9th Circuit Addresses "Gap in Coverage" Issues Created by Liability Insurer Insolvency
Insurer insolvency can have significant impacts for an insured even where a particular claim or loss triggers policies issued by multiple insurers. This point is illustrated by the 9th Circuit's decision earlier this month in California Insurance Company v. Stimson Lumber Co.,2009 WL 1035238 (.pdf) -- a coverage action stemming from Stimson's settlement of a class action lawsuit related to Stimson's Forestex wood siding product. One of Stimson's primary liability insurers, Home Indemnity, was insolvent which raised two coverage issues for Stimson as well as Stimson's other insurers: (1) Whether Stimson was obligated to itself cover Home Indemnity's pro-rata share of defense costs for the class action lawsuit; and (2) Whether an umbrella policy from another insurer "drops down" to fill the gap created by Home Indemnity's insolvency.
The 9th Circuit decided the defense costs issue in favor of Stimson, reasoning "[i]t It is unreasonable to treat Stimson as self-insured, when it sought to limit its liability by purchasing primary insurance."
But the 9th Circuit rejected Stimson's argument for its umbrella insurer to "drop down" as contrary to the umbrella policy language. In connection with this latter ruling, the 9th Circuit noted that the umbrella policy included an other insurance clause that demonstrated that the policy was to be excess over all primary insurance, both scheduled and unscheduled.
