1. A drop down clause provides coverage that “drops down” and acts as primary coverage in certain situations. These include when the primary insurer is insolvent or the underlying policy aggregate limits have been exhausted.
2. A drop down clause covering insolvency will only be effective if the policy says so. For example, if the excess or umbrella policy does not provide drop down coverage if the primary insurer is insolvent, then the clause is not triggered. Since all policies are contracts, courts are not willing to add terms that are not agreed to by the parties at the inception of the contract. See, e.g. Sybron Transition Corp. v. Sec. Ins. of Hartford., 258 F. 3d 595, 598 (7th Cir. 2001) (the insolvency of a successor excess carrier should not increase the liability of its predecessor); and Interco Inc. v. Nat’l Sur. Corp., 900 F.2d 1264, 1267-68 (8th Cir. 1990). But cf. Cal. Ins. Co. v. Stimson Lumber Co., 325 Fed. App’x 496, 499 (9th Cir. 2009) (“There is no equitable reason to treat [an insured] as self-insured in face of [its insurer’s] insolvency.”).
3. Defense costs can drop down. An excess or umbrella carrier will be liable for defense costs if its coverage is broader than that afforded by the primary policy. However, such defense costs will be apportioned, to the extent possible, to those claims covered by the excess insurer. See, Home Ins. Co. v. Nat’l Union Fire Ins. of Pittsburgh, 658 N.W.2d 522, 529-30 (Minn. 2003) (excess carrier is liable for defense costs association with those claims on which its coverage is primary), and Fid. & Deposit Co. of Maryland v. Hartford Cas. Ins. Co., 189 F. Supp. 2d 121, 12226 (D. Kan. 2002) (requiring excess carrier to provide defense on claims covered by its broader policy terms).