Colorado Supreme Court rejects "drop down" coverage for insolvent insurer

If any insurer in a complex insurance program becomes insolvent, that can cause serious coverage gaps and leave a policyholder holding the bag. Colorado’s latest ruling underscores why all policyholders should review both policy wording and their carriers' financial strength.

The ruling and why it matters

On September 21, 2026, the Colorado Supreme Court decided A.R. Wilfley & Sons, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2026 CO 64. Wilfley, a pump maker facing decades of asbestos claims, had a scheduled primary insurer, Reliance Insurance Company, that went insolvent and could not pay. Wilfley argued that its umbrella/excess insurer, Federal Insurance Company, had to "drop down" and provide the first-dollar defense and indemnity Reliance would otherwise have owed.

Upon a certified question from the federal Colorado district court, the Colorado Supreme Court answered that Federal did not have to do so. Applying its policy language, Federal agreed to drop down only for claims "not covered" by the underlying policies, and the Court held that phrase asks whether a claim falls within the scope of the underlying coverage, not whether the underlying insurer can pay. Wilfley's asbestos claims fell within Reliance's coverage, so they stayed "covered" despite Reliance's insolvency and Federal was never triggered.

The takeaway for policyholders is clear: an excess or umbrella insurer does not automatically backstop an insolvent primary carrier. Federal never agreed to guarantee the solvency of the primary insurer Wilfley chose, and never charged a premium for that risk. The Court also set aside the one Colorado decision policyholders had relied on, Deisch & Marion, P.C. v. Int'l Ins. Co., 771 P.2d 19 (Colo. App. 1989), distinguishing it as an equitable fee-recovery dispute, calling its coverage analysis non-binding dictum, and overruling it to the extent inconsistent.

Practical takeaways

1. Involve coverage counsel at placement

Engage experienced coverage counsel before binding policies. Seek "deemed exhaustion" or similar terms expressly permitting excess access when an underlying insurer is unwilling or unable to pay. Specify what satisfies attachment, who funds any shortfall, and when defense obligations begin. Do not assume deemed exhaustion also supplies first-dollar coverage. Without negotiated protection, the insured may have to absorb the unpaid layer.

A deemed-exhaustion (or recognition-of-insolvency) clause treats the underlying limits as satisfied once a loss reaches the attachment point, even if the underlying insurer never pays because it is insolvent. When negotiating, pin down four points: 

1. The trigger, expressly naming insolvency, liquidation, or refusal to pay, not merely exhaustion by the underlying insurer's payment.
2. Attachment, confirming the excess layer attaches without the insured first funding the gap out-of-pocket.
3. Defense, stating when the excess insurer's defense duty begins.
4. Scope, clarifying whether the clause grants only vertical access to higher limits or true drop-down primary coverage. Beware the inverse: deemed-self-insured or strict exhaustion-by-payment provisions push the unpaid layer's dollars back onto the policyholder.

2. Prioritize creditworthy lower-layer insurers

Vet financial strength when selecting carriers and monitor it afterward. Price and limits are not enough: under wording like Federal’s, a scheduled primary carrier’s insolvency does not require the umbrella/excess insurer to replace it.

3. Review legacy programs now

Inventory historical policies and identify insolvent insurers and potential funding gaps. Ask your broker and/or coverage counsel whether replacement or gap-filling coverage can be purchased for those historical exposures, including known insolvencies. Test any proposal against the old tower’s attachment requirements and the proposed coverage’s exclusions. Do not assume new insurance will cover old claims.