Fox Paine & Co, LLC v. Twin City Fire Ins CoFox Paine & Co, LLC v. Twin City Fire Ins Co
Insurance is sometimes procured in a series of layers, with an insured acquiring a primary insurance policy that provides an initial layer of coverage for loss or liability and an excess insurance policy or policies that provide additional coverage in the event the underlying coverage is exhausted. (See Montrose Chemical Corp. of California v. Superior Court (2020) 9 Cal.5th 215, 222–223.) Excess insurance policies vary in how they define exhaustion. Some excess policies provide that underlying insurance policies are exhausted and coverage under the excess policy attaches only when the coverage limits on the underlying policies have been fully paid out.
In this case, we consider whether claims for declaratory relief and breach of the implied covenant of good faith and fair dealing brought by alleged insureds (hereinafter referred to as insureds) against excess insurers are susceptible to demurrer on the ground that the insureds could not allege prior exhaustion of all of the insurance coverage underlying the excess insurers’ policies. We conclude that the absence of exhaustion is not fatal to these claims.
The issue arises here after a dispute between former colleagues at an investment firm led to lengthy — and expensive — litigation. Plaintiffs, representing one faction within this feud, later brought this lawsuit asserting several
When the excess insurers demurred to the complaint, the trial court determined that plaintiffs had alleged exhaustion of the primary insurance policy through compensation that the primary insurer had provided to the other faction, but that none of the excess insurance policies had been exhausted. On this basis, plaintiffs’ claims relating to the first layer of excess insurance were allowed to proceed, but the trial court sustained the demurrers filed by two other excess insurers who supplied higher layers of excess coverage. The Court of Appeal affirmed the resulting judgment of dismissal.
Plaintiffs now challenge the rejection of their claims against the two excess insurers for declaratory relief and breach of the implied covenant of good faith and fair dealing. They argue that the lower courts placed too much emphasis on the lack of actual exhaustion.
We conclude that an insured may state a viable cause of action for declaratory relief regarding coverage and liability under an excess insurance policy even if all of the underlying
In light of these holdings, we reverse the judgment of the Court of Appeal and remand the cause to that court for further proceedings consistent with this opinion.
I. FACTUAL AND PROCEDURAL BACKGROUND
The background facts provided below are drawn from the allegations in the third amended complaint filed by plaintiffs Saul Fox (Fox), Fox Paine & Company, LLC (FPC), and related entities.1 We treat the factual allegations in the complaint as true for present purposes.
To summarize what follows, plaintiffs allege that three excess insurers improperly allowed plaintiffs’ former colleagues at an investment firm, who later became their rivals in lengthy litigation proceedings, to usurp an insurance claim seeking recovery for expenses incurred in that litigation. Plaintiffs
This lawsuit derives from earlier litigation between Fox and Dexter Paine (Paine), the cofounders of FPC, an investment firm. Fox and Paine managed two investment funds together. In 2006, Paine wanted to establish a third fund, while Fox preferred not to. Paine proceeded to launch the fund on his own as a new company, Fox Paine Management III, LLC (FPM III). Fox did not participate in the management of the fund but had a small investment stake in it. An agreement was reached whereby “[a]ny material commitment, action, or undertaking by FPC” would require approvals from both Fox and Paine, and FPC employees could provide services to FPM III while remaining employees of FPC.
The relationship between Fox and Paine deteriorated soon thereafter. In August 2007, FPC, Fox, and related parties (the Fox Parties)2 sued Paine, FPM III, FPC,3 and Paine‘s family trust (the Paine Parties) in Delaware after Paine and others poached employees from FPC to go work for FPM III, arranged lucrative compensation packages for defecting employees, and fraudulently represented that Fox had authorized various actions when he had not done so. The Paine Parties soon filed counterclaims (which the complaint refers to as the Paine
The extensive litigation between the Fox Parties and the Paine Parties led to the presentation of claims under insurance policies that provided coverage to FPC, related entities, and affiliated individuals. The policies consist of a primary insurance policy issued by Houston Casualty Company (HCC) and four excess policies issued by three other insurers. The complaint identifies specific provisions in the primary policy that, according to plaintiffs, provide coverage for investigation and defense costs incurred in litigation such as the Delaware litigation and the Continuing Paine Claims. Each excess policy is a “follow form” policy that adopts the substantive coverage terms appearing within the HCC policy.
