Primary Carrier’s Insolvency Triggers Excess Carrier’s Obligation
A waterworks products company facing asbestos claims is entitled to tap its Chubb excess insurance policy because its primary insurance has been “exhausted” as a result of the primary carrier’s insolvency and its inability to pay any covered claims.
A Massachusetts Superior Court found in favor of Water Applications Distribution Group (WADG) and against the Chubb subsidiary Federal Insurance Co. on the grounds that the term “exhausted” in Federal’s policy is ambiguous and must be interpreted in the policyholder’s favor.
The case turned on whether the primary coverage was “exhausted” in circumstances where WADG’s primary carrier became insolvent before paying money to WADG on relevant claims.
Federal had argued that primary coverage is “exhausted” only once the primary carrier has paid in full the primary policy limit, and because that has not occurred, Federal is not obligated to “drop down” to provide coverage to WADG.
The policyholder argued that because its primary carrier, now insolvent, will not be making any payments on its claim, its primary policy has been “exhausted,” obligating Federal to “drop down” and provide coverage.
Suffolk County Superior Court Justice Christopher K. Barry-Smith granted summary judgment for WADG, ruling that Federal is obligated to “step down” and provide coverage under its excess policy.
WADG is corporate successor to Pacific Waterworks Supply Co., a Washington corporation that merged into U.S. Filter Distribution Group, which in 2004 changed its name to WADG. In 2007, WADG moved its principal office to Massachusetts, where it remains today,
Federal issued two excess liability insurance policies to Pacific, each effective for one year, the first between June 1, 1986 and June 1, 1987 and the second effective June 1, 1987 to June 1, 1988. The latter policy was cancelled effective August 7, 1987.
One important aspect is that the Insuring Clause states that the Federal policy applies “only in excess of and after all UNDERLYING INSURANCE has been exhausted.”
During the time period of the Federal policies, the only primary or “underlying” insurance was issued by United Pacific Insurance Co., a subsidiary of Reliance Insurance Co., which was declared insolvent in 2001and placed into liquidation by the Pennsylvania Insurance Department.
WADG, as successor to Pacific, was named in lawsuits alleging that products it sold or distributed contained asbestos. Those lawsuits alleged that WADG was liable for bodily injury, sickness, and disease suffered by people who were exposed to these products at various times, including during the time period (June 1, 1986-August 7, 1987) when the Federal policies were in effect.
WADG made a claim in the liquidation proceedings. The final bar date for claims against United Pacific was March 31, 2016. Effective November 29, 2021, the Reliance liquidation was closed, and Reliance was dissolved by court order. In light of the now-passed bar date and Reliance’s dissolution, there is no prospect that WADG will receive any money for defense or indemnification under the Reliance policies.
Federal declined to indemnify WADG and sued seeking to avoid coverage and to recoup money it previously paid for similar asbestos claims.
The parties agreed that Washington law should govern. The court relied upon the interpretation of the insurance policy under governing Washington law.
First, the court held that the meaning of “exhausted” in the Federal policy is ambiguous. The judge disagreed with Federal’s argument that, when the Insuring Clause with the word is read in conjunction with another clause (the Maintenance Clause), it unambiguously means that the “exhausted” requirements could be satisfied solely by payment of claims up to the amount of the primary policy limit.
Instead, the court found that even considering all provisions of the policy together, “exhausted” remains subject to different, reasonable interpretations and therefore was ambiguous.
The court determined that the dictionary definition of exhausted—to have used up or consumed completely— did not solve any ambiguity. According to the opinion. if assessed through the lens of whether the primary insurer has actually paid claims up to the policy limit, then the primary insurance has not been exhausted. On the other hand, WADG knows that its insolvent primary insurer will not be paying any amount in claims for WADG’s covered loss; in other words, its primary insurance has been exhausted, used up or consumed completely. The judge found both of these interpretations reasonable, which he said means the term “exhausted” is ambiguous.
The judge added that the Maintenance Clause, which makes clear that “any reduction” of a policy limit occurs “solely by payment of claims,” does not carry over to provide meaning to the Insuring Clause and resolve the ambiguity because the Maintenance Clause defines a duty of the insured and says little about the duties of the insurer which appear in the Insuring Clause. Again, the court found, because it is subject to differing, reasonable interpretations, the word “exhausted” is ambiguous.
The court applied Washington law requiring that ambiguity in an insurance contract be interpreted in favor of the insured
In so doing, the court held that primary insurance is exhausted when the primary carrier is insolvent, and it is a certainty that the primary carrier will not be making any payment on the insured’s covered losses. Federal therefore is obligated to drop down and provide coverage to WADG consistent with its excess policy, the court concluded.