Opinion ID: 3158528
Heading Depth: 2
Heading Rank: 1

Heading: Canal’s Drop Down Obligation

Text: The terms of the insurance policy Canal issued to Montello are undisputed. Four sections of the policy are relevant to this appeal: the Coverage Section; the Excess Clause & Umbrella Clause, both found within the Underlying Limit–Retained Limits provision; and the Other Insurance Clause. -5-
Rather than reading the Coverage Section in its entirety, Montello focuses exclusively on the introductory clause. (“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.”) Montello argues that as a result of Home’s insolvency, it has incurred expenses and may become legally obligated to pay damages. Contrary to Montello’s suggested interpretation, the district court read the provision in its entirety and correctly held: “Canal did not undertake to insure the solvency of Montello’s primary insurer[.]” Canal Ins. Co., 2013 WL 6732658, at 1 The policy provides: Coverage: 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, by reason of liability,
(b) assumed by the named insured, or by any officer, director, stockholder or employee thereof while acting within the scope of his duties as such, under any contract or agreement other than liability assumed with respect to occurrences taking place prior to the time such contract or agreement became effective. because of

an occurrence which takes place during the policy period anywhere in the world. I Aplt. App. 38. -6- . The Coverage Section clearly states that Canal’s obligation to indemnify is only triggered by personal injury, property damage, or advertising liability caused by or arising from an occurrence. The policy defines an “occurrence” as “an accident which takes place during the policy period . . . which causes personal injury, property damage or advertising liability[.]” I Aplt. App. 38. We agree with the district court that the “insolvency of the underlying insurer is not an occurrence” as defined in the contract. Canal Ins. Co., 2013 WL 6732658, at . 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.
2 The policy provides: Underlying Limit - Retained Limits: The company shall be liable only for ultimate net loss resulting from any one occurrence in excess of either (a) the amounts of the applicable limits of liability of the underlying insurance as stated in the Schedule of Underlying Insurance Policies less the amount, if any, by which any aggregate limit of such insurance has been reduced by payment of loss, hereinafter called the underlying limit, or (b) if the insurance afforded by such underlying insurance is inapplicable to the occurrence, the amount stated in the declarations as the retained limit. The limits of liability of any underlying insurance policy shall be deemed applicable irrespective of any defense which the underlying insurer may assert because of the insured’s failure of comply with any condition of the policy subsequent to an occurrence. -7- The Excess Clause is clear: When the underlying insurer’s limits are reduced by payment of loss, Canal’s liability is triggered. The underlying insurer’s inability to pay is not payment of loss. Mission Nat’l Ins. Co. v. Duke Transp. Co., Inc., 792 F.2d 550, 553 (5th Cir. 1986) (citing Molina v. U.S. Fire Ins. Co., 574 F.2d 1176, 1178 (4th Cir. 1978)). On appeal, Montello argues the district court misread the term “applicable” in the Excess Clause. Montello suggests Home’s insolvency renders the underlying limits of liability no longer “applicable.” According to Montello, if there are no applicable underlying limits, there is nothing to exhaust. If there is nothing to exhaust, then there is nothing preventing Canal from dropping down. Montello offers two grounds supporting Canal’s drop down obligation. First, Montello relies on Gulezian v. Lincoln Insurance Co., 506 N.E.2d 123 (Mass. 1987), where the court found ambiguity and relied on an “other insurance” provision to hold that the excess policy drops down if the underlying insurance is uncollectible through no fault of the insured. As noted by the district court, Gulezian is unpersuasive because it rests upon an ambiguity we do not perceive and it is also distinguishable because the applicable policies lack similar language. Canal Ins. Co., 2013 WL 6732658, at –14. Moreover, Gulezian has been criticized and represents a minority view. See Barrett v. Chin, 843 F. Supp. I Aplt. App. 38. -8- 783, 786 (D. Mass. 1994) (indicating that subsequent decisions “signal a direction different from Gulezian”). Second, Montello argues that the absence of language in Canal’s policy expressly preventing drop down coverage signals that the inverse must be true: insolvency must trigger the excess insurers’ drop down obligation. This argumentum ex silentio is weak and generally unpersuasive. See Karahalios v. Def. Language Inst./Foreign Language Ctr. Presidio of Monterey, 821 F.2d 1389, 1392 (9th Cir. 1987). It is common for courts to hold that excess insurers have no obligation to drop down, even when the contract does not expressly prohibit it. See, e.g., Cont’l Marble & Granite v. Canal Ins. Co., 785 F.2d 1258, 1259 (5th Cir. 1986).
An umbrella policy “provide[s] primary coverage for risks that the underlying policy does not cover.” Mid-Continent Cas. Co. v. Circle S Feed Store, LLC, 754 F.3d 1175, 1179 (10th Cir. 2014) (quoting 15 Steven Plitt et al., Couch on Insurance § 220:32 (3d ed. 2013)). The Umbrella Clause in the Canal policy is no exception. For Canal’s umbrella policy to apply, the underlying insurance must be inapplicable to the occurrence. Home’s policies provided coverage for asbestos related claims, making them applicable to the occurrence. As we have explained elsewhere, the district court was correct in its determination that “Home’s insolvency is not an occurrence to which the -9- underlying policy is inapplicable because it is not an occurrence at all.” Canal Ins. Co., 2013 WL 6732658, at  (citing Value City, Inc. v. Integrity Ins. Co., 508 N.E.2d 184, 188 (Ohio Ct. App. 1986)).
An Other Insurance Clause is a “standard provision intended to limit the excess insurer’s liability in the event that insurance other than the scheduled underlying insurance is available to the insured.” Alaska Rural Elec. Co-op Ass’n, Inc. v. INSCO Ltd., 785 P.2d 1193, 1196 (Alaska 1990). It is not intended to expand an excess or umbrella insurer’s liability. Given this backdrop, the district court correctly held the Other Insurance Clause “does not require Canal to assume the obligations of underlying insurers listed in the Schedule of Underlying Policies simply because those insurers are no longer able to fulfill their obligations.” Canal Ins. Co., 2013 WL 6732658, at . Other courts interpreting nearly identical provisions have reached the same conclusion. See, 3 The policy provides: Other Insurance: The insurance afforded by this policy shall be excess insurance over any other valid and collectible insurance available to the insured, whether or not described in the Schedule of Underlying Insurance Policies, (except insurance purchased to apply in excess of the sum of the underlying limit or retained limit and the limit of liability hereunder) and applicable to any part of ultimate net loss, whether such other insurance is stated to be primary, contributing, excess or contingent . . . I Aplt. App. 40. -10- e.g., Steve D. Thompson Trucking, Inc. v. Twin City Fire Ins. Co., 832 F.2d 309, 311 (5th Cir. 1987); Holland v. Stanley Scrubbing Well Serv., 666 F. Supp. 898, 901 (W.D. La. 1987). It would be inequitable to read an other insurance clause as insuring the solvency of the underlying primary insurer. On appeal, Montello focuses on the phrase “valid and collectible” in the Other Insurance Clause. It argues Home’s insolvency rendered the underlying insurance invalid and uncollectible, requiring Canal to drop down and provide primary insurance. When the term “collectible” appears in an excess insurance clause, some, but not all, courts interpret the provision in the manner Montello suggests. See, e.g., Mission Nat’l Ins. Co., 792 F.2d at 553; Gulezian, 506 N.E.2d at 124–26. But see Ambassador Assocs. v. Corcoran, 589 N.E.2d 1258 (N.Y. 1992). Here, however, the term “collectible” appears only in the Other Insurance Clause. This isolated use of the word is not enough to “transmogrify the policy into one guaranteeing the solvency of whatever primary insurer the insured might choose.” Cont’l Marble & Granite, 785 F.2d at 1259; see also Steve D. Thompson Trucking Inc., 832 F.2d at 311. Alternatively, Montello argues because courts must read contracts as a whole, the term “valid and collectible” found in the Other Insurance Clause should be considered when interpreting the Excess and Umbrella Clauses. This, however, does not allow us to modify the contracts and impose such an obligation throughout the contract given the applicable provisions. -11-
Canal’s duty to defend is outlined in the Endorsement for Defense Coverage. It arises only when: “1) the defense involves a claim for which the Canal Policies provide coverage; and 2) there is no underlying insurer obligated to defend.” Canal Ins. Co., 2013 WL 6732658, at . This comports with the traditional view that an “excess insurer is not required to contribute to the defense of the insured so long as the primary insurer is required to defend.” ABT Bldg. Prods. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 472 F.3d 99, 135 (4th Cir. 2006) (quoting Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes 188 (5th ed. 1992)). The district court correctly held the excess insurer’s duty to defend does not arise as a result of the primary insurer’s inability to defend. See Harville v. Twin City Fire Ins. Co., 885 F.2d 276, 279 (5th Cir. 1989). Montello attempts to distinguish the case relied on by the district court, Harville v. Twin City Fire 4 The policy provides: Defense Coverage: With respect to such insurance as is afforded by this policy, if there is no underlying insurer obligated to do so, the Company shall: (a) defend any suit against the Insured alleging personal injuries (including death resulting therefrom), property damage or advertising liability and seeking damages on account thereof, even if such suit is groundless, false, or fraudulent . . . I Aplt. App. 44. -12- Insurance Co., by noting the primary insurer in Harville was placed in receivership while the primary insurer in the present action, Home, had its contracts discharged by a New Hampshire court. Id. Montello argues that the court’s cancellation of Home’s contracts is tantamount to a cancellation of any obligation under the contract. This distinction, however, does not invalidate the basic principles from Harville relied on by the district court. The Harville court reached its ultimate conclusion by looking not at the specifics of the primary insurer’s insolvency, but rather, at the purpose of excess insurance generally. Excess insurers are able to provide insurance with low premiums because the premium is “held down by the fact that the duty to defend rests primarily on the primary insurer, falling on the excess liability carrier only when the primary carrier is not required to defend because the loss is not covered by the primary policy.” Id. at 279. The implications resulting from requiring an excess insurer to insure the solvency of a primary insurer would be widespread: “Such a ‘rule would require insurance companies to scrutinize one another’s financial wellbeing before issuing secondary policies.’” Id. (quoting Cont’l Marble & Granite, 785 F.2d at 1259). In the present case, the language of the defense endorsement is clear: the excess insurer must provide defense coverage only when the extent of the underlying insurer’s obligations have been satisfied.
In the alternative, Montello urges the court to determine the contract is -13- ambiguous and apply the reasonable expectations doctrine. In Oklahoma, the doctrine of reasonable expectations applies only when there is ambiguity in the contract. See Simpson v. Farmer Ins. Co., Inc., 981 P.2d 1262, 1265 (Okla. 1999). Ambiguity arises where a word or phrase is reasonably susceptible to more than one construction, however, a “court should not torture the language of the policy in order to create ambiguities.” E. Associated Coal Corp. v. Aetna Cas. & Sur. Co., 632 F.2d 1068, 1075 (3d Cir. 1980); see, e.g., Morgan Stanley Grp. Inc. v. New England Ins. Co., 225 F.3d 270, 275 (2d Cir. 2000). If the doctrine applied in every case, “insureds could develop a ‘reasonable expectation’ that every loss will be covered by their policy and courts would find themselves engaging in wholesale rewriting of insurance policies.” Max True Plastering Co. v. U.S. Fid. & Guar. Co., 912 P.2d 861, 868 (Okla. 1996). In the event ambiguity is found, “the meaning of the language is not what the drafter intended it to mean, but what a reasonable person in the position of the insured would have understood it to mean.” Spears v. Shelter Mut. Ins. Co., 73 P.3d 865, 868 (Okla. 2003). Montello finds ambiguity in the relationship of the policy provisions to one another. Specifically, Montello contrasts the Underlying Limits Clause with the Other Insurance Clause, arguing that the former does not consider the solvency of the underlying insurer while the latter does. This argument is unpersuasive. As previously discussed, the Other Insurance Clause is not ambiguous and is inapplicable in the current case. It can -14- be read in conjunction with the remainder of the contract as limiting the insurers’ liability when other applicable insurance exists. Even if we were to determine there was ambiguity, which we do not, it is clear that Montello was buying excess, not primary, insurance from Canal. We believe that Oklahoma would follow the clear majority rule: “the excess insurer is not required to ‘drop down’ to assume the primary insurer’s coverage obligations” when the primary insurer becomes insolvent. Canal Ins. Co., 2013 WL 6732658, at . A reasonable person in the position of the insured would have understood the contract to provide excess and umbrella coverage, not coverage insuring the solvency of the primary insurer.