All told, $10 million in primary coverage was provided by HCC; defendant Twin City Fire Insurance Company (Twin City) provided a first excess layer of $10 million in coverage; defendant St. Paul Mercury Insurance Company (St. Paul) provided a second excess layer of $10 million in coverage; Twin City provided a third excess layer of $10 million in coverage; and defendant Liberty Mutual Insurance Company (Liberty Mutual) provided a fourth excess layer of $10 million in coverage. Combined, these policies created a $50 million coverage tower with HCC‘s primary policy at the base and Liberty Mutual‘s excess policy at the top. Each excess insurance policy conditions the issuing insurer‘s liability on exhaustion of all underlying
According to the complaint, in November 2007 FPC‘s insurance broker, acting on behalf of FPC and all other insureds under the policies, sent the excess insurers notice of the Delaware litigation. The complaint alleges that although this notice did not mention the Paine Counterclaims, the excess insurers had actual knowledge of, or through the exercise of reasonable diligence should have become aware of, these counterclaims. The complaint further alleges that the excess
Later, after the initiation of the Continuing Paine Claims, an FPM III partner wrote to HCC inquiring about the status of the 2007 notice. He represented that the notice had been submitted on behalf of the Paine Parties and that only the Paine Parties were pursuing a claim under the HCC policy. The excess insurers knew about this correspondence but did not inform plaintiffs about it. Without notifying plaintiffs, HCC paid the Paine Parties the entire $10 million available under its policy.
The Paine Parties also presented claims for coverage to Twin City and St. Paul. These insurers denied the claims in 2012. At a meeting with all three excess insurers in September 2012, the Paine Parties continued to demand coverage. The next year, Twin City and St. Paul filed declaratory relief actions against the Paine Parties, FPC, FPC‘s executives, and others, seeking declarations that there was no coverage under the policies. Liberty Mutual knew about these lawsuits before they were filed but did not inform plaintiffs about them. Although both Twin City‘s and St. Paul‘s complaints named FPC as a defendant, neither insurer served its complaint on FPC. Instead, FPC only learned about the actions through a third-party docket alert. This was the first time that plaintiffs learned about HCC‘s earlier payment to the Paine Parties, and that Twin City and St. Paul had been communicating with the Paine Parties pursuant to the earlier notice.
Plaintiffs had requested information from Twin City and St. Paul about the Paine Parties’ insurance claims. After the settlement, Twin City and St. Paul each wrote back to plaintiffs, refusing to provide information about the claims and falsely maintaining that they had not paid any proceeds to the Paine Parties. Liberty Mutual also knew about the settlement but did not tell plaintiffs about it.
Plaintiffs allege that they “have submitted to the . . . Excess Insurers virtually all of their invoices — seeking approval and reimbursement thereof — detailing the Loss arising out of the Delaware Litigation and the Continuing Paine Claims.” Yet “the . . . Excess Insurers have failed to communicate with Plaintiffs concerning their receipt of those invoices, have failed to conduct a good-faith, reasonable and timely investigation of Plaintiffs’ coverage claims, and have failed to reimburse Plaintiffs[] for their Losses.” Plaintiffs assert that “[i]n defending themselves from and against the Delaware Litigation and Continuing Paine Claims,” they “have incurred covered ‘Loss’ and recoverable interest exceeding $43,000,000, not subject to offset, according to proof at the time of trial.”
The operative third amended complaint alleges four causes of action, for breach of contract, declaratory relief, breach of the implied covenant of good faith and fair dealing (also
Concerning declaratory relief, plaintiffs allege that “[a]n actual justiciable controversy exists” regarding “the proper interpretation of the FPC [E]xcess Policies and Defendants’ obligations thereunder to insure and reimburse Plaintiffs for ‘Loss’ incurred in connection with the Delaware Litigation and the Continuing Paine Litigation” and as to whether “the HCC Policy is exhausted by payment of ‘Loss’ thereunder.” With each excess insurer, plaintiffs allege that there are actual controversies regarding whether: (1) the insurer‘s policy is “triggered by the exhaustion of” all underlying insurance; (2) “Plaintiffs’ losses constitute covered ‘Loss’ under the policy“; and (3) the insurer “should be held liable to pay, and must actually pay” policy benefits to plaintiffs.
