Declaratory Relief Was Neither Unnecessary Nor Improper Under The Circumstances

Post 5423

In Fox Paine & Company, LLC, et al. v. Twin City Fire Insurance Company et al., S287404, Supreme Court of California (July 27, 2026) Fox Paine & Company, LLC, Saul Fox, and related entities sued excess insurers after a long-running dispute between the Fox and Paine factions generated substantial litigation costs.

FACTS

The issue arises here after a dispute between former colleagues at an investment firm led to lengthy — and expensive — litigation.

Insurance is sometimes procured in a series of layers, with an insured acquiring a primary insurance policy that provides an initial layer of coverage. The insurance tower included a $10 million primary policy followed by four $10 million excess layers.

Plaintiffs allege that:

1. they suffered a loss;
2. the loss is covered by specific policy provisions described in the complaint;
3. they submitted “virtually all of their invoices” to defendants, seeking reimbursement; but
4. defendants have failed to reimburse them for these losses.

LAW

In the insurance context, the implied covenant of good faith and fair dealing prevents an insurer from impairing the insured’s right to receive policy benefits.

DISCUSSION

Although there is a categorical rule requiring an insured to plead actual exhaustion of all underlying insurance before seeking declaratory relief against excess insurers the Court reasoned that insurance coverage disputes often involve contingencies, and the mere existence of an exhaustion contingency does not make the dispute hypothetical.

Requiring insureds to litigate sequentially through each layer of an excess tower would create hardship, inefficiency, and a risk of inconsistent rulings, particularly where follow-form policies require interpretation of common coverage language.

ANALYSIS

The Court’s decision draws a distinction between attachment for payment and justiciability for adjudication. Actual exhaustion remains relevant to whether an excess insurer must presently pay benefits, but it is not an absolute prerequisite to adjudicating coverage obligations or bad-faith claims.

CONCLUSION

On remand, the Court of Appeal must determine whether plaintiffs adequately pleaded covered losses sufficient to create an actual controversy as to each excess policy and whether the bad-faith allegations satisfy the proper standard.

If the pleadings are deficient but curable, plaintiffs should be given leave to amend.

The Supreme Court reversed the Court of Appeal and remanded. It held that lack of actual exhaustion is not, by itself, fatal to claims for declaratory relief or tortious breach of the implied covenant of good faith and fair dealing against excess insurers.

The Supreme Court concluded that plaintiffs’ inability to allege the exhaustion of all coverage underlying the St. Paul and Liberty Mutual policies is not by itself fatal to their claims for declaratory relief against these insurers.

The Supreme Court remanded the case to the Court of Appeal to reevaluate the adequacy of plaintiffs’ allegations as they bear upon the existence of an actual controversy. Once the appropriate standard has been identified that court shall determine whether it has been met.

BAD FAITH

It has long been recognized in California that ‘[t]here is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. An insurer’s denial of or delay in paying benefits gives rise to tort damages, but only if the insured shows the denial or delay was unreasonable. Because the duty attaches at the inception of the insurance agreement, wrongful conduct by the insurer from that point forward can support a claim for bad faith.

Allegations that an excess insurer paid rival claimants a disproportionate share of the benefits available under its policy prior to the insureds’ exhaustion of the primary policy stated a viable claim for bad faith.

Plaintiffs Need Not Plead Prior Exhaustion Of All Underlying Insurance To State A Claim For Bad Faith

Plaintiffs inability to plead that all underlying insurance has already been exhausted is not by itself fatal to their claims for bad faith.

But an insurer may breach the implied covenant of good faith and fair dealing while remaining in technical compliance with the express terms of its policy; indeed, that is the very reason for the implied covenant’s existence.

ZALMA OPINION

When no insurer is willing to take on the entire risks of loss faced by an insured the insured buys a primary policy and a tower of excess insurance policies from multiple insurers all of whom promise to respond after each layer of insurance is exhausted by payment of claims or claims and defense clauses. When the excess insurers did not respond in accordance with their policies they claimed no coverage because the other insurers had not exhausted their limits. The California Supreme Court disagreed and allowed the declaratory relief action to go forward creating a new way to get to excess insurers without exhausting the primary and other insurers limits to seek declaratory relief.

(c) 2026 Barry Zalma & ClaimSchool, Inc.

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