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Ninth Circuit Rules on Impact of Insolvent Primary Insurer
Insurance Law Update
Ninth U.S. Circuit Court of Appeals
In California Ins. Co. v. Stimson Lumber Co., 2009 WL 1035238 (9th Cir. (Or.) April 16, 2009), the Ninth U.S. Circuit Court of Appeals held that an insured is not responsible to pay an insolvent primary insurer’s portion of defense costs on a pro-rata basis, and an umbrella policy does not “drop down” to fill the gap created by an underlying insurer’s insolvency.
Stimson Lumber Company entered into a class action settlement related to its wood siding product, for which it sought coverage under its insurance policies. As one of Stimson’s primary liability insurers, Home Indemnity, was insolvent, the issue was whether Home Indemnity’s pro-rata share of Stimson’s defense costs was the responsibility of Stimson, or whether it must be reallocated to the solvent primary insurers. An issue raised by Home Indemnity’s insolvency was whether Stimson must exhaust the Home Indemnity policy limits before seeking indemnification through an umbrella policy. Stimson had argued that the phrase “applicable limits” means “amount capable of being applied,” and that when Home Indemnity became insolvent, the limits no longer existed and coverage under the umbrella policy was triggered. The Ninth Circuit rejected this argument, holding that the umbrella policy “does not drop down to fill the gap created by the insolvency.” Any other conclusion, the court reasoned, would render the limits of liability provision of the umbrella policy meaningless.
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