                   IN THE SUPREME COURT OF MISSISSIPPI

                               NO. 2006-CA-00088-SCT

CALDWELL FREIGHT LINES, INC.


v.

LUMBERMENS MUTUAL CASUALTY
COMPANY, INC.

DATE OF JUDGMENT:                        01/03/2006
TRIAL JUDGE:                             HON. MICHAEL R. EUBANKS
COURT FROM WHICH APPEALED:               PEARL RIVER COUNTY CIRCUIT COURT
ATTORNEY FOR APPELLANT:                  DONNA POWE GREEN
ATTORNEY FOR APPELLEE:                   DORRANCE D. AULTMAN, JR.
NATURE OF THE CASE:                      CIVIL - INSURANCE
DISPOSITION:                             AFFIRMED - 02/01/2007
MOTION FOR REHEARING FILED:
MANDATE ISSUED:

      EN BANC.

      DICKINSON, JUSTICE, FOR THE COURT:

¶1.   Jared M. Harvey filed suit against Caldwell Freight Lines (“Caldwell”) to recover

damages he claims resulted from an accident involving one of Caldwell’s trucks. Caldwell’s

primary liability insurer, Legion Insurance Company (“Legion”), became insolvent, causing

Caldwell to turn to its Commercial Catastrophe Liability Policy (“Catastrophe Policy”)

written by Lumbermens Mutual Casualty Company (“LMCC”) to fill the gap in coverage

caused by Legion’s insolvency. The question presented is whether LMCC’s policy covers

a gap in coverage resulting from a primary insurer’s insolvency.
                      BACKGROUND FACTS AND PROCEEDINGS

¶2.    On July 8, 2000, Harvey was involved in an automobile accident with William S.

Campbell, who was driving a Freightliner truck owned by Caldwell. Harvey filed a

complaint against various defendants 1 to recover damages and expenses he incurred as a

result of the accident. Caldwell was insured by Legion through a commercial general

liability policy with limits of $1,000,000 per occurrence and $2,000,000 in the aggregate.

In addition to its commercial general liability policy with Legion, Caldwell was covered by

a Catastrophe Policy issued by LMCC.

¶3.    When the North Carolina Department of Insurance placed Legion into insolvency, the

North Carolina Insurance Guaranty Association (“NCIGA”) became obligated to pay up to

$300,000 on behalf of Caldwell, should Caldwell be found liable to Harvey.

¶4.    During the course of the original action, Harvey entered into a settlement agreement

with several defendants whereby NCIGA paid $300,000 and Caldwell paid $200,000.

Apparently believing that Harvey’s damages totaled $1,200,000, LMCC agreed to pay the

$200,000 in damages which exceeded the $1,000,000 Legion policy limit. Arguing that

LMCC’s policy provided coverage for losses exceeding the $300,000 paid by NCIGA,

Caldwell demanded LMCC reimburse it for the $200,000 it paid to Harvey.

¶5.    This demand for “gap” coverage was the subject of a Third-Party Complaint filed by

Caldwell against Kemper Casualty Insurance Company 2 and its subsidiary, LMCC. Caldwell



       1
           The defendants named in the complaint are Campbell, Caldwell, and Legion.
       2
        Kemper Casualty Insurance Company was dismissed without prejudice on August 25, 2005,
per an Agreed Order of Dismissal.

                                                2
alleged the Catastrophe Policy required LMCC to provide primary coverage under certain

circumstances, including the primary insurer’s insolvency. Caldwell also claimed LMCC

had a duty to defend it in the litigation filed by Harvey.

¶6.    LMCC filed a motion for summary judgment alleging the Catastrophe Policy covered

only the damages exceeding the primary insurer’s policy limits, and therefore, LMCC could

not be liable for the gap in coverage caused by Legion’s insolvency. Caldwell filed its own

motion for summary judgment arguing the Catastrophe Policy required LMCC to “drop

down” and fill the gap caused by Legion’s insolvency.

¶7.    The trial court granted LMCC’s motion for summary judgment and denied Caldwell’s.

Final judgment was rendered in favor of LMCC on January 3, 2006. In his order, Judge

Eubanks, applying North Carolina law,3 found that the language of the Catastrophe Policy

at issue unambiguously precluded “drop down” coverage to Caldwell, so LMCC could not

be required to reimburse Caldwell for the $200,000 paid in settlement to Harvey.

