Primary vs. Excess/Umbrella:
Hammering, Dropping, Exhausting and More
Neil Selman
Selman Breitman LLP
11766 Wilshire Boulevard, Sixth Floor
Los Angeles, CA 90025-6538
(310) 445-0800
[email protected]
Neil Selman represents insurers in coverage related matters, including general
liability, environmental, entertainment, professional liability, and extra-contractual
issues. He advises clients on business practices, underwriting and claims handling,
and drafts policy language and endorsements. His expertise also includes primary/
excess and surplus lines issues. Mr. Selman has litigated coverage and bad faith cases
before the California Supreme Court and federal and state appellate courts in several
jurisdictions. He is the managing partner of Selman Breitman LLP, a firm with 120
lawyers.
Primary vs. Excess/Umbrella:
Hammering, Dropping, Exhausting and More
Table of Contents
I.Introduction..................................................................................................................................................87
II. Who Are the Team Members?.....................................................................................................................87
III. Issue 1: “If I Had a Hammer”.......................................................................................................................88
IV. Issue 2: Can the Excess Insurer Sue Defense Counsel Retained by Primary?...........................................90
V. Issue 3: “Exhaustion” and “Drop Down” Disputes......................................................................................90
VI. Issue No. 4: How an Umbrella Can Be Ordered to Be Primary Coverage Even if There
Is a Primary Policy........................................................................................................................................93
VII.Conclusion.....................................................................................................................................................94
Primary vs. Excess/Umbrella: Hammering, Dropping, Exhausting and More ■ Selman ■ 85
Primary vs. Excess/Umbrella:
Hammering, Dropping, Exhausting and More
I.Introduction
In cases involving large damage claims, we often see situations where two or more insurers either
face off or try to use their positions for strategic advantage. These opposing teams can be referred to as (1)
Team Primary, and (2) Team Excess/Umbrella. These teams frequently go into “battle” regarding each team’s
respective obligations owed the same insured during the same policy period, whether it is the excess insurer
blaming the primary for failing to settle or one insurer seeking reimbursement from another. Excess insurers
take out their “hammers,” and the carrier fight each other over “exhausting,” “dropping down” and whether
umbrella policies can be forced to act as primary policies.
Team Excess/Umbrella may start “hammering” Team Primary to settle within the primary limits.
Team Primary may argue: “I don’t owe anything more; it’s time for Team Excess/Umbrella to step up, ‘drop
down’ and take over responsibility for the defense and/or indemnity.” Of course, many liability insurers issue
both primary policies and excess/umbrella policies, and these insurers often change their team jerseys on
a regular basis, depending on whether the insurer’s policy in issue in the claim or suit is primary or excess/
umbrella. It is only natural that the insurer will take one position when it is on Team Primary, and the same
insurer will take the polar opposite position when it is on Team Umbrella/Excess. Here’s a brief look at some of
the key aspects of the “battle” between the two teams.
II. Who Are the Team Members?
Primary coverage is just that. It provides the first layer of liability coverage. See, e.g., Diaz v. National
Car Rental Systems, Inc., 143 Wash. 2d 57 (Wash. 2001).
Excess coverage affords specific coverage above an underlying limit of primary insurance. A true
excess policy affords coverage that is no broader than the coverage afforded by the underlying primary policy
and increases the overall amount of liability coverage available to compensate for a loss, but does not increase
the scope of that liability coverage. See, e.g., Kennerly v. State, 580 A.2d 561 (Del. 1990). The general rule is
that excess coverage is not triggered until the underlying primary limits are “exhausted” by way of payments
of judgments or settlements. See, e.g., Allan D. Windt, 2 Insurance Claims and Disputes 5th, §6:45.
The excess policy will afford either “stand-alone” coverage or “following form” coverage. The coverage
afforded by a “stand-alone” excess policy is exclusively defined by the excess policy’s own insuring agreement,
conditions, definitions and exclusions. See, e.g., Planet Ins. Co. v. Ertz, 920 S.W.2d 591 (Mo. Ct. App. 1996).
