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Werner Industries Inc. v. First State Insurance Co.

Decided: May 6, 1987.


On appeal from Superior Court, Law Division, Passaic County.

Pressler, Baime and Ashbey. The opinion of the court was delivered by Baime, J.A.D.


[217 NJSuper Page 438] This appeal presents a question of first impression. At issue is whether an excess liability carrier is obliged to pay a claim falling within the coverage of the underlying insurance where the primary insurer has become insolvent. The surplus umbrella policy issued in this case provides that the secondary insurer will pay sums in excess of the "amounts recoverable" under the underlying insurance. We hold that under this language the

excess carrier is duty-bound to bear the loss resulting from the insolvency of the primary insurer.

The facts are not in dispute. Plaintiff, a machinery manufacturer, retained the Rice Agency, a licensed broker, to procure primary general insurance and excess liability coverage. The broker placed plaintiff's underlying insurance with Ambassador Insurance Company (Ambassador) and its surplus umbrella coverage with defendant First State Insurance Company. The umbrella policy issued by defendant is an extensive and complex document consisting of a declaration page, an insuring agreement and several attached riders. The declaration page provides for individual occurrence and aggregate annual maximum liability coverage in the amount of $3,000,000 for injury or damage "in excess of [t]he amount recoverable under the underlying insurance as set out in [s]chedule A." Attached to the policy is schedule A which states the limits of the underlying Ambassador policy, $500,000 for bodily injury and $250,000 for property damage. The declaration page also provides that the "limit of [defendant's] liability is subject to all the terms of [the] policy."

The insuring agreement states that defendant "shall be liable only for the ultimate net loss in excess of the . . . insured's underlying limit. . . ." The term "ultimate net loss" is defined as "the sums paid as damages for which the insured is legally liable after making deductions for all other recoveries, salvages and other insurance (whether recoverable or not) other than the underlying insurance. . . ." The term "underlying limit" is defined as "an amount equal to the limits of liability indicated beside the underlying insurance listed in [s]chedule A, plus the applicable limits of any other underlying insurance collectible by the insured." The agreement further provides that coverage is not applicable until the insured's underlying insurer becomes obligated to pay the "underlying limit." In the agreement, the insured "warrants" that the underlying insurance "shall be maintained in force" and that any renewals or replacements will not be "more restrictive in coverage." In the event

of a breach of that provision, the agreement states that defendant's liability under the policy will not be increased.

As noted previously, several riders and schedules are attached to the insuring agreement. The only rider in any sense relevant to the issue presented is one entitled "contractual liability." In that rider, apparently designed to cover risks assumed by the insured by way of indemnification agreements, it is stated that the policy "is not applicable unless the contractual liability is covered by valid and collectible underlying insurance. . . ."

During the policy period, plaintiff was served with complaints in two personal injury actions. Both complaints were referred to Ambassador for defense and possible indemnification. In both cases, plaintiff advised Ambassador that the claims might exceed the coverage provided by the underlying insurance. Defense of these matters was undertaken by Ambassador which retained attorneys on plaintiff's behalf. Although one matter was settled for an amount substantially less than the underlying insurance policy limit, the other case remains pending.

In 1984, Ambassador was declared insolvent by a Vermont court. Since Ambassador was a surplus line insurer, it was excluded from the purview of the New Jersey Property -- Liability Insurance Guaranty Association Act (N.J.S.A. 17:30A-1 et seq.). Our Legislature thus enacted the New Jersey Surplus Lines Insurance Guaranty Fund Act (N.J.S.A. 17:22-6.70 et seq.) specifically to deal "with the imminent declaration of insolvency of Ambassador. . . ." Introductory Statement, Assembly Bill No. 2273, L. 1984, c. 101. The fund created by that statute provides coverage up to a maximum of $300,000 for any single occurrence. N.J.S.A. 17:22-6.74a(1). That amount may be adjusted periodically based on the monies available to the fund. Following plaintiff's application, the fund assumed the defense in the pending personal injury action. We are advised that the fund is presently paying claims on a proportional basis

covering only 40% of the amounts due with the promise to pay the remainder when ...

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