¶8.    Caldwell claims as its only issue on appeal that the circuit court erred in finding that

LMCC’s policy did not require “drop down” coverage. Thus, Caldwell argues, the trial court

erred in granting LMCC’s motion for summary judgment and denying Caldwell’s.

                                           DISCUSSION

                                                   I.

¶9.    The standard which guides us in reviewing a summary judgment is settled and clear.

“This Court applies a de novo standard of review to the trial court’s grant of summary

judgment.” Moss v. Batesville Casket Co., 935 So. 2d 393, 398 (Miss. 2006). Our rules of

       3
           See discussion infra regarding the conflict of laws issue.

                                                   3
civil procedure require the trial court to grant summary judgment where “the pleadings,

depositions, answers to interrogatories and admissions on file, together with the affidavits,

if any, show that there is no genuine issue as to any material fact and that the moving party

is entitled to a judgment as a matter of law.” Miss. R. Civ. P. 56(c).

¶10.   The movant bears the burden of demonstrating that no genuine issues of material fact

exist for presentation to the trier of fact. This is a difficult burden, given that the non-moving

party must be given the benefit of every reasonable doubt. Moss, 935 So. 2d at 398. “‘Issues

of fact . . . are present where one party swears to one version of the matter in issue and

another says the opposite.” Id. (quoting Tucker v. Hinds County, 558 So. 2d 869, 872

(Miss. 1990)).

¶11.   In the instant case, both parties agree that no genuine issues of material fact exist and,

therefore, the coverage dispute should be decided as a matter of law. Also, this Court has

held that “[t]he interpretation of insurance policy language is a question of law.” Lewis v.

Allstate Ins. Co., 730 So. 2d 65, 68 (Miss. 1998). Therefore, because there are no genuine

issues of material fact, we now proceed to determine whether the trial court erred in granting

LMCC’s Motion for Summary Judgment and denying Caldwell’s Cross-Motion for Summary

Judgment.

                                               II.

¶12.   The issues to be resolved in addressing the question presented are (1) whether the

LMCC Catastrophe Policy provides “drop down” coverage; (2) whether Caldwell’s

reasonable expectation entitles it to coverage; and (3) whether LMCC owed a duty to defend




                                                4
Caldwell. In deciding these issues, we apply North Carolina law which, as applied to this

case, is not materially different from our own.4

       1.     Whether the LMCC Catastrophe Policy provides “drop down”
              coverage to Caldwell to fill the gap in coverage caused by Legion’s
              insolvency.

¶13.   In characterizing the relative positions of the parties, the trial court aptly stated, “we

are asked to declare the winner in a game of grammatical tug-of-war between an excess

insurer and an insured over whether an excess insurance policy ‘drops down’ in place of a

policy issued by a now-insolvent primary insurer.” Caldwell argues that the Catastrophe

Policy is ambiguous and should be construed against the drafter and in favor of the insured.

LMCC argues that the Catastrophe Policy unambiguously precludes “drop down” coverage.

¶14.   Under North Carolina law, when policy language is unambiguous, there is a “‘duty

to construe and enforce insurance policies as written, without rewriting the contract or

disregarding the express language used.” Eatman Leasing, Inc. v. Empire Fire & Marine

Ins. Co., 145 N.C. App. 278, 281, 550 S.E.2d 271, 273 (2001) (quoting Fidelity Bankers

Life Ins. Co. v. Dortch, 318 N.C. 378, 380, 348 S.E.2d 794, 796 (1986)). However, judicial

construction is necessary “‘[w]here the language used in the policy is ambiguous and

reasonably susceptible to more than one interpretation.’” Eatman Leasing, 550 S.E.2d at

273 (quoting Allstate Ins. Co. v. Runyon Chatterton, 135 N.C. App. 92, 94, 518 S.E.2d 814,

816 (1999)). Any ambiguity in an insurance policy as to whether certain provisions impose

liability should be resolved in favor of the insured. Williams v. Nationwide Mut. Ins. Co.,



       4
         The parties agree that North Carolina law applies; therefore, we find it unnecessary to
address this choice of law issue further.

                                               5
269 N.C. 235, 238, 152 S.E.2d 102, 105 (1967). Furthermore, “exclusions from liability are

not favored, and are to be strictly construed against the insurer.” Eatman, 550 S.E.2d at 281.

We will discuss and analyze the disputed provisions separately.