The coverage afforded by a “following form” excess policy incorporates by reference the terms, conditions and
exclusions of the underlying primary policy. It “follows the form” of that primary policy, although the excess
policy may include some provisions that differ from those in the primary policy. See, e.g., Johnson Controls,
Inc. v. London Mkt., 784 N.W.2d 579 (Wis. 2010).
An umbrella policy may insure against certain risks that the primary policy does not; it can be a
“gap filler.” See, e.g., Commercial Union Ins. Co. v. Walbrook Ins. Co., Ltd., 7 F.3d 1047 (1st Cir. 1993, applying Massachusetts law). However, it might be better to think of the shape of an actual umbrella, where the
primary coverage fits under the canopy, but, around the primary coverage, the umbrella coverage can actually come down to the ground, providing a type of primary coverage for some claims not covered by the primary. For example, an umbrella policy may afford coverage for “personal and advertising injury” in a situation
where the particular underlying primary policy only affords coverage for “bodily injury” and “property damPrimary vs. Excess/Umbrella: Hammering, Dropping, Exhausting and More ■ Selman ■ 87
age.” In this situation, because the umbrella coverage will “drop down” (from the secondary layer of insurance) to provide primary (first layer) coverage for “personal and advertising injury,” the umbrella policy will
broaden the insured’s primary coverage. In affording this limited primary coverage, the umbrella insurer will
owe a duty to defend the insured regarding the claim or suit that is subject to coverage under the umbrella
policy, but not under the primary policy.
Some secondary liability policies are written to include separate (1) excess coverage for claims covered by the scheduled primary policy, and (2) umbrella coverage for claims not covered by the scheduled primary policy.
III. Issue 1: “If I Had a Hammer”
“If I Had A Hammer” is not just a folk song written by Pete Seeger and Lee Hays. It is also a mantra for
insureds and excess insurers in situations where the primary insurer may have an opportunity to settle the claim
or suit against the insured within the primary insurance limits of insurance. Actually, the more accurate mantra is: “I Need A Hammer Letter.” A “hammer letter” is a letter written by or on behalf of the insured or excess
insurer, that clearly and unequivocally (1) demands that the primary insurer settle the claim or suit within primary policy limits, and (2) warns that a failure to do so would leave the primary insurer responsible to pay any
ultimate judgment in excess of the primary policy limits. More often than not, this demand and warning is followed by a threat that, if the primary insurer does not settle within its limits, the “hammering” party (whether
insured or excess insurer) will take legal action against the “hammered” insurer. A hammer letter is designed to
put a great deal of pressure on the primary insurer to settle the case within the existing primary limits.
The hammer letter is useful in most jurisdictions as they recognize that an unreasonable failure to
settle within policy limits exposes the primary insurer to liability for paying a subsequent judgment in excess
of policy limits. See, e.g., 40 A.L.R.2d 168 (“Duty of liability insurer to settle or compromise”); and Am. Jur.
2d, Insurance §§1530 et seq. The hammer letter can later be used to show that the insured or excess insurer
saw impending disaster in terms of a result in excess of primary policy limits and pointed out this impending
disaster to the primary insurer, and yet the primary insurer chose to ignore this situation such that it should
now face a duty to pay any judgment in excess of the limits it unreasonably refused to pay. For the excess carrier, there is little downside to sending a hammer letter if there is a demand within the primary limits, unless
the excess carrier has taken the position that the claim is not covered under the applicable insurance.
Whether the primary insurer will in fact be held liable for an excess judgment will depend on the
outcome of a second trial regarding this issue. The jurisdictions differ as to what standard should apply
regarding the primary insurer’s liability for the judgment in excess of primary limits. Is negligence enough?
Is a showing of “bad faith” required? Once the primary insurer receives a hammer letter, is “bad faith” presumed? In most jurisdictions the primary insurer’s failure or refusal to settle within its limits must be found to
have been “unreasonable” under the circumstances.
Let’s assume the excess insurer is displeased with the way the primary insurer handled the insured’s
defense and/or failed or refused to settle the case against the insured and believes that it was this conduct on
the part of the primary insurer that resulted in the excess insurer’s policy being called into play. What’s an
unhappy excess insurer to do?
