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The Home Insurance Co. v. Hooper, 294 Ill. App. 3d 626, 691 N.E.2d 65 (1998),
appeal denied, 178 Ill.2d 576, 699 N.E.2d 1031 (1998). A company purchased
a $1 million insurance policy under which it self‐insured for the first $250,000
in damages. Shortly after an employee, the defendant Hooper, was injured
on the job, the company went bankrupt. Home filed a declaratory judgment
action seeking an order that the company was required to actually pay the
$250,000 self‐insured retention before Home had any obligation to pay
under its policy. After concluding that the language of the policy did not
include a drop down provision that would require the insurance company to
pay the first $250,000 in liability, the court held that Section 388 of the
Illinois Insurance Code required the insurance company to pay any portion of
an award to the injured worker that was in excess of 250,000, up to the
policy limit. The court's rationale was that the plain language of Section 388
makes clear the legislative intent to prevent insurers from using the
insured's bankrupt condition and resulting inability to make actual payment
to satisfy a judgment or any portion thereof as grounds to avoid payment on
a policy.
Louisiana
Massachusetts
Huggins v. Gerry Lane Enters. Inc., 950 So. 2d 750 (La. Ct. App. 2006). Plaintiff
filed suit against defendant and its insolvent insurer. The insolvent insurer had
provided a $1 million liability insurance policy. Defendant and Louisiana
Insurance Guaranty Association (“LIGA”) filed an answer and a third‐party
demand against excess of loss insurer alleging that the excess insurer’s $10
million commercial umbrella policy should drop down to provide coverage for
the first $1 million in liability unavailable due to the liability insurer’s insolvency.
The court of appeals rejected defendant’s and LIGA’s argument for “drop
down” because the language of the excess of loss policy specifically provided
that no drop down would occur if there was underlying coverage for the first $1
million. Therefore, the excess of loss policy, which coverage began at $1 million,
would not be reached until the net loss to defendant exceeded $1 million. In
sum, the excess of loss policy was intended to drop down to provide coverage
for an underlying insolvent insurer.
Gulezian v. Lincoln Ins. Co., 399 Mass. 606, 506 N.E. 2d 123 (1987). References
to "applicable limits" and "collectible insurance" in an excess insurance policy
created an ambiguity which would be resolved against the excess insurer, and
excess indemnity coverage dropped down to cover the consequences of the
insolvency of the primary insurer.
Massachusetts Insurers Insolvency Fund v. Continental Casualty Co., 399 Mass.
598, 506 N.E. 2d 118 (1987). Where an excess insurance policy says, without
limitation, that it drops down when the underlying coverage has been
"reduced," that policy provides first dollar coverage if the primary insurer
becomes insolvent and unable to make a payment on a claim.
MBTA v. Allianz Ins. Co., 413 Mass. 473, 597 N.E.2d 439 (1992). A second‐layer
excess policy that provides that its obligation does not attach until underlying
insurers paid or were held liable to pay full amount of underlying coverage
does not create ambiguity to be resolved in favor of the insured and does not
provide drop down coverage to replace coverage uncollected from an
insolvent underlying insurer.
Northmeadow Tennis Club, Inc. v. Northeastern Fire Ins. Co. of Pa., 26 Mass.
App. Ct. 329, 526 N.E. 2d 1333 (1988). The court provided several guidelines to
consider in determining whether excess insurance "drops down" when the
primary insurer is insolvent, including: (1) there is no overriding principle or
policy involved in deciding whether excess coverage insurers against the
insolvency of the primary insurer; (2) the reasonable expectations of the buyer
of the insurance policy can be taken into account but are not decisive; (3) in the