A Scheduled Primary Insurer’s Insolvency Does Not Trigger Umbrella or Excess Drop-Down Coverage

Introduction

This case addresses whether an umbrella/excess insurer must “drop down” and replace a scheduled primary insurer that has become insolvent. A.R. Wilfley & Sons, Inc. manufactured industrial and mining pumps and faced long-running asbestos bodily-injury litigation. Reliance Insurance Company had issued Wilfley primary liability policies, but later became insolvent. Federal Insurance Company issued umbrella/excess policies sitting above those scheduled primary policies.

Wilfley argued that Reliance’s inability to pay rendered the asbestos occurrences “not covered” within the meaning of Federal’s policies, thereby requiring Federal to provide first-dollar defense and indemnity. Federal responded that “not covered” concerns the scope of insurance, not whether benefits are collectible from the primary carrier.

The United States District Court for the District of Colorado certified that unresolved question of Colorado law to the Colorado Supreme Court. The court unanimously held that insolvency does not convert a covered occurrence into an occurrence that is “not covered.”

Summary of the Opinion

The Colorado Supreme Court held that Federal was not required to step into Reliance’s shoes or provide first-dollar defense and indemnity. The Federal policies unambiguously distinguished between:

• whether an occurrence falls within the scope of a scheduled underlying policy; and
• whether insurance from an unscheduled insurer is collectible.

Reliance’s policies were scheduled underlying insurance. Because the asbestos claims were assumed to fall within their scope, they remained “covered” despite Reliance’s insolvency. Federal’s umbrella coverage therefore did not attach. Its excess coverage likewise had not attached because the underlying limits were assumed not to have been exhausted.

The court also rejected the contrary reasoning in Deisch & Marion, P.C. v. International Insurance Co., characterizing its contractual discussion as unnecessary dictum and overruling that decision to the extent it conflicted with the present opinion.

Analysis

1. Governing Rule

When an occurrence falls within the scope of a scheduled primary policy, the primary insurer’s insolvency does not make the occurrence “not covered” and does not require an umbrella/excess insurer to provide first-dollar defense or indemnity, absent policy language expressly imposing that obligation.

2. Jurisdiction and Standard of Review

Under C.A.R. 21.1(a), the Colorado Supreme Court may answer a certified question that may determine a pending federal case and for which no controlling Colorado Supreme Court precedent exists. Relying on Hamilton v. Amazon.com Servs. LLC and In re Phillips, the court explained that accepting such a question is discretionary.

Policy interpretation is reviewed de novo under Bailey v. Lincoln Gen. Ins. Co.. Because the insolvency issue was novel under Colorado law, the court also relied on People v. Weiss and Furlong v. Gardner for the proposition that decisions from other jurisdictions may provide persuasive guidance.

3. Contract-Interpretation Principles

The court applied ordinary contract principles:

• Cotter Corp. v. Am. Empire Surplus Lines Ins. Co. establishes that the primary objective is to enforce the parties’ intent as expressed in the policy.
• Cyprus Amax Mins. Co. v. Lexington Ins. Co. requires terms to receive their plain meaning and forbids courts from rewriting policies by adding or deleting provisions.
• Heller v. Fire Ins. Exch., a Div. of Farmers Ins. Grp. holds that unambiguous language must be enforced as written, although genuine ambiguity is generally construed in favor of the insured.
• Pub. Serv. Co. of Colo. v. Wallis &Cos. and Rocky Mountain Prestress, LLC v. Liberty Mut. Fire Ins. Co. support reading the contract as a whole and avoiding interpretations that make words surplusage.

Applying these rules, the court found only one reasonable meaning of “not covered”: an occurrence outside the underlying policy’s substantive scope.

4. Umbrella Coverage Versus Excess Coverage

Apodaca v. Allstate Ins. Co. supplied the principal distinction between the two forms of coverage:

• Umbrella coverage operates horizontally. It may provide first-dollar protection for a category of risk not insured by the primary policy.
• Excess coverage operates vertically. It supplies additional limits after the applicable primary limits have been exhausted.

Com. Union Ins. Co. v. Walbrook Ins. Co. likewise recognizes that umbrella insurance may act as primary coverage where the underlying policy affords no coverage at all. Here, however, the court assumed the claims were within Reliance’s coverage. There was therefore no horizontal coverage gap for Federal’s umbrella layer to fill.

5. Why “Not Covered” Does Not Mean “Not Collectible”

Three provisions demonstrated a deliberate distinction between coverage and collectibility:

1. Defense provision: Federal agreed to defend occurrences “not covered” by scheduled underlying policies or by other underlying insurance “collectible” by Wilfley.
2. Underlying-limit provision: Scheduled policy limits counted toward the underlying limit without a collectibility qualification, while limits from “other” underlying insurance counted only if collectible.
3. Other-insurance condition: The policy again used “collectible” when referring to insurance available from other, unscheduled insurers.

Thus, “covered” described the substantive reach of scheduled policies, while “collectible” addressed the availability of unscheduled insurance. Treating the terms as synonymous would erase this distinction and render the repeated references to collectibility meaningless.

6. Maintenance of Underlying Insurance and Allocation of Insolvency Risk

The maintenance condition required Wilfley to keep the scheduled underlying policies in force and limited Federal’s liability to what it would have been had Wilfley complied. This confirmed the parties’ allocation of risk: Federal priced and issued coverage on the assumption that it would sit above the scheduled primary layer.