Some courts have held that the unhappy excess insurer can maintain a direct action against the primary insurer for “bad faith.” These states view the primary insurer as owing a direct duty to the excess insurer
to act in good faith, the same duty owed to the insured. See, e.g., General Star Nat’l Ins. Co. v. Liberty Mut. Ins.
Co., 960 F.2d 337 (3d Cir. 1992, applying New York law).
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Other courts have disagreed and do not view the primary insurer as owing the excess insurer any
direct independent obligation, but have held that the excess insurer is subrogated to the rights of the insured.
In these states, upon paying the judgment rendered against the insured, the excess insurer is equitably subrogated to the insured’s rights and remedies against the primary insurer and can file an equitable subrogation
suit. However, in that suit the defendant primary insurer will have the benefit of all defenses it would have
against the insured. See, e.g., Hartford Accident & Indem. v. Aetna Cas. & Sur. Co., 792 P.2d 749 (Ariz. 1990);
and Commercial Union Assur. Cos. v. Safeway Stores, Inc., 26 Cal. 3d 912, 918 (Cal. 1980)
Other courts have rejected this equitable subrogation claim approach and have instead concluded
that the excess insurer has no cause of action against the primary insurer unless the excess insurer has
obtained an assignment of rights from the insured. See, e.g., Allstate Ins. Co. v. Reserve Ins. Co., 116 N.H. 806
(N.H. 1976).
Whether the excess insurer is going to prevail on its cause of action against the primary insurer is
going to depend on what standing to sue approach (e.g. direct action, equitable subrogation or assignment)
approach and what standard for the primary insurer’s liability (e.g. negligence, recklessness or bad faith) the
jurisdiction has adopted, and application of this approach and standard to the facts of the particular situation.
Neither the insured nor the excess insurer is going to have a viable cause of action against the primary insurer for its negligent or bad faith failure to settle the underlying claim or suit within primary limits
unless it can be factually alleged and shown that the estimated expected value of the case exceeded those limits and how the primary insurer in fact acted negligently or in bad faith. Schal Bovis, Inc. v. Casualty Ins. Co.,
732 N.E.2d 1082 (Ill.App.1999). In most states, though, the resulting excess of limit judgment becomes evidence in the subsequent action, sometimes creating a rebuttable presumption of the case’s value.
In those states where the excess insurer has no personal, direct right of action against the primary
insurer, and its standing to sue the primary insurer is based on an assignment of rights from the insured or
the equitable subrogation doctrine, the excess insurer is “stepping into the shoes” of the insured and will not
prevail if the insured would not prevail had the insured brought the same cause of action against the primary
insurer. For example, in Puritan Ins. Co. v. Canadian Universal Ins. Co., Ltd., 775 F.2d 76 (3d Cir. 1985), the
Court of Appeals applied Pennsylvania law, pursuant to which the excess insurer only has standing to sue
pursuant to an equitable subrogation theory. The court held that, where the primary insurer’s decision to try,
rather than to settle, the suit was approved by the insured (the primary insurer and the insured and its counsel
all evaluated the suit as a “no liability” case), the excess insurer could not successfully sue the primary insurer
when the verdict exceeded the primary policy limits. The court concluded: “[T]he insured’s consent, and
indeed direction, to try the case after being fully informed of the risks involved is an insurmountable barrier
to the maintenance of a bad faith claim against the insurer” by either the insured or excess insurer.
The excess insurer is going to have to show that the primary insurer’s conduct was in fact the cause
of the loss suffered by the excess insurer. The excess insurer is not going to prevail where the primary insurer’s claims handling, while clearly substandard, cannot be shown to have caused the excess insurer to have
to make a payment towards the ultimate settlement or judgment. Sometimes the claim or suit simply could
not have been settled by the primary insurer for the primary policy limit. See, e.g., RLI Ins. Co. v. General
Star Indem. Co., 997 F. Supp. 140 (D. Mass. 1998) (eight year old severely injured in fall as a result of defects
in stairwell of apartment owned by insured; primary policy limit was only $1 million; insurer affording $4
million in excess coverage could not prevail against the primary insurer, which engaged in very poor claims
handling because, based on the liability/injury situation, the child’s representatives would never have settled
for an amount within the primary limit no matter what efforts at settlement the primary insurer might have
made).