Regarding breach of the implied covenant of good faith and fair dealing, plaintiffs allege that all of the excess insurers “were or should have been aware” that “[p]laintiffs had the only valid and legitimate claim to insurance under the” excess policies and that “Twin City[‘s] and St. Paul‘s [2013] disbursement of proceeds to the Paine Parties, who were not legitimate insureds [because they were suing FPC and being sued for actions adverse to FPC], could not and did not reduce the limits available to Plaintiffs under the” excess policies. Plaintiffs also allege that the excess insurers failed “to provide reasonably prompt notice to any legitimate representative of FPC” regarding the November 2007 notice, subsequent coverage determinations, plaintiffs’ rights and benefits under the excess insurance policies, coverage decisions regarding the Paine Parties, and the declaratory judgment actions. According to
Twin City, St. Paul, and Liberty Mutual all demurred to the third amended complaint.5 The three excess insurers argued in their demurrers that plaintiffs’ claims concerning the higher-layer excess policies (i.e., the policies above Twin City‘s first-excess-layer policy) failed due to a lack of exhaustion of all underlying insurance. The trial court concluded that plaintiffs had sufficiently alleged exhaustion of the primary HCC policy and on that basis it allowed plaintiffs’ claims against Twin City to proceed to the extent they involved Twin City‘s first-excess-layer policy. But the trial court also reasoned that “[a]s Twin City only paid $6 million out of its first excess policy, which has a limit of $10 million, . . . exhaustion has not yet occurred for St. Paul, Twin City (as to the third coverage policy), and Liberty to be held liable.” The trial court sustained the demurrers filed by St. Paul and Liberty Mutual, and Twin City‘s demurrer as to
Plaintiffs appealed the subsequent dismissal of their claims against St. Paul and Liberty Mutual. The Court of Appeal affirmed. (Fox Paine & Co., LLC v. Liberty Mutual Ins. Co. (2024) 104 Cal.App.5th 1034 (Fox Paine).) Regarding plaintiffs’ claims for breach of contract, the Court of Appeal concluded that much of the misconduct asserted by plaintiffs “cannot be breaches of contract, as the alleged wrongs are not within the coverage of the policies.” (Id. at p. 1046.) As for the failure to pay plaintiffs policy benefits, which plaintiffs also alleged was a breach of the policies, the Court of Appeal found no breach because the relevant policies had not yet ” ‘attached’ ” upon exhaustion of all underlying insurance. (Id. at p. 1047; see also id. at pp. 1047–1048.)
The Court of Appeal also upheld the trial court‘s ruling rejecting plaintiffs’ claims for declaratory relief against St. Paul
In perceiving there to be no actual controversy regarding coverage, the court regarded the situation here as “exactly the same as that in” Qualcomm, Inc. v. Certain Underwriters at Lloyd‘s, London (2008) 161 Cal.App.4th 184 (Qualcomm). (Fox Paine, supra, 104 Cal.App.5th at p. 1050.) That earlier case also involved a claim for declaratory relief concerning coverage under an excess insurance policy. In Qualcomm, the Court of Appeal affirmed a judgment of dismissal upon concluding that the exhaustion required for the excess policy to attach could not occur due to the insured‘s settlement with the primary insurer for less than the primary policy‘s coverage limit. (Qualcomm, at p. 189; see also id. at pp. 188, 193–203.)
Meanwhile, the Court of Appeal rejected plaintiffs’ reliance on Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592 (Ludgate) in support of their argument that they did not have to allege the actual exhaustion of all underlying insurance in order to pursue their claims for declaratory relief against St. Paul and Liberty Mutual. Ludgate stated that an insured did not have “to show a reasonable
The Court of Appeal also concluded that St. Paul‘s and Liberty Mutual‘s demurrers to the cause of action for declaratory relief had been properly sustained because, had it exercised its discretion, the trial court could have found that such relief was not necessary or proper as to these insurers. (Fox Paine, supra, 104 Cal.App.5th at p. 1052.)7 The Court of Appeal perceived this cause of action, as alleged against St. Paul, as partly derivative of plaintiffs’ breach of contract claim against
Plaintiffs also failed to persuade the Court of Appeal to revive their claims against St. Paul and Liberty Mutual for tortious breach of the implied covenant of good faith and fair dealing. The Court of Appeal reasoned that plaintiffs’ inability to allege exhaustion of the underlying insurance coverage was “fatal” to these claims (Fox Paine, supra, 104 Cal.App.5th at p. 1056) because it meant that plaintiffs could not show coverage under the St. Paul and Liberty Mutual policies, as required to support a claim for bad faith (id. at p. 1057, citing Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 36 (Waller)).8
II. DISCUSSION
After describing the standard of review, we address plaintiffs’ claims for declaratory relief and then consider their claims for tortious breach of the implied covenant of good faith and fair dealing.