Wilfley’s interpretation would transform Federal into a guarantor of the financial condition of every scheduled primary insurer. The court found no language showing that Federal accepted that risk or charged a premium for it.

7. Precedents Concerning “Not Covered”

Decisions from other jurisdictions strongly supported the court’s interpretation:

• Mission Nat'l Ins. Co. v. Duke Transp. Co. held that an excess insurer’s promise to drop down for risks “not covered” applies when the underlying policy’s terms do not insure the occurrence, not when the underlying insurer cannot pay.
• Garmany v. Mission Ins. Co. concluded that “not covered by said underlying insurances” concerns the fact of coverage, rather than the amount or practical availability of payment.
• Wells Fargo Bank, N.A. v. Cal. Ins. Guarantee Ass'n reasoned that an ordinary policyholder would understand a claim to be covered when it falls within the underlying policy’s scope, regardless of whether the insurer ultimately pays.

8. The Tenth Circuit’s Closely Related Analysis

Scott's Liquid Gold, Inc. v. Lexington Insurance Co. was particularly persuasive. There, the Tenth Circuit predicted that Colorado would interpret “not covered” as referring to an event outside the definition of coverage in the underlying policy. It rejected the argument that exhaustion converted a previously covered event into an uncovered one.

That court relied on Unigard Mut. Ins. Co. v. Mission Ins. Co., which described umbrella provisions as protecting against risks not insured by the underlying policies. The Colorado Supreme Court adopted the same fundamental distinction: the absence of substantive coverage is different from the inability to collect benefits.

9. Treatment of the Federal District Court Decisions

In A.R. Wilfley &Sons, Inc. v. Fed. Ins. Co. (“Wilfley I”), the federal district court initially held that Federal had no duty to defend or indemnify until the underlying limits were exhausted or paid by Wilfley. The court emphasized that insolvency affected collectibility, not coverage.

In A.R. Wilfley &Sons, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA (“Wilfley II”), the district court withdrew that ruling and certified the controlling question because Colorado Supreme Court precedent was absent and Deisch & Marion, P.C. v. International Insurance Co. arguably pointed in the opposite direction.

10. Rejection and Partial Overruling of Deisch

Deisch & Marion, P.C. v. International Insurance Co. involved a law firm seeking unpaid defense fees after a primary insurer became insolvent. The division imposed liability on the excess insurer principally under an implied-contract or equitable theory because the insurer had benefited from the firm’s work.

The division also suggested that insolvency and non-collectibility triggered the excess insurer’s defense obligation. The Supreme Court found that contractual discussion unnecessary to the equitable holding and therefore dictum. It also criticized the decision for merging coverage and collectibility without textual analysis. Deisch is now overruled to the extent it conflicts with the rule announced in this case.

Complex Concepts Simplified

Scheduled underlying insurance

A primary policy specifically listed in the umbrella or excess policy’s schedule.

Drop-down coverage

Coverage under which an umbrella or excess insurer moves down to assume obligations ordinarily belonging to a primary insurer.

Scope of coverage

The kinds of risks, occurrences, and claims that a policy contractually insures.

Collectibility

Whether payment can actually be obtained from an insurer. Insolvency may destroy collectibility without changing the policy’s scope.

First-dollar coverage

Insurance that responds from the beginning of a covered loss rather than only after another layer has been exhausted.

Exhaustion

The use or payment of all applicable limits in an underlying policy, allowing the next excess layer to attach.

Reservation of rights

An insurer’s notice that it will temporarily defend while preserving its ability to deny coverage or seek reimbursement later.

Dictum

A judicial observation unnecessary to the case’s actual holding and therefore not binding precedent.

Certified question

A state-law question sent by another court—often a federal court—to the state’s highest court for an authoritative answer.

Impact

The decision establishes a clear Colorado rule that insolvency alone does not trigger drop-down coverage under policy language addressing occurrences “not covered” by scheduled underlying insurance. Its principal consequences include:

• Insolvency risk remains with the insured unless the umbrella/excess policy expressly reallocates that risk.
• Excess insurers are not financial guarantors of scheduled primary insurers merely because those insurers later fail.
• Coverage and collectibility must be analyzed separately in future insurance disputes.
• Policy drafting will matter greatly: parties wishing to provide insolvency-based drop-down coverage must say so expressly.
• Deisch can no longer support a contrary contractual rule in Colorado.

The holding is limited to the certified assumptions. The court did not decide whether Reliance’s policies actually covered particular asbestos claims, whether Reliance’s limits had been exhausted, or how materially different policy language might operate. It also did not independently resolve Wilfley’s estoppel and bad-faith theories, which remained for the federal court to address consistently with the certified answer.

Conclusion

A.R. Wilfley & Sons v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA draws a firm line between the existence of insurance coverage and the ability to collect payment. A covered occurrence remains covered even when the scheduled primary insurer is insolvent. Without express drop-down language, an umbrella/excess carrier need not assume the insolvent insurer’s first-dollar defense and indemnity obligations.

The decision preserves the contractual architecture of layered insurance programs, prevents judicial reassignment of insolvency risk, and provides controlling Colorado authority on a previously unsettled question.