Primary vs. Excess/Umbrella: Hammering, Dropping, Exhausting and More ■ Selman ■ 89
IV. Issue 2: Can the Excess Insurer Sue Defense Counsel Retained by
Primary?
Can the unhappy excess insurer sue defense counsel retained by the primary insurer when it believes
that it was, at least in part, the way counsel handled the defense that resulted in the excess insurance layer
being reached? The recent answer of the Mississippi Supreme Court in Great American Excess & Surplus Ins.
Co. v. Quintairos, Prieto, Wood & Boyer, P.A., 2012 WL 266858 (Miss. Ct. App. Jan. 31, 2012) cert. granted, 94
So. 3d 290 (Miss. 2012) and aff ’d in part, rev’d in part, 100 So. 3d 420 (Miss. October 18, 2012), was: “Yes, the
excess insurer can sue defense counsel retained by the primary insurer, but only on an equitable subrogation,
and not on a direct legal malpractice, theory of recovery.”
The Supreme Court first held that an attorney-client relationship is an essential element in a legal
malpractice claim and the excess insurer could not plead sufficient facts to establish an attorney-client relationship between it and defense counsel allege the factual basis required to maintain a direct claim of professional negligence against attorneys retained by the primary insurer. Defense counsel did not provide legal
advice or services to the excess insurer by simply communicating to that insurer their opinion regarding the
outcome and value of the case against the insured.
The Quintairos court then concluded that the excess insurer could sue defense counsel for equitable
subrogation, finding that, when attorneys breach the duty they owe to their client (the insured), an excess
insurer that must pay the damages on behalf of the client, can pursue, to the extent of the insurer’s loss, the
same claim the client could have pursued. The excess insurer may pursue equitable subrogation claim against
the attorneys retained by the primary insurer for counsel’s mishandling of the underlying action that caused a
result that called the excess insurer’s coverage into play, but the excess insurer can only recover to the extent of
the loss the insurer sustained as a result of such mishandling. (In Quintairos, defense counsel failed to timely
designate the insured’s expert witness, leaving the insured without an expert for trial such that the case had to
be settled for an amount in excess of primary limits.)
Some other courts would agree with the Quintairos court that the excess insurer can pursue an equitable subrogation claim. For example, in ACE American Ins. Co. v. Sandberg, Phoenix & Von Gontard, PC.,
2012 WL 4573340 (S.D. Ill. Oct. 2, 2012), the court held that the excess insurer had a claim for equitable subrogation where the trial court had sanctioned defendant insured by striking all pleadings as a result of defense
counsel’s discovery abuses and the excess insurer alleged that this situation increased the costs of settling the
underlying suit such that the excess coverage was called into play.
However, the majority of the jurisdictions that have addressed the question of whether the excess
insurer has a viable equitable subrogation claim against defense counsel hired by the primary insurer do not
agree with the Mississippi Supreme Court. The majority view prohibits equitable subrogation regarding such
a professional negligence claim either on the ground that a professional negligence claim cannot be assigned
or as a matter of public policy. A key public policy reason for not allowing such an equitable subrogation cause
of action is the need to protect the attorney-client relationship between defense counsel and the insured. See,
e.g., the cases referenced in the Court of Appeals’ decision in Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, P.A., 2012 WL 266858 (Miss. Ct. App. Jan. 31, 2012).
V. Issue 3: “Exhaustion” and “Drop Down” Disputes
The basic principle is that the excess insurer owes no coverage obligation to the insured unless and
until the primary insurer exhausts its policy limits with respect to settlements or judgments on behalf of the
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insured. There are numerous situations that give rise to disputes between primary and excess insurers regarding whether proper “exhaustion” has occurred in a particular case, including the following:
Situation No. 1: There are multiple claimants and insufficient primary policy limits to pay all the
claims. How can the primary insurer properly exhaust its coverage? Can it settle some claims on a “first come,
first served” basis and then stop defending the remaining claims and assert that it is up for the excess insurer
to take over?
