(Article from Insurance Law Alert, July/August 2024)
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Holding
A Texas district court ruled that an umbrella insurer had no duty to defend claims pursuant to a “drop down” provision that applied only when claims were “not covered” by underlying insurance. ACE American Ins. Co. v. Murco Wall Products, Inc., 2024 U.S. Dist. LEXIS 111368 (N.D. Tex. June 24, 2024).
Background
Murco Wall Products was named as a defendant in asbestos-related bodily injury suits. When the limits of Murco’s primary policies were exhausted, Murco sought coverage under excess policies, including an umbrella policy issued by Travelers. The policy provided two types of coverage: excess coverage (Section I) and drop-down coverage (Section II). The excess coverage provided indemnity once the underlying policy limits had been exhausted, whereas the drop down coverage required Travelers to defend Murco in suits arising from risks “not covered” by the underlying policy. The parties agreed that Travelers owed excess coverage under Section I, but Travelers denied drop-down coverage under Section II, arguing that the asbestos claims were covered by the underlying primary policy. The court agreed and granted Travelers’ summary judgment motion.
Decision
The court ruled that the phrase “not covered” under the drop-down provision of Section II was unambiguous and applied only to risks outside the scope of coverage under the primary policy; it did not encompass scenarios in which the claims against the insured were covered by the underlying policy and which exhausted the limits of those primary policies. The court rejected Murco’s assertion that once the primary policy limits were exhausted, it “no longer covered” the asbestos claims, so as to trigger Section II of the Travelers policy. As the court noted, such an interpretation not only contradicts the plain language of the provision (“not covered by the underlying insurance”), but also would “erode the difference between excess coverage (Section I) and drop-down coverage (Section II), which insure different risks.”
Comments
An umbrella insurer’s obligations to “drop down” and assume the duty to defend (or indemnify) turn primarily on applicable policy language. In addition to policy language, courts have also emphasized the inherent distinction between primary and excess coverage, as reflected by different premiums and contractual duties, when ruling on the obligations of an excess insurer.