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California’s Supreme Court issued a significant ruling clarifying when policyholders may pursue legal claims against excess insurers before the underlying layers of coverage have been fully exhausted.
In a unanimous decision issued July 27, 2026, the court held that insureds are not required to demonstrate prior exhaustion of all underlying insurance to bring claims for declaratory relief or for breach of the implied covenant of good faith and fair dealing against excess insurers. The ruling, Fox Paine & Co LLC vs. Twin City Fire Ins Co, has broad implications for how coverage disputes involving layered insurance programs are litigated in California.
The case arose from a business dispute between the cofounders of Fox Paine & Company LLC, a private equity investment firm. After the partnership between Saul Fox and Dexter Paine collapsed, the two sides engaged in years of costly litigation.
The firm carried a $50 million insurance tower consisting of a $10 million primary policy and four excess policies issued by three insurers: Twin City Fire Insurance Company, St. Paul Mercury Insurance Company, and Liberty Mutual Insurance Company. The plaintiffs alleged that the excess insurers improperly allowed the rival Paine faction to usurp the insurance claim, resulting in payments to the Paine parties while the Fox parties received nothing. The plaintiffs claimed losses exceeding $43 million and sued the excess insurers for breach of contract, declaratory relief, and bad faith.
The trial court allowed claims against Twin City’s first-layer excess policy to proceed, finding that the primary policy had been exhausted. However, it dismissed claims against St. Paul and Liberty Mutual, whose policies sat higher in the coverage tower, on the grounds that the underlying layers had not been fully exhausted. The Court of Appeal affirmed, reasoning that exhaustion was a prerequisite to establishing an actual coverage controversy and that the absence of exhaustion was fatal to the bad faith claims.
The California Supreme Court disagreed on both counts. On the question of declaratory relief, the court found that an actual, justiciable controversy can exist regarding excess coverage even when underlying policies have not yet been exhausted. The court emphasized that requiring insureds to litigate sequentially against each insurer in a coverage tower would impose severe hardships, risk inconsistent rulings, and deter policyholders from pursuing their legitimate rights.
The court did establish that insureds must adequately plead covered losses sufficient to reach a given excess policy’s attachment point, applying a “reasonable likelihood” standard in cases where the ultimate amount of loss remains uncertain.
On the bad faith question, the court drew a critical distinction between when coverage is due and when an insurer’s duty of good faith attaches. As the court explained, “An excess insurer’s implied covenant not to injure an insured’s right to receive the benefits of the insurance contract exists from the inception of the agreement with the insured.”
Accordingly, an insured need only allege facts showing that coverage under an excess policy will attach — or would attach but for the insurer’s misconduct — and that the insurer’s conduct has impaired the insured’s ability to recover those benefits.
The Supreme Court reversed the Court of Appeal’s judgment and remanded the case for further proceedings, directing the lower court to evaluate whether the plaintiffs’ allegations were sufficient under the standards the ruling established and, if not, whether leave to amend should be granted.
View the full decision here. &Â
The post California Court Rules Policyholders Can Sue Excess Insurers Before Lower Coverage Exhausted appeared first on Risk & Insurance.
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