The majority of states have adopted a “first come, first served,” aka “first to settlement,” approach to
settling claims where there are insufficient policy limits to settle all claims. See, e.g., 70 A.L.R.2d 416 (Basis
and manner of distribution among multiple claimants of proceeds of liability insurance policy inadequate to
pay all claims in full); and Texas Farmers Ins. Co. v. Soriano 881 S.W. 2d 312 (Tex. 1994) (when faced with a
settlement demand arising out of multiple claims with inadequate proceeds, an insurer may enter into a reasonable settlement with one of several claimants, even though the settlement will exhaust or diminish proceeds available to pay other claims).
The “first come, first served” approach recognizes that insurers should be able to enter into reasonable settlements with any one or several of multiple claimants, even though such settlement(s) may deplete or
exhaust the policy limits, without incurring bad faith liability in connection with any of the remaining claims.
Pursuant to this approach, the insurer need only act in good faith in securing the settlement on behalf of its
insured and may settle less than all the claims if (and only if) it is reasonable to do so based upon the information available to the insurer at the time of the settlement of each claim. The comparative severity of the
injuries or damages is not always the deciding factor regarding which claim(s) to settle. The question is what a
reasonable insurer would do when confronted with the opportunity to settle some, but not all, claims.
However, to see whether a particular primary insurer is properly “exhausting” in a particular multiple claimants/insufficient limits situation, you will have to check the approach used by the particular jurisdiction because not all jurisdictions apply this “first some, first served” approach. For example, there is California
authority that the primary insurer cannot simply settle quickly on a “first come, first served” basis and then
“abandon” the insured. Rather, the insurer should attempt to purchase the greatest possible release of liability
for the insured. Heredia v. Farmers Ins. Exch. (1991) 228 Cal.App.3d 1345; and Kinder v. Western Pioneer Ins.
Co. (1965) 231 Cal.App. 2d 894.
Situation No. 2: The primary insurer tenders its primary limits to either the insured or to the excess
insurer, or it files an interpleader action in which the limits are deposited with the court for proper division
among multiple claimants. Has this insurer properly “exhausted” the primary policy, or does proper “exhaustion” only occur when the primary insurer actually pay the limits to the injured claimant(s)?
The answer depends on the “exhaustion” language of the particular excess policy. Some definitions
of exhaustion are broad and generic, such as agreements to pay ultimate net loss only “after all primary and
other underlying insurance has been exhausted.” Other excess policies provide that the policy does not attach
until the insured’s underlying insurer “shall have paid the amount of the policy limits.” Still others are more
precise, providing that “liability for any covered loss shall attach only after the insurers of the Underlying Policies have been paid, in the applicable legal currency, the full amount of the Underlying Limit and the Insureds
shall have paid the full amount the uninsured retention, if any applicable to the primary Underlying Policy.”
Nationwide, there is a split in authority as to whether the primary insurer’s mere tendering of its limits to the insured or excess insurer or, in conjunction with an interpleader proceeding, depositing those limits
with the court, results in “exhaustion” that would call the excess coverage into play. Some courts have held that
simply tendering or depositing the limits is not enough; actual payment to the injured claimant(s) is required.
Primary vs. Excess/Umbrella: Hammering, Dropping, Exhausting and More ■ Selman ■ 91
See, e.g., Chubb/Pacific Indemnity Group v. Insurance Co. of North America, 188 Cal. App. 3d 691 (Cal.App.
1987) (primary insurer’s coverage must be exhausted by actual payment of a judgment or settlement; primary insurer may not “exhaust” its limits by merely tendering those policy limits to the excess insurer). Other
courts have disagreed.
Situation No. 3: What if there is a coverage dispute, and the insured and the primary insurer settle the
dispute by way of the primary insurer’s payment of less than 100 percent of the primary limits? Does this payment of less than the full primary policy limits qualify as “exhaustion”? In deciding this issue, courts consider
a number of factors, including applicable jurisdictional law, the language of the particular policies’ exhaustion
provisions, and whether the insured’s loss in fact exceeded the limits of the primary policy.
