Colorado Supreme Court Determines Insurer Insolvency Does Not Obligate Excess Carriers to Drop Down

The Colorado Supreme Court recently held that an umbrella or excess insurer is not required to “drop down” and provide coverage simply because an underlying insurer becomes insolvent.

The U.S. District Court for the District of Colorado certified the question of whether an excess insurer has an obligation to provide coverage or defense when a primary or underlying insurer is unable to pay.

The insured argued that the primary insurer’s insolvency effectively transformed claims that were “covered” by the primary policy into claims that were “not covered,” triggering coverage under umbrella or excess policies for claims “not covered” by the underlying policies.

The Colorado Supreme Court rejected that argument, holding that, by providing excess coverage, the excess insurers did not agree to defend the insured against claims for which the insolvent underlying insurer had provided coverage, nor did they agree to pay claims before the underlying coverage had been exhausted.

Because the insolvency of the primary insurer did not transform a “covered” claim into a “not covered” claim, the Court concluded that the excess policies did not provide coverage on that basis.

The case now returns to the federal district court to resolve the remaining issues in the underlying declaratory judgment action.

A.W. Wilfley & Sons, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2026 CO 64 (Sept. 21, 2026).

For insurers and policyholders dealing with insolvency issues, the distinction between coverage exhaustion and insurer insolvency can have significant consequences—particularly where multiple layers of insurance are involved.