underlying insurance.' As determined previously in Part 1A, supra, that amount is the $1,000,000 policy limit, which is clearly provided under the terms of the policy. Therefore, the Underlying Insurance provision clearly and unambiguously provides that, in the event of insolvency of the underlying insurer, LMCC is liable only for losses exceeding $1,000,000. ¶ 29. In this case, LMCC paid $200,000, which was the portion of the loss that exceeded $1,000,000. Therefore, this Court finds that LMCC paid the amount it contracted to pay and, consequently, is not liable for any gap in coverage caused by Legion's insolvency. For these reasons, we find that not only does the lack of a loss payable clause not evidence that the Catastrophe Policy must drop down, but the Underlying Insurance provision clearly precludes such drop down coverage under the terms of the policy.
¶ 30. The LMCC Catastrophe Policy includes an Other Insurance provision which states: If other valid and collectible insurance is available to the insured for loss covered hereunder, this Coverage Part will be excess of such other insurance. This condition does not apply to insurance purchased specifically to be either quota share with this insurance or excess of this insurance. Caldwell creatively argues that the NCIGA policy qualified as other insurance, and therefore, the Catastrophe Policy will be excess of such other insurance. Thus, Caldwell argues LMCC should reimburse it for the $200,000 it paid in settlement to Harvey. ¶ 31. Conversely, LMCC argues that it would be preposterous to interpret its Other Insurance clause as providing drop down coverage. LMCC points out that nearly all excess liability policies contain such a clause, which does not void or abrogate the effect of the policy's other provisions. ¶ 32. Interpreting the Other Insurance clause as implying a duty to provide drop down coverage would not only contradict the specific policy provisions, but it would also contradict North Carolina law, which states that drop down coverage will not be found unless the policy expressly provides for such coverage. Century, 444 S.E.2d at 470. Furthermore, the Century court noted that excess insurance is to protect the insured against excess liability claims, not to insure against the underlying insurer's insolvency. Id. ¶ 33. For the reasons stated, this Court finds that the Other Insurance provision does not imply that LMCC is liable for all amounts which exceed the amount paid by NCIGA. The LMCC policy does not expressly provide for drop down coverage, but merely states that the Catastrophe Policy is to be in excess of any other insurance available to the insured.
¶ 34. Caldwell argues, without citation of any authority for the proposition, that the Catastrophe Policy is more like an umbrella policy, which can certainly `drop down' because it contemplates excess protection in Coverage A and primary protection in Coverage B. We find this argument unpersuasive for two reasons. ¶ 35. First, Coverage B of the Catastrophe Policy applies when underlying insurance does not apply, that is, where there is no other insurance in any way applicable. Further, according to the policy, the retained limit means the greater of: a. The amount stated in the Declarations as Retained Limit; or b. The amount payable as damages under any other valid and collectible insurance purchased specifically in excess of this insurance. Thus, the provisions of Coverage B are clear and unambiguous. We find that Coverage B provides that where neither the terms and conditions of the Catastrophe Policy or any other policy apply, then Coverage B of the Catastrophe Policy may apply. There is no dispute that Legion was the primary insurer and its policy covered the instant loss. Therefore, Coverage B is neither applicable nor does it require LMCC to drop down and provide primary coverage due to Legion's insolvency. Thus, whether the Catastrophe Policy is characterized as an excess policy or an umbrella policy, its interpretation is controlled by contract law, and the result remains the same. ¶ 36. Second, as noted previously, the policies in Newton and Century were both umbrella policies, and in each case, North Carolina law provided that the policies did not drop down. Therefore, for both of these reasons, this argument has no merit.