(Article from Insurance Law Alert, October 2026)
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Holding
Answering a certified question, the Colorado Supreme Court held that an umbrella/excess insurer was not required to “step into the shoes” of an insolvent primary insurer and provide first-dollar defense and indemnity coverage. The court concluded that the umbrella/excess policies’ “drop down” provision, which refers to occurrences “not covered” by the underlying insurance, addresses the scope of coverage, not whether payment can be collected from the primary insurer. A.R. Wilfley & Sons, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2026 CO 64, 2026 Colo. LEXIS 850 (Colo. Sept. 21, 2026).
Background
A.R. Wilfley & Sons, Inc., a manufacturer of industrial pumps, has faced asbestos litigation since the 1980s. Wilfley maintained primary general liability policies with Great Northern Insurance Company, whose limits had been exhausted, and Reliance Insurance Company, which became insolvent. Federal Insurance Company issued Wilfley at least three policies providing umbrella and excess liability coverage above the primary insurance. The Reliance policies are expressly listed in the Federal policies’ schedules of underlying insurance.
The Federal umbrella/excess policies provide that Federal will defend any occurrence “not covered by the underlying policies listed in the schedule of underlying insurance, or any other underlying insurance collectible by the insured, but covered by the terms and conditions of this policy.” The Federal policies also require Wilfley to maintain the scheduled underlying insurance in full effect and provide that Federal’s obligations remain unchanged if Wilfley fails to do so.
After exhausting the Great Northern primary policies’ limits, Wilfley tendered the underlying actions to Federal under its umbrella/excess policies. Federal initially defended under a reservation of rights and later denied coverage. Wilfley filed suit against Federal, contending that, because the primary insurer’s coverage was uncollectible due to its insolvency, the underlying actions were “not covered” by the primary insurance and so Federal was obligated to drop down to provide first-dollar defense and indemnity coverage. Citing the unsettled state of Colorado law, the federal district court certified the issue to the Colorado Supreme Court, which considered “whether the primary insurer’s insolvency places a covered occurrence in the ‘not covered’ category, thereby requiring the umbrella/excess carrier to drop down and provide first-dollar indemnity and defense costs to the insured.”
Decision
The Colorado Supreme Court held that the Federal umbrella/excess policies unambiguously do not require Federal to drop down into the shoes of an insolvent primary insurer. The court explained that the primary insurer’s inability to pay did not transform an otherwise covered occurrence into one that is “not covered” by the primary policy.
The court based its conclusion on the distinction the Federal policies draw between “covered” and “collectible.” It observed that three provisions—the defense provision, the underlying limit provision, and the other insurance condition—make collectibility relevant only to insurance issued by unscheduled underlying insurers. By contrast, the Federal policies use “covered” to describe occurrences within the scope of the scheduled underlying insurance—including the primary policies issued by the now-insolvent Reliance. Reading “not covered” to encompass otherwise covered claims for which payment is uncollectible, the court reasoned, would render the umbrella/excess policies’ references to collectibility in other provisions meaningless and erase the distinction the policies draw between scheduled and unscheduled insurers.
The court also relied on the maintenance-of-underlying-insurance condition, which requires Wilfley to maintain its scheduled primary insurance and provides that Federal’s umbrella/excess obligations remain the same if Wilfley fails to do so. The court explained that Wilfley’s interpretation would fundamentally alter the parties’ agreed allocation of risk by effectively making Federal a guarantor of the solvency of Wilfley’s primary insurers—a risk Federal neither agreed to assume nor charged a premium to cover.
Comments
The court observed that it was “beating a drum many others have beat before,” citing similar rulings from the Fifth, Tenth, and Eleventh Circuits. The decision reinforces the distinction between the existence of coverage and its collectibility. It also underscores the importance of closely reading the particular policy language to evaluate the parties’ agreed allocation of insolvency risk.