(Article from Insurance Law Alert, March 2026)
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Holding
A Massachusetts trial court applying Washington law held that a primary insurance policy was “exhausted,” thereby triggering the excess insurer’s coverage obligations, when the primary insurer became insolvent and paid nothing on the insured’s claims. Fed. Ins. Co. v. Water Applications Distribs. Grp., No. 2482cv2929-BLS-1, 2026 Mass. Super. LEXIS 17 (Mass. Super. Ct. Mar. 2, 2026).
Background
The policyholder, Water Applications Distribution Group, sought coverage for asbestos-related claims through the liquidation proceedings of its primary insurer. The liquidation was closed, and the primary insurer was dissolved, without making any payments to the insured. As a result, the insured sought coverage from its excess insurer, Federal Insurance Company, arguing Federal was required to “step down” to pay the first-dollar that otherwise would have been paid by the insolvent primary carrier.
Federal denied coverage and filed a declaratory judgment action seeking a declaration that it had no coverage obligation. Federal argued that the excess policy attaches only after the primary policy has been “exhausted,” which, according to Federal, only occurs once the primary carrier pays the full limits of the primary policy limit. Because the insolvent primary insurer had paid nothing, Federal contended that the excess policy had not been triggered. The insured argued that the primary policy was effectively “exhausted” because the insolvent primary insurer would never make any payment on the claims, leaving the insured without access to the underlying coverage.
Decision
The court focused on the policy provision stating that coverage applies “only in excess of and after all UNDERLYING INSURANCE . . . has been exhausted.” The policy also contained a “Maintenance Clause,” requiring the underlying policy to be “maintained in full effect during the currency of this policy except for any reduction of the aggregate limit or limits contained therein solely by payment of claims in respect of occurrences happening during the period of this policy.”
Federal argued that these provisions require exhaustion through payment of the primary policy’s limits. The insured, by contrast, argued that the primary policy was “exhausted” because there was no possibility of payment from the insolvent primary insurer.
The court found both parties’ interpretations reasonable. Because the policy did not clearly define exhaustion as requiring payment of limits, the court concluded that the term “exhausted” was ambiguous. Applying Washington law, which the court found required ambiguities in insurance contracts to be construed in favor of the insured, the court granted summary judgment to the insured.
Comments
The court declined to follow several decisions cited by Federal holding that “exhaustion” requires payment of underlying limits. In particular, the court declined to follow Zurich Ins. Co. v. Heil Co., 815 F.2d 1122 (7th Cir. 1987), where the policy required the insured to maintain “collectible insurance.” The court reasoned that the “collectible” modifier clarified the parties’ intent because coverage from an insolvent insurer is not “collectible.” By contrast, the Federal policy at issue contained no similar language. Emphasizing that “the words of each policy matter,” the court found that Zurich and subsequent cases recognizing “exhaustion” as requiring payment of claims up to the primary policy’s limits were therefore not universally applicable.