       A.     Whether the term “sums actually payable” refers to the policy limit of
              $1,000,000 under Legion’s policy.

¶15.   The parties dispute whether the term “sums actually payable” refers to the limit of

$1,000,000 under Legion’s policy or to the actual amount Legion was able to pay, which was

zero due to insolvency. The provision states:

       [LMCC] will pay only the amount in excess of the sums actually payable
       under the terms of the ‘underlying insurance.’ No other obligation or liability
       to pay sums or perform acts or services is covered unless explicitly provided
       for under Supplementary Payments. In the event the duty of the underlying
       insurer to defend the insured against a ‘suit’ ceases solely because the
       applicable limit of insurance is used up in the payment of judgments, then we
       shall assume the duty for such defense.

(Emphasis added).

¶16.   Caldwell argues that the term “sums actually payable” is ambiguous and should be

liberally construed in its favor. On the other hand, LMCC argues that the phrase “sums

actually payable” should be read in the context of the entire policy, and when doing so, the

phrase unambiguously provides coverage only in excess of the primary insurer’s coverage.

The trial court agreed with LMCC, stating, “it follows that in reading the entire policy the

Court finds that the meaning of [the term ‘sums actually payable’] is clearly qualified at

Section V, part 9, ‘Underlying Insurance’ to preclude any form of ‘drop down’ coverage

from the insurance policy issued by [LMCC].” Section V, part 9 of the policy, dealing with

“Commercial Catastrophe Liability Conditions” and “Underlying Insurance” states that “[i]n



                                              6
the event of bankruptcy, insolvency or financial impairment of the insurance company that

issued the ‘underlying insurance,’ [LMCC] shall be liable under Coverage A only to the

extent we would otherwise have been liable.” (Emphasis added).

¶17.    In construing the terms of an insurance policy, the North Carolina Supreme Court has

stated “[w]here the immediate context in which words are used is not clearly indicative of

the meaning intended, resort may be had to other portions of the policy and all clauses of it

are to be construed, if possible, so as to bring them into harmony.” Wachovia Bank & Trust

Co. v. Westchester Fire Ins. Co., 276 N.C. 348, 355, 172 S.E.2d 518, 522 (1970).

Furthermore, “[e]ach word is deemed to have been put into the policy for a purpose and will

be given effect, if that can be done by any reasonable construction in accordance with the

foregoing principles.” Id.

¶18.    The North Carolina Court of Appeals has addressed similar disputes regarding

whether an excess insurer had an obligation to provide “drop down” coverage when the

primary insurer became insolvent.5 In Newton v. U. S. Fire Ins. Co., 98 N.C. App. 619, 623,

391 S.E.2d 837, 838-39 (1990), the North Carolina Court of Appeals examined a trial court’s

finding that an excess insurer’s umbrella policy “dropped down” to primary coverage.6

Caldwell contends that Newton is not applicable because it is factually distinguishable and

did not attempt to define the term “sums actually payable.” However, we have found no case


        5
        Although the parties cite authority from numerous other jurisdictions, we find the North
Carolina cases to be dispositive of the issues in this case.
        6
         The U.S. Fire policy provided that the company would pay on behalf of the insured the
ultimate net loss in excess of the retained limit, with the “retained limit” defined as the “total of the
applicable limits of the underlying policies listed in the schedule and the applicable limits of any
other insurance collectible by the insured.” Newton, 391 S.E.2d at 839 (emphasis added).

                                                   7
that deals with the term “sums actually payable,” and therefore, we rely on cases which

analyze the use of similar terms in determining whether an excess insurer is required to “drop

down” when the primary insurer becomes insolvent.

¶19.   Although the facts of Newton differ slightly,7 the North Carolina court’s analysis is

clearly applicable to this case. There, the court found that the excess insurer was not

obligated to cover any claim unless the claim was greater than the $500,000 policy limit of

the primary insurer, regardless of whether or not that $500,000 was “collectible.” Id. at 840.

Although there was no gap in coverage, the Newton court noted “the possibility of a ‘gap’

in coverage that may occur when a primary carrier becomes insolvent since the statutory cap

on NCIGA’s liability here is $300,000.” Id. at 839. Accordingly, the court found that U.S.

Fire was entitled to summary judgment. Id. at 840.

¶20.   Four years later, the North Carolina Court of Appeals faced a similar situation in

North Carolina Ins. Guar. Ass’n v. Century Indem. Co., 115 N.C. App. 175, 444 S.E.2d

464 (1994). A dispute arose between NCIGA and Century Indemnity Co. (“Century”) as to

whether Century’s commercial umbrella policy 8 was required to “drop down” and become

       7
         In Newton, the court was faced with determining the meaning of the word “collectible” as
used in the definition of “retained limit.” 391 S.E.2d at 839. Furthermore, there was no gap in
coverage because NCIGA’s liability, per statute, was $300,000 and the injured plaintiff’s claims
amounted to $185,000. Id.
       8
           Century’s policy provided that it would be

       liable for the ultimate net loss the excess of either

                 (a) the amount recoverable under the underlying insurances as set out in Item
                 7 of the Declarations, or

                 (b) the amount of the retained limit state in Item 4 of the Declarations in
                 respect of each occurrence not covered by said underlying insurances . . . .

                                                  8
the primary liability insurance as a result of the primary insurer’s insolvency. Id. at 467.

NCIGA argued that the phrase “amount recoverable” meant “that amount actually

recoverable and collectible from the primary insurer. . . . Because [the primary insurer was]

now insolvent, no amount [was] recoverable from the primary insurer.”                    Id. at 469.

Therefore, NCIGA argued, Century was required to “drop down” and provide primary

coverage. Id.

¶21.   The court reasoned that the “amount recoverable” phrase, read in connection with the

“loss payable” condition,9 made it clear that “a loss arising from an occurrence is not payable

by. . . Century unless the limit of the underlying insurance is exhausted by payment, coming

either from the insured or from the insured’s underlying carrier.” Id. at 470. In addition to

finding the language of the policy unambiguously to preclude “drop down” coverage, the

court stated that “the fundamental purpose of excess insurance is to protect the insured

against excess liability claims, not to insure against the underlying insurer’s insolvency.” Id.

¶22.   Though there are some differences in the language of the various insurance contracts

in Newton and Century, this Court finds the reasoning in both cases applicable to this case.


       In the event of reduction or exhaustion of the aggregate limits of liability under said
       underlying insurances by reason of payment of claims in respect of occurrences
       occurring during the period of this policy, this policy, subject to all the terms,
       conditions and definitions hereof, shall

                (1) in the event of reduction pay the excess of the reduced underlying limit;

                (2) in the event of exhaustion continue in force as underlying insurance.

Century, 444 S.E.2d at 468 (emphasis added).
       9
         Century’s policy included a “loss payable” clause which provided that “[l]iability under this
policy . . . shall not attach unless and until the Insured . . . shall have paid the amount of the
underlying limits on account of such occurrence.” Id. at 469.

                                                  9
We find that the disputed term “sums actually payable” is unambiguous, particularly when

read in connection with the “Underlying Insurance” provision. Furthermore, North Carolina

law provides that where words are not clear in their immediate context, other clauses may

be used to bring the policy into harmony. Wachovia Bank, 172 S.E.2d at 522.

¶23.   An equally convincing argument is found in looking at the entire phrase in the

contract provision of the Catastrophe Policy, where LMCC contracted to pay only the

amount in excess of the “sums actually payable under the terms” of the Legion policy.

(Emphasis added). There is only one amount “payable under the terms” of the Legion policy,

and that is the policy limit of $1,000,000. LMCC points out that “Caldwell improperly

divorces the phrase ‘sums actually payable’ from the remainder of the sentence.” LMCC

correctly notes that the sentence, taken as a whole, “refers to what amount is covered

pursuant to the Legion policy, not what Legion is capable of paying.” Caldwell, on the other

hand, argues that LMCC should pay the amount in excess of what was actually paid, rather

than the amount payable under the terms of the policy. This interpretation would require

rewriting the terms of the insurance contract.

¶24.   Furthermore, the clause in Section V, part 9 of the policy clearly defines LMCC’s

obligation should the underlying insurer become insolvent. It provides that, in the event of

insolvency, LMCC will be liable “only to the extent we would otherwise have been liable.”

Taken together, the policy terms evidence that the Catastrophe Policy was not required to

“drop down” and provide primary coverage due to Legion’s insolvency. Therefore, we

conclude that the Catastrophe Policy, by its plain language, covered only losses in excess of

$1,000,000.


                                             10
       B.        Whether LMCC’s failure to use a “loss payable” clause causes the
                 Catastrophe Policy to “drop down” and fill the gap caused by Legion’s
                 insolvency.

¶25.   Caldwell alleges that LMCC’s failure to use a “loss payable” clause, such as the one

used in Century,10 evidences that LMCC’s coverage should “drop down” and fill the gap

caused by Legion’s insolvency. Other than its position that the “Underlying Insurance”

provision adequately conveys that the Catastrophe Policy precludes “drop down” coverage,

LMCC did not specifically respond to this argument. Caldwell claims that, pursuant to North

Carolina Rule of Appellate Procedure 28(a), LMCC’s failure to respond requires that this

Court accept its position.

¶26.   We first point out that Rule 28(a) is a procedural rule which has no application in this

case. When we are required to apply the law of another state, we apply its substantive law,

but we continue to rely on our own procedural rules. Zurich Am. Ins. Co. v. Goodwin, 920

So. 2d 427, 433 (Miss. 2006).

¶27.   LMCC clearly argues that the contract, read as a whole (including its “Underlying

Insurance” provision), is dispositive of Caldwell’s claim. Additionally, Caldwell cites no

authority which mandates that a “loss payable” clause must be included in an excess insurer’s

policy in order to preclude “drop down” coverage. Furthermore, the “Underlying Insurance”

provision in the Catastrophe Policy adequately addresses LMCC’s obligations in the event

the underlying insurer becomes insolvent. The provision states that “[i]n the event of

bankruptcy, insolvency or financial impairment of the insurance company that issued the

‘underlying insurance,’ [LMCC] shall be liable under Coverage A only to the extent we

       10
            See the “loss payable” clause language, supra, footnote 7.

                                                 11
would otherwise have been liable.” While Caldwell argues that the phrase, “to the extent we

would otherwise have been liable,” is ambiguous, we disagree, and find Caldwell’s argument

to be without merit.

¶28.   Under Coverage A, LMCC is liable for the “amount in excess of the sums actually

payable under the terms of the ‘underlying insurance.’” As determined previously in Part

1A, supra, that amount is the $1,000,000 policy limit, which is clearly provided under the

terms of the policy.     Therefore, the “Underlying Insurance” provision clearly and

unambiguously provides that, in the event of insolvency of the underlying insurer, LMCC

is liable only for losses exceeding $1,000,000.

¶29.   In this case, LMCC paid $200,000, which was the portion of the loss that exceeded

$1,000,000. Therefore, this Court finds that LMCC paid the amount it contracted to pay and,

consequently, is not liable for any gap in coverage caused by Legion’s insolvency. For these

reasons, we find that not only does the lack of a “loss payable” clause not evidence that the

Catastrophe Policy must “drop down,” but the “Underlying Insurance” provision clearly

precludes such drop down coverage under the terms of the policy.

       C.     Whether the “Other Insurance” clause is applicable to the NCIGA
              coverage.

¶30.   The LMCC Catastrophe Policy includes an “Other Insurance” provision which states:

       If other valid and collectible insurance is available to the insured for loss
       covered hereunder, this Coverage Part will be excess of such other insurance.
       This condition does not apply to insurance purchased specifically to be either
       quota share with this insurance or excess of this insurance.




                                             12
Caldwell creatively argues that the NCIGA policy qualified as “other insurance,” and

therefore, the Catastrophe Policy “will be excess of such other insurance.” Thus, Caldwell

argues LMCC should reimburse it for the $200,000 it paid in settlement to Harvey.

¶31.   Conversely, LMCC argues that it would be preposterous to interpret its “Other

Insurance” clause as providing “drop down” coverage. LMCC points out that nearly all

excess liability policies contain such a clause, which does not void or abrogate the effect of

the policy’s other provisions.

¶32.   Interpreting the “Other Insurance” clause as implying a duty to provide “drop down”

coverage would not only contradict the specific policy provisions, but it would also

contradict North Carolina law, which states that “drop down” coverage will not be found

unless the policy expressly provides for such coverage.        Century, 444 S.E.2d at 470.

Furthermore, the Century court noted that “excess insurance is to protect the insured against

excess liability claims, not to insure against the underlying insurer’s insolvency.” Id.

¶33.   For the reasons stated, this Court finds that the “Other Insurance” provision does not

imply that LMCC is liable for all amounts which exceed the amount paid by NCIGA. The

LMCC policy does not expressly provide for “drop down” coverage, but merely states that

the Catastrophe Policy is to be in excess of any other insurance available to the insured.

       D.     Whether Coverage B causes the Catastrophe Policy to “drop down,”
              by contemplating primary protection in certain circumstances.

¶34.   Caldwell argues, without citation of any authority for the proposition, that the

Catastrophe Policy “is more like an umbrella policy, which can certainly ‘drop down’”




                                             13
because it contemplates excess protection in Coverage A and primary protection in Coverage

B. We find this argument unpersuasive for two reasons.

¶35.   First, Coverage B of the Catastrophe Policy applies when underlying insurance does

not apply, that is, where “there is no other insurance in any way applicable.” Further,

according to the policy, the “retained limit” means the greater of:

       a.     The amount stated in the Declarations as Retained Limit; or
       b.     The amount payable as damages under any other valid and collectible
              insurance purchased specifically in excess of this insurance.

Thus, the provisions of Coverage B are clear and unambiguous. We find that Coverage B

provides that where neither the terms and conditions of the Catastrophe Policy or any other

policy apply, then Coverage B of the Catastrophe Policy may apply. There is no dispute that

Legion was the primary insurer and its policy covered the instant loss. Therefore, Coverage

B is neither applicable nor does it require LMCC to “drop down” and provide primary

coverage due to Legion’s insolvency. Thus, whether the Catastrophe Policy is characterized

as an excess policy or an umbrella policy, its interpretation is controlled by contract law, and

the result remains the same.

¶36.   Second, as noted previously, the policies in Newton and Century were both umbrella

policies, and in each case, North Carolina law provided that the policies did not “drop down.”

Therefore, for both of these reasons, this argument has no merit.

       2.     Whether Caldwell’s expectation that the LMCC Catastrophe
              Policy would fill any gaps in coverage entitles it to obtain “drop
              down” coverage.

¶37.   Caldwell argues that it “had a reasonable expectation when it obtained approximately

$20,000,000 of insurance coverage that there would be no gaps in that coverage and that any

                                              14
policy such as [LMCC] would drop down to fill in any gaps.” Caldwell correctly states that

when an insurance policy is ambiguous, the law requires the intention of the parties to be

determined based on what a reasonable person placed in the insured’s position would have

understood the terms to mean. Therefore, Caldwell argues, because it understood the policy

to provide “drop down” coverage, the policy should be interpreted based on what it (the

insured) understood the terms of the policy to mean.

¶38.   However, the critical requirement to trigger the “reasonable person expectations”

argument is ambiguity. Where the contract language is clear, North Carolina law follows the

majority of jurisdictions (including Mississippi) in applying the objective theory of contracts.

See Higgins v. Higgins, 321 N.C. 482, 486, 364 S.E.2d 426, 429 (1988). Thus, North

Carolina courts enforce the terms of a contract pursuant to objective evidence, such as the

language of the contract, rather than the subjective thoughts and expectations of the parties,

which are irrelevant, absent an ambiguous term capable of more than one reasonable

interpretation. Caldwell’s subjective expectations and beliefs concerning “drop down”

coverage are irrelevant in the face of the clear contract language which contradicts those

expectations.

¶39.   As stated previously, the terms of the Catastrophe Policy unambiguously preclude

“drop down” coverage. The mere fact that Caldwell argues that the terms of the policy

preclude “drop down” coverage does not cause the policy to be ambiguous causing it to be

interpreted in its favor. See Wachovia Bank, 172 S.E.2d at 522 (“[A]mbiguity in the terms

of an insurance policy is not established by the mere fact that the plaintiff makes a claim

based upon a construction of its language which the company asserts is not its meaning.”).

                                              15
¶40. Furthermore, Caldwell argues that the $131,000 premium it paid to LMCC in

exchange for the excess policy was a high premium, unlike the low premiums typically

charged by excess insurers. Therefore, Caldwell argues, because it paid such a high premium

in exchange for coverage, it is now entitled to receive “drop down” coverage. In support of

this argument, Caldwell points to the Affidavit of Caldwell’s President, Dave Brenner, who

attested that LMCC did not set its premium until it was apprised of the identity of the

underlying insurer. Caldwell argues that in doing so, LMCC was determining the risk to

which it would be exposed.

¶41.   LMCC explains that setting a premium, in part, based on the identity of the underlying

insurer does not indicate LMCC intended its policy to “drop down” and cover any gaps

caused by the underlying insurer’s insolvency. LMCC points out that there are “[n]umerous

reasons for wanting to know the identity of the underlying insurer. Most significantly,

Coverage B of the LMCC Policy applies when ‘underlying insurance’ does not apply.”

Therefore, LMCC argues, it had a vested interest in knowing the identity of the underlying

insurer because inapplicable underlying insurance would increase LMCC’s risk under

Coverage B.

¶42.   Caldwell also argues that because it paid a high premium, LMCC assumed the risk of

insolvency of the primary insurer. The premium charged in LMCC’s policy was $131,000

for $2,000,000 of excess coverage. Although this premium may, at first blush, appear high,

we note that the policy covered a fleet of trucks for a trucking company. On the other hand,

Caldwell paid a premium of $708,525 for the primary policy with limits of $1,000,000 per

occurrence and $2,000,000 in the aggregate. Both the Legion policy and the LMCC


                                             16
Catastrophe Policy had an effective period from January 1, 2000 to July 1, 2001. Therefore,

in accordance with the foregoing reasoning, we find these arguments have no merit.

       3.     Whether LMCC owes a duty to defend Caldwell.

¶43.   Caldwell alleges that LMCC has a duty to defend it in the litigation because in

“dropping down,” LMCC “assumes the primary insurer’s obligations, including defense.”

LMCC points out that NCIGA paid for Caldwell’s defense, and “there is no evidence that

Caldwell has incurred any defense costs that have not been paid by insurance or NCIGA.”

Therefore, LMCC argues, Caldwell’s argument is moot because there is no controversy

regarding the payment of defense costs. Furthermore, LMCC argues that in the event

defense costs are an issue, LMCC has no duty to defend under the terms of the Catastrophe

Policy.

¶44.   Looking to the language of the policy, Section I, Coverage A of the Catastrophe

Policy clearly states that “[i]n the event the duty of the underlying insurer to defend the

insured against a ‘suit’ ceases solely because the applicable limit of insurance is used up in

the payment of judgments, then we shall assume the duty for such defense. (Emphasis

added). This language is unambiguous, and the North Carolina Supreme Court has stated

that absent ambiguity, “the court must enforce the contract as the parties have made it and

may not, under the guise of interpreting an ambiguous provision, remake the contract and

impose liability upon the company which it did not assume and for which the policyholder

did not pay.” Wachovia Bank, 172 S.E.2d at 522.

¶45.   The language in the Catastrophe Policy clearly states that LMCC has a duty to defend

only when the applicable limit of insurance is used up in the payment of judgments, which

                                             17
did not happen here. The policy does not provide that LMCC will defend if the underlying

insurer becomes insolvent, but instead specifically provides that LMCC will only assume the

duty to defend when the applicable limit of insurance is “used up” in the payment of

judgments.

¶46.   We find that LMCC’s duty to defend Caldwell was not triggered according to the

plain and unambiguous language of the Catastrophe Policy. Furthermore, as pointed out by

LMCC, the lawsuit has concluded, and there is no evidence in the record that Caldwell has

incurred any defense costs that have not been paid.11 In addition, a finding that LMCC has

a duty to defend Caldwell assumes that the Catastrophe Policy “drops down” to provide

primary coverage in Legion’s place. Having already determined that the Catastrophe Policy

does not “drop down,” it reasonably follows that LMCC does not owe Caldwell a duty to

defend.

                                         CONCLUSION

¶47.   While it is unfortunate that Legion is insolvent and unable to cover Caldwell’s loss

as a result of the settlement with Harvey, this does not justify holding LMCC liable for an

obligation it never contracted to assume. For the reasons stated herein, we affirm the Pearl

River County Circuit Court’s grant of summary judgment in favor of LMCC and its denial

of Caldwell’s cross-motion for summary judgment.

¶48.   AFFIRMED.




       11
           Caldwell writes in its brief that “[w]ithout NCIGA, Caldwell would apparently have to foot
the bill for its own defense . . . .” This indicates that NCIGA defended Caldwell, and Caldwell did
not incur any defense costs.

                                                 18
       SMITH, C.J., WALLER AND COBB, P.JJ., EASLEY, CARLSON AND
RANDOLPH, JJ., CONCUR. DIAZ, J., CONCURS IN RESULT ONLY. GRAVES,
J., DISSENTS WITHOUT SEPARATE WRITTEN OPINION.




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