Some courts have concluded that unambiguous exhaustion provisions requiring actual payment of
the full amount of the underlying insurance are enforceable and that a failure by the insurer to actually pay
its full primary limits is a failure to “exhaust” such that the excess insurer’s obligation is not triggered. See,
e.g., Citigroup Inc. v. Fed. Ins. Co., 649 F.3d 367 (5th Cir. 2011, applying Texas law) (provision of excess policy
requiring that “full amount of the underlying insurer’s limits be exhausted before coverage attaches” meant
that settlement for less than the underlying insurer’s limits of liability did not trigger the excess insurer’s coverage); Goodyear Tire & Rubber Co. v. Nat’l Union Fire Ins. Co., 2012 WL 4054122 (6th Cir. 2012, applying
Ohio law) (excess insurer had no indemnity obligation where the insured settled with the primary carrier for
less than policy limits; policy language stating that the primary insurer must “have paid in legal currency the
full amount of the Underlying Limit” unambiguously required actual payment of full policy limits in order to
access excess coverage); and Qualcomm, Inc. v. Certain Underwriters at Lloyds, London (2008) 161 Cal.App.4th
184, review denied (Cal.App. 2008) (insured which settled with its primary insurers for less than policy limits,
cannot collect from an excess policy that provided it did not attach until the underlying insurers “have paid or
have been held liable to pay the full amount of the Underlying Limit of Liability”).
However, other courts have found exhaustion requirements to be ambiguous and/or to be against
public policy such that a settlement between insured and primary insurer for less than the full policy limits could trigger excess insurance. For example, in Trinity Homes, LLC v. Ohio Casualty Insurance Company,
629 F.3d 653 (7th Cir. 2010, applying Indiana law), the federal appellate court held that an excess policy providing that, “[i]f the limits of ‘underlying insurance’ have been exhausted by payment of claims, this policy
will continue in force as ‘underlying insurance,’” did sufficiently state that exhaustion would only occur when
the underlying policy limits had been completely paid. However, the court held that this language “does not
clearly provide that the full limit must be paid out by the CGL insurer alone. As such, the policy is ambiguous
and susceptible to the meaning put forth by [the insured] that a CGL policy can be exhausted when an insured
and a CGL insurer enter into a settlement agreement where the primary insurer will pay a large percentage of
the total limit and the insured takes responsibility for the remainder.” The court noted that this construction
of the policy language “was reinforced by Indiana public policy favoring out-of-court settlements.”
Situation No. 4: Before the excess policy is obligated to respond, does only exhaustion of the limits of
the scheduled primary policy directly underlying the excess policy (“vertical exhaustion”) have to occur? Or,
where injury or damage occurs in more than one policy year, must exhaustion of all of the limits of the primary policies triggered with respect to the injury or damage in issue (“horizontal exhaustion”) have to occur?
The answer depends on the language of the particular excess policy and the way the courts of the
pertinent jurisdiction have treated the “vertical” vs. “horizontal” exhaustion issue. For example, in California, whether “vertical exhaustion” or “horizontal exhaustion” applies with respect to a particular excess policy
situation depends on the terms of the particular insuring language of that secondary policy. Unless the insuring language of the excess policy expressly provides otherwise, the secondary insurer could owe no duty to
92 ■ Insurance Coverage and Claims ■ April 2013
provide a defense to the insured until “horizontal exhaustion” (exhaustion of all the limits of the triggered
primary policies) has occurred. See, e.g., Community Redevelopment Agency v. Aetna Casualty & Surety Co.
(1996) 50 Cal.App.4th 329 (Cal.App. 1996) (“horizontal exhaustion” of primary covered was required where
the excess policy stated that the insurer owed no obligation unless “no other insurance affording a defense or
indemnity against such a suit is available to the Insured;” this language made it clear that the excess policy
“was intended to be excess to all underlying insurance whether such insurance was described in the schedule
of underlying insurance or not”); and Travelers Cas. and Surety Co. v. Transcontinental Ins. Co., 122 Cal. App.
4th 949 (Cal.App. 2004) (“horizontal exhaustion” of primary coverage is not required to trigger an excess policy where the provisions of that excess policy provide “otherwise;” “[i]f an excess policy states that it is excess
over a specifically designated policy and will cover a claim when that specific primary policy is exhausted,
such language is sufficiently clear to overcome the usual presumption that all primary coverage must be
exhausted”).
A “drop down” occurs when an insurer providing higher layer of coverage is obligated to “drop down”
from its layer of coverage to provide the coverage that the immediately underlying insurer agreed to provide.
A key example of the “drop down” dispute situation occurs when the primary insurer becomes insolvent.
When must the excess insurer “drop down” to the primary layer and fill in the coverage gap caused by the
underlying primary insurer’s insolvency? The answer depends on the language of the particular excess policy and the way the courts of the pertinent jurisdiction interprets this language. However, the majority view
has been that, absent express policy language requiring that the excess insurer drop down, the excess insurer
should not be required to either defend or indemnify the insured simply because the underlying primary
insurer is financially unable to do so.
“Drop down” disputes are not limited to insolvent primary insurer situations. For example, is an
excess or umbrella insurer required to “drop down” where the injury or damage in question is not covered by
the underlying primary policy, whether pursuant to application of an exclusion in the primary policy or for
some other reason?
VI. Issue No. 4: How an Umbrella Can Be Ordered to Be Primary
Coverage Even if There Is a Primary Policy
Here’s an example of how an umbrella policy can be ordered to pay first dollar coverage even in the
presence of other primary insurance. In Federal Ins. Co. v. Steadfast Ins. Co., 209 Cal. App. 4th 668 (Cal.App.
2012), review and depublication denied, this author and his partner represented prevailing primary insurer
Steadfast in its dispute with secondary insurer Federal, which afforded both excess and umbrella coverage, over primary policies issued by Steadfast and another primary insurer (Liberty). The dispute concerned
whether the primary insurers or Federal, pursuant to its umbrella coverage, owed a duty to defend a suit by
the United States against the insured landlords for discrimination in violation of the federal Fair Housing Act.
Steadfast and Liberty afforded primary liability coverage to the landlords for injury arising out of the offenses
of “wrongful eviction,” “wrongful entry” and “invasion of the right of private occupancy.” Federal afforded
both (1) excess coverage regarding liability arising out of these offenses, and (2) specific coverage for injury
arising out of “discrimination,” coverage which was not afforded by the two primary insurers. At different
times in the underlying suit, Steadfast and Federal defended the insureds.
The Court of Appeal held that only Federal had a duty to defend because only Federal afforded coverage for the “discrimination” in violation of federal statute claims being pursued by the federal government.
Plaintiff United States could not seek, and, was not seeking, damages because of injury arising out of the comPrimary vs. Excess/Umbrella: Hammering, Dropping, Exhausting and More ■ Selman ■ 93
mon law theories of recovery of “wrongful eviction,” “wrongful entry” and “invasion of the right of private
occupancy.” Since the underlying primary coverage afforded by Steadfast and Liberty did not include coverage
for “discrimination,” whereas the secondary coverage afforded by the Federal policy did, Federal’s “discrimination” coverage was umbrella coverage and, as an umbrella insurer, Federal was obligated to “drop down” and
defend the insureds.
In Federal, the Court of Appeal concluded: “Because the Sterling action was based on discrimination
and only the Federal policies, and not the Steadfast or Liberty policies, provided coverage for discrimination
claims, the umbrella coverage in the Federal policies ‘dropped down’ to fill the gap in the Steadfast and Liberty
policies and provide primary coverage in the Sterling action.”
VII.Conclusion
This was only a very brief overview of some of the major battles that are waged in the primary vs.
excess/umbrella coverage arena. To try to predict which side will prevail in a specific dispute between a primary insurer and an excess/umbrella insurer, you have to look closely at the particular policy language
involved and do some research regarding whether the courts in the pertinent jurisdiction have favored either
Team Primary or Team Excess/Umbrella in that type of dispute and why.
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