The California Supreme Court concluded that the insureds could state a cause of action for declaratory relief regarding coverage under an excess policy even though all of the underlying policies had not yet been exhausted. Fox Paine & Co., LLC v. Twin City Fire Ins. Co., 2026 Cal. LEXIS 3942 (Cal. July 27, 2026).

The insureds filed a complaint for a declaratory judgment and bad faith against its excess carriers. The insureds alleged the excess carriers acted in bad faith by issuing proceeds to parties who were not insureds and not properly communicating with the insureds.

The complaint sought coverage under various policies that totaled $50 million in coverage, consisting of a primary policy issued by Houston Casualty Company (HCC) of $10 million followed by four successive excess policies totaling $40 million. The complaint did not allege exhaustion of the first layer excess policy issued by Twin City Insurance Company. Each excess policy conditioned the issuing insurer’s liability on exhaustion of all underlying insurance. Liberty Mutual and St. Paul sought a demurrer from the trial court arguing their excess policies were not yet implicated absent exhaustion of the policies in the tower beneath their excess policies. The trial court granted the demurrer and the Court of Appeal affirmed.

The California Supreme Court first concluded that the insureds’ inability to allege the exhaustion of all coverage underlying the St. Paul and Liberty Mutual policies was not by itself fatal to their claims for declaratory relief against these insurers. If the plaintiff had uncertain liabilities at the time of filing the complaint, ripeness against an excess policy for a declaratory judgment coverage action required that it be practically or reasonably likely that the insured’s potential liability would reach into the excess coverage. Absolute proof that the policies would be triggered was not required.

The case was remanded to the Court of Appeal to reevaluate the adequacy of plaintiffs’ allegations as they bore upon the existence of an actual controversy. The Court of Appeal was instructed to address whether plaintiffs had to allege a covered loss that reached an excess policy’s attachment point in order to state an actual controversy involving that policy, or whether additional considerations justified application of the reasonable likelihood approach.

Regarding the bad faith issue lodged against St. Paul and Liberty Mutual, the Court of Appeal determined that the insurers’ demurrers to these claims were properly sustained because plaintiffs had not alleged exhaustion under the excess policies, and thus no coverage, which was fatal to their claim for bad faith. The Supreme Court held that plaintiffs’ inability to plead that all underling insurance had been exhausted was not by itself fatal to their claims of bad faith. At the pleading stage, the insureds needed only to allege facts that, taken as true, were sufficient to show that coverage under an insurer’s excess policy would attach if not for the excess insurer’s bad faith conduct and that the insurer’s misconduct had impaired the insureds’ recovery of benefits owed to it under the policy.