Second Circuit Holds Insurer Has No Duty to Drop Down and Pay Asbestos Claims

June 16, 2022 | Insurance Coverage

On June 16, 2022, in First State Insurance Company v. Columbia Casualty Company, et al.,  the United States Court of Appeals for the Second Circuit handed down a decision in favor of Fireman’s Fund, an excess insurer, affirming that it was not required to pay asbestos claims under an excess policy issued to an asbestos defendant before the underlying insurance policy’s limits (issued by another insurer) were properly exhausted.

Because the underlying insurer, Comstock Insurance Company, was insolvent, it had not paid anything on account of the asbestos claims, nor would it be doing so. The asbestos defendant – policyholder Ferguson Enterprises, Inc. – argued in the District Court that Fireman’s Fund was obligated to “drop-down” in place of the insolvent insurer’s policy. This would have had the effect of making the third-layer excess policy, which sat above $20.6 million in underlying insurance limits, into a second-layer excess policy, sitting above only $10.6 million in underlying insurance limits – something very different from the contract that it entered.

The District Court  rejected Ferguson’s argument that Fireman’s Fund was required to drop-down. Ferguson appealed this ruling to the Second Circuit, which affirmed.

The Second Circuit upheld the award of summary judgment to Fireman’s Fund, holding that its third-layer excess policy had no obligation to drop-down in place of the underlying second-layer excess policy issued by Comstock. The parties agreed that California law applied. Ferguson contended that the Fireman’s Fund excess policy’s own anti-drop-down policy language was inapplicable and that the Fireman’s Fund policy, rather, followed form to the underlying lead umbrella policy’s language, which it asserted allowed drop-down in the event that any underlying insurance was not “collectible.”

The Court rejected this and placed the focus on the language of the Fireman’s Fund policy. It held that the “Fireman’s Fund policy closely tracks the language of the excess policy at issue in Span,” a California Court of Appeal decision which denied policyholder arguments that an excess insurer should be required to drop down in the face of an underlying insurer insolvency. Specifically, the Court explained that the Fireman’s Fund policy language – “that ‘in the event of reduction or exhaustion of the applicable aggregate limit or limits of liability under said underlying policy or policies solely by reason of losses paid thereunder on account of occurrences during this policy period,’ the Fireman’s Fund policy shall ‘apply as excess of the reduced limit of liability thereunder’” – forbade making the policy drop down due to insolvency. The Court likewise rejected Ferguson’s argument that a “Liberalization Clause” in the Fireman’s Fund policy, akin to a Broad as Primary Endorsement, caused the Fireman’s Fund policy to follow form to the underlying lead umbrella policy, finding “that clause concerns only the scope of coverage.”

Fireman’s Fund was represented by Michael A. Kotula and Lawrence A. Levy.

The case is styled First State Insurance Company v. Columbia Casualty Company, et al., 2022 U.S. App. LEXIS 16655 (2d Cir. June 16, 2022).

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