A. Standard of Review
” ‘This case comes to us on appeal from the trial court‘s sustaining of a demurrer. For purposes of reviewing a demurrer, we accept the truth of material facts properly pleaded in the operative complaint, but not contentions, deductions, or conclusions of fact or law. We may also consider matters subject to judicial notice.’ ” (Capito v. San Jose Healthcare System, LP (2024) 17 Cal.5th 273, 280.) Furthermore, “On appeal from a judgment of dismissal after the sustaining of a demurrer, a court must ‘treat as true not only the complaint‘s material factual allegations, but also facts that may be implied or inferred from those expressly alleged.’ ” (Sarale v. Pacific Gas & Electric Co. (2010) 189 Cal.App.4th 225, 244–245; see also Miklosy v. Regents of University of California (2008) 44 Cal.4th 876, 883.) In this posture, ” ’ “we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action.” ’ ” (Centinela Freeman EmergencyMedical Associates v. Health Net of California, Inc. (2016) 1 Cal.5th 994, 1010.)
B. Declaratory Relief
1. Legal principles
“Any person interested . . . under a contract” as to which there is an “actual controversy relating to the legal rights and duties of the respective parties” may bring an action seeking “a declaration of rights or duties, either alone or with other relief,” and a court may then “make a binding declaration of these rights or duties, whether or not further relief is or could be claimed at the time.” (
” ’ “The purpose of a declaratory judgment is to ‘serve some practical end in quieting or stabilizing an uncertain or disputed jural relation.’ ” [Citation.] “Another purpose is to liquidate doubts with respect to uncertainties or controversies which might otherwise result in subsequent litigation.” ’ ” (Meyer v. Sprint Spectrum L.P. (2009) 45 Cal.4th 634, 647 (Meyer).)
”
“Whether a case is founded upon an ‘actual controversy’ centers on whether the controversy is justiciable. ‘The principle that courts will not entertain an action which is not founded on an actual controversy is a tenet of common law jurisprudence, the precise content of which is difficult to define and hard to apply.’ ” (Stonehouse Homes LLC v. City of Sierra Madre (2008) 167 Cal.App.4th 531, 540 (Stonehouse Homes).) Justiciability incorporates a ripeness component. (Vandermost v. Bowen (2012) 53 Cal.4th 421, 453.) ” ‘A controversy is “ripe” when it has reached, but has not passed, the point that the facts have sufficiently congealed to permit an intelligent and useful decision to be made.’ ” (Stonehouse Homes, at p. 540; see also Pacific Legal Foundation v. California Coastal Com. (1982) 33 Cal.3d 158, 171 (Pacific Legal Foundation).)
In determining whether a dispute is ripe enough to involve an actual controversy permitting declaratory relief, courts have applied a two-part test drawn from our decision in Pacific Legal
Even if an “actual controversy” has been shown (
A trial court‘s discretion not to entertain a claim seeking declaratory relief “is not boundless,” however. (Meyer, supra, 45 Cal.4th at p. 647.) We have said that when “a case is properly before the trial court, under a complaint which is legally sufficient and sets forth facts and circumstances showing that a declaratory adjudication is entirely appropriate, the trial court may not properly refuse to assume jurisdiction; and if it does enter a dismissal, it will be directed by an appellate tribunal to entertain the action. Declaratory relief must be granted when the facts justifying that course are sufficiently alleged.” (Columbia Pictures Corp. v. DeToth (1945) 26 Cal.2d 753, 762.) Ultimately, a determination of whether “a declaration of rights and obligations would be unnecessary or improper at the time under all the circumstances . . . rests on the facts in each case” (Kessloff v. Pearson (1951) 37 Cal.2d 609, 613), and “doubts regarding the propriety of an action for declaratory relief pursuant to
” ‘Whether a claim presents an “actual controversy” within the meaning of
2. Actual controversy
The insurers advance multiple arguments why this case does not involve an actual controversy. St. Paul asserts that “[t]he non-exhaustion of the underlying policies means this case does not implicate any ‘present’ controversy” over indemnification under its policy. Liberty Mutual, meanwhile, argues that plaintiffs have not alleged an actual controversy as to coverage under its policy because their allegations fail to show a covered loss in an amount that will reach its policy. Both insurers also stress that plaintiffs’ legal battle with the Paine Parties concluded several years ago. They take the position that declaratory relief is no longer necessary, if it ever was, to guide plaintiffs’ conduct in connection with that litigation.
We address these arguments in turn. As we explain below, actual controversies regarding coverage and liability under the St. Paul and Liberty Mutual policies may exist here even though the coverage beneath these policies has not been fully exhausted. Plaintiffs bear the burden, however, of adequately pleading a covered loss sufficient to create an actual controversy regarding each excess policy in light of its attachment point. We explain what this burden entails, and remand this case to the Court of Appeal to determine whether plaintiffs have satisfied it. Finally, we conclude that an actual controversy may exist here notwithstanding the cessation of the earlier litigation.
a. The exhