Opinion ID: 1138395
Heading Depth: 2
Heading Rank: 2

Heading: Does an Excess Insurer Have a Duty to Drop Down and Assume the Obligations of the Primary Insurer When the Primary Insurer Becomes Insolvent?

Text: We have held that an insurance policy is a contract of adhesion and, as such, it will be construed according to the `principle of reasonable expectations.' State v. Underwriters at Lloyds, 755 P.2d 396, 400 (Alaska 1988). The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations. Id. (quoting R. Keeton, Basic Text on Insurance Law § 6.3(a), at 351 (1971)). Both parties agree that at the time they entered into this agreement neither party anticipated the insolvency of the primary carrier Ambassador. ARECA argues that it reasonably expected that by purchasing insurance from Ambassador plus excess insurance from INSCO it would never be faced with a loss in excess of its SIR of $100,000. From this premise, ARECA concludes that its purchase of excess coverage from INSCO protected it from all losses over $100,000 except those paid by Ambassador. We disagree. Excess coverage policies have relatively low premiums because excess insurers are only obligated to pay claims to the extent they exceed the amount of primary coverage. INSCO's premium for providing excess insurance for all of ARECA's members was $43,992. Ambassador's premium was $150,000. Given these premiums, ARECA's expectation that INSCO would cover losses down to ARECA's SIR if Ambassador became insolvent is not objectively reasonable. The majority of courts addressing this issue agree. [2] It is not unfair to leave the risk of insolvency with the insured since the insured selected the primary carrier. INSCO should not bear the risk of insolvency of a carrier it did not choose. If INSCO was required to investigate Ambassador's financial condition before writing its policy, it probably would have charged a higher premium. We hold that absent policy language to the contrary, an excess insurer is not required to drop down and provide primary coverage when the primary insurer becomes insolvent.