Insurer Insolvency – Colorado

A.R. Wilfley & Sons, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA
-- P.3d ---, 2026 WL 2820029 (Colo. Sept. 21, 2026)

The Colorado Supreme Court held that the umbrella/excess insurer, Federal Insurance Company (Federal), was not required to drop down and provide first-dollar indemnity and defense coverage to the insured, A.R. Wilfley & Sons, Inc. (Wilfley), when the scheduled primary insurer was insolvent. The issue in the case was whether the phrase “not covered,” as used in umbrella/excess policies issued by Federal to Wilfley, included occurrences that fell within the scope of a scheduled primary policy issued by an insolvent insurer. The Supreme Court concluded that “not covered” addresses the scope of coverage, not the collectability of payment, and that a covered occurrence remains covered even when the primary carrier is insolvent. It, therefore, held that Federal was not obligated to drop down and provide coverage to Wilfley.

Since the 1980s, Wilfley was named in lawsuits alleging bodily injury from exposure to asbestos in its products. Great Northern Insurance Company covered these lawsuits until its policy limits were exhausted. Another primary insurer, Reliance Insurance Company (Reliance), issued scheduled primary policies to Wilfley, but those policies became uncollectible due to Reliance’s insolvency. Every source of Wilfley’s underlying primary insurance eventually fell away through insolvency, exhaustion, exclusion or settlement.

Federal issued umbrella/excess policies to Wilfley covering policy periods in 1981, 1982 and 1985 (Federal policies). The Federal policies’ defense provision obligated Federal to defend “any occurrence not covered by the underlying policies listed in the schedule of underlying insurance, or any other underlying insurance collectible by the insured, but covered by the terms and conditions of this policy.” (Emphasis added.) The Federal policies also required Wilfley to maintain the scheduled underlying insurance in full effect, and provided that if Wilfley failed to do so, Federal would be liable only to the same extent as if Wilfley had complied.

Wilfley tendered the asbestos actions to Federal, which initially defended under a full reservation of rights but eventually denied coverage. Wilfley sued in federal court, alleging breach of contract, declaratory relief, estoppel and common law bad faith. Wilfley argued that because Reliance’s policies had become uncollectible, the claims were “not covered” by those policies, and Federal was required to drop down and supply the primary coverage Reliance could no longer furnish. The district court initially agreed with Federal, but it later withdrew its order and certified the question to the Colorado Supreme Court, citing a 1989 Colorado Court of Appeals decision that arguably required an umbrella/excess insurer to defend when the primary coverage became uncollectible.

The Supreme Court concluded that the Federal policies were unambiguous and allowed only one reasonable reading. The Supreme Court found that the Federal policies deliberately distinguished between the term “covered,” which described occurrences within the scope of scheduled underlying insurance, and the term “collectible,” which applied only to insurance from unscheduled insurers. The Supreme Court acknowledged that adopting Wilfley’s reading would render the term “collectible” surplusage, convert Federal into a financial guarantor of every scheduled underlying insurer—a risk Federal neither agreed to assume nor charged a premium to cover—and relieve Wilfley of its responsibility to maintain coverage through a solvent carrier of its own choosing. Therefore, Federal was not required to step into the shoes of the scheduled, but insolvent, underlying primary insurer and provide Wilfley with first-dollar indemnity or defense costs for the asbestos lawsuits.

By: Joshua R. LaBar