A coverage dispute rooted in 1986 policy language, an insolvent primary carrier, and two new asbestos lawsuits tendered in the summer of 2024 came to a head on March 2, 2026, when Justice Christopher K. Barry-Smith of the Suffolk Superior Court Business Litigation Session ruled against Federal Insurance Company in a declaratory judgment action Federal itself had filed. The court held that Federal, as excess insurer, is obligated to “drop down” and provide coverage to the insured, Water Applications Distribution Group, because the primary carrier’s insolvency — not actual payment of claims — satisfied the policy’s exhaustion requirement. The decision turned entirely on what the word “exhausted” means in an excess liability policy that never defined it.
The Parties and How a Washington State Insurance Dispute Arrived in Massachusetts
Federal Insurance Company is an Indiana-incorporated carrier headquartered in Whitehouse Station, New Jersey. Its defendant, Water Applications Distribution Group (“WADG”), is a Georgia domestic corporation with its principal office in North Andover, Massachusetts.
The corporate lineage matters to the story. WADG’s predecessor was Pacific Waterworks Supply Co., a Seattle-based wholesale distributor of water system products incorporated in Washington in 1961. In 1988, Pacific merged into U.S. Filter Distribution Group, Inc., which changed its name to WADG in 2004. When WADG moved its principal office to North Andover, Massachusetts, it carried with it a body of unresolved insurance coverage obligations that wound up before the Massachusetts Superior Court.
Federal filed its complaint on October 9, 2024, in Essex County Superior Court, where WADG is headquartered. The case was subsequently transferred, by agreement of the parties, to the Business Litigation Session of the Suffolk Superior Court in Boston, where it was assigned docket number 2482cv2929-BLS-1.
The Excess Policies — and the Primary Carrier That No Longer Exists
Federal issued two excess liability policies to Pacific:
Both policies were placed by a Washington-based broker and identified Seattle as Pacific’s place of business. Neither Federal nor WADG retained a complete copy of either policy. Federal reconstructed the policy terms from specimen forms it used at the time; both parties accepted the reconstruction as accurate.
Sitting beneath both Federal excess policies was a primary policy issued by United Pacific Insurance Company, a subsidiary of Reliance Insurance Company, with limits of $2 million per occurrence and $2 million annual aggregate.
In 2001, the Pennsylvania Insurance Department declared Reliance insolvent and placed it into liquidation. WADG filed claims in the liquidation proceedings. The final bar date for those claims — including claims against United Pacific — passed on March 31, 2016. The Reliance liquidation closed, and Reliance was dissolved by court order on November 29, 2021. WADG received no payment from Reliance for defense or indemnification. The Pennsylvania Receiver did, however, handle certain prior WADG tenders and, after auditing defense invoices, paid approximately forty percent of the amounts WADG claimed under the Reliance policies.
Prior Disputes — and the Settlements Federal Later Wanted Back
For years before the current lawsuit, WADG tendered asbestos bodily injury claims to Federal and demanded that Federal drop down to fill the coverage gap left by Reliance’s insolvency. Federal contested that obligation at each turn but ultimately resolved the individual disputes by negotiated settlement without admitting liability or waiving future coverage positions.
The most recent pre-lawsuit settlements came in 2020, when Federal agreed to contribute negotiated amounts — substantially less than WADG sought — toward two Washington State asbestos cases: one in King County and one in Pierce County. After those settlements, Federal asked WADG whether any other claims were pending. WADG said there were none. Federal concluded the coverage disputes had ended and chose not to seek recoupment of the 2020 settlement payments at that time.
That conclusion proved premature.
The 2024 Tenders That Triggered the Lawsuit
In June 2024, WADG tendered a new asbestos bodily injury lawsuit to Federal — Raulerson et al. v. Water Applications Distribution Group, pending in King County Superior Court in Washington State. The Raulerson complaint named WADG as successor-in-interest to Pacific Waterworks Supply Co. and demanded that Federal drop down, assume the role of primary carrier, and defend the matter.
A few weeks later, on July 15, 2024, WADG tendered a second action: an asbestos bodily injury case pending in San Francisco Superior Court naming WADG and listing Pacific Water Works Supply Co. as an alternate entity. WADG again demanded that Federal drop down and provide a defense.
These two new tenders confirmed to Federal that the coverage disputes were not over. On October 9, 2024, Federal filed a complaint for declaratory judgment in Essex County Superior Court, seeking a determination that its excess policy did not obligate it to drop down before the underlying Reliance policy limits were paid in full. Federal also sought resolution of several subsidiary coverage questions: the effect of a policy release Pacific had signed in August 1987; whether a separate, full set of policy limits applied to the short “stub period” after the policy was extended past June 1, 1987 before cancellation; and, contingent on a ruling in its favor, recoupment of the amounts it paid in the 2020 Smith and Bergrud settlements.
The Policy Language — Two Clauses, One Undefined Word
The parties agreed that the coverage question turned entirely on two clauses in the Federal excess policy:
The Insuring Clause provided that Federal agreed to pay loss arising from occurrences insured under the primary policy, but with a critical limitation:
“The insurance afforded by this policy shall apply only in excess of and after all UNDERLYING INSURANCE (as scheduled in Item 6 of the Declarations) has been exhausted.**”
The Maintenance Clause required the insured to keep the primary policy in full effect during the policy period, with one express carve-out:
“…except for any reduction of the aggregate limit or limits contained therein solely by payment of claims in respect of occurrences happening during the period of this policy.”(Emphasis added).
The word “exhausted” appears in the Insuring Clause but is not defined anywhere in the policy. That omission drove the entire case.
- Federal’s position: “Exhausted” means the primary carrier has actually paid claims up to the policy limit. Because Reliance never paid WADG’s claims up to the $2 million limit, the primary coverage was not exhausted, and Federal’s excess obligation had not been triggered.
- WADG’s position: When a primary carrier is insolvent and it is certain that no payment will ever be made on covered claims, the primary coverage has been used up — consumed completely — and therefore exhausted. Federal’s drop-down obligation followed.
The Court’s Ruling: Two Arguments, One Outcome
WADG advanced two independent grounds for summary judgment. Justice Barry-Smith rejected one and accepted the other, reaching the same result either way.
Collateral Estoppel. WADG argued that Federal was barred from re-litigating the meaning of “exhausted” in its own policy because a federal appellate court in Washington State had already decided that precise question against Federal in 1991, holding that primary insurer insolvency does exhaust coverage and triggers the excess insurer’s drop-down obligation. Washington law permits a non-party to invoke that prior ruling against Federal — so-called “offensive” collateral estoppel — so long as Federal had a full and fair opportunity to litigate the issue in the earlier case, which it did.
Justice Barry-Smith declined to apply collateral estoppel, however, as a matter of discretion. The 1991 decision is thirty-five years old, and a number of courts since then have reached contrary results applying substantially similar policy language. Under those circumstances, the court found it more equitable to consider the interpretation question fresh, rather than to hold Federal permanently bound by a ruling in a case to which WADG was not a party.
Policy Interpretation. Applying Washington insurance contract law — which governs because Washington was the insured’s location and the state with the most significant relationship to the parties when the policies were issued — the court conducted its own two-step analysis.
Step one: Is “exhausted” ambiguous? The court found that it is. The dictionary definition — to have used up or consumed completely — does not resolve the question. Read from Federal’s perspective, the primary coverage is not exhausted unless the primary carrier has paid its full policy limits. Read from WADG’s perspective, coverage that will never pay a dollar on a covered claim has been used up as completely as coverage that paid every dollar to its limit. The court found both readings reasonable, which made the term ambiguous.
The Maintenance Clause did not eliminate that ambiguity. The court agreed with the reasoning of the 1991 appellate decision that the Maintenance Clause defines a duty of the insured — to keep the underlying coverage in place — and says nothing about what conditions trigger the excess insurer’s own obligations under the Insuring Clause.
Step two: How should the ambiguity be resolved? Washington law, like the law of virtually every state, requires that ambiguous insurance policy terms be construed in favor of the insured. The court applied that rule and held that primary coverage is exhausted when the primary carrier is insolvent and therefore certain not to pay on covered claims.
The majority rule cases. Federal argued that courts across the country — citing a line of federal cases stretching from a 1987 Seventh Circuit (Great Lakes States) decision through decisions in the Fifth Circuit (Gulf States) and in the District of Massachusetts — have held that exhaustion requires actual payment up to the policy limit, and that this represents the “overwhelming majority rule.” The court was unpersuaded.
The court examined the first case in that line of authority and found that it construed different policy language — specifically, a Maintenance Clause requiring that underlying coverage remain in force as “collectible” insurance. That word, absent from the Federal-WADG policy, provided at least some basis for concluding that insolvency (which makes coverage non-collectible) defeats exhaustion. The cases that followed that first decision, the court found, often repeated the first case’s holding without performing the same close textual analysis, and without attending to material differences between the policies each court was actually reading.
The court also rejected Federal’s reliance on public policy arguments — that excess insurers do not price their policies to provide first-dollar coverage, and that requiring drop-down after a primary insolvency would force excess carriers to evaluate the financial soundness of every primary carrier in the market. Those observations may be sensible, the court acknowledged, but they do not allow a court to choose between reasonable interpretations once a term is found ambiguous. At that point, Washington law compels the court to construe the policy in favor of the insured. Policy-preference arguments work only where the policy language itself is unambiguous.
The Outcome
Justice Barry-Smith granted WADG’s motion for summary judgment and denied Federal’s cross-motion for partial summary judgment. The court held that WADG’s primary insurance is exhausted because its primary carrier is insolvent and will not pay on any covered claims, and that Federal is obligated to step down and provide coverage under its excess policy. The court ordered the parties to confer and submit a proposed judgment by March 20, 2026.
The Business Litigation Session ruling disposed of the central coverage question Federal brought to court. Federal’s subsidiary claims — on the policy release, the stub period limits, and recoupment of the 2020 settlement payments — remain to be addressed, though the court’s coverage holding substantially undermines Federal’s recoupment argument.
What the Decision Means
On policy drafting. The court’s decision rests entirely on the absence of a single word. Had the Federal excess policy’s Maintenance Clause required the underlying coverage to remain in force as “collectible” insurance — the language present in many of the policies underlying the majority-rule cases — the outcome might have been different. Excess and umbrella carriers that want to limit their drop-down obligations when a primary carrier becomes insolvent must explicitly state so. Undefined terms like “exhausted” invite the application of the ambiguity rule, and the ambiguity rule favors the insured.
On jurisdiction. A company’s relocation to Massachusetts can bring decades-old coverage disputes from other states into Massachusetts courts. Here, policies written in Washington, on Washington risks, for a Washington company were litigated in Suffolk Superior Court because the insured’s successor had moved its principal office to North Andover. The substantive law that governed — Washington insurance contract law — was applied by a Massachusetts judge, but Massachusetts procedural rules controlled how the case was managed and decided.
On tender timing. The complaint reveals that WADG’s practice of tendering claims to Federal — sometimes after litigation had already concluded and settlements had already been negotiated — contributed to Federal’s decision to seek a declaratory judgment rather than continue settling case by case. Policyholders and agents who advise them should be aware that late tenders run the risk that excessive delay in reporting liability claims can create actual prejudice for insurers. Actual prejudice through delay can allow the carrier to deny or contest coverage in good faith.
Federal Insurance Company v. Water Applications Distribution Group, as successor to Pacific Waterworks Supply Co., Civil Action No. 2482cv2929-BLS-1, Suffolk Superior Court, Business Litigation Session (Barry-Smith, J.) (March 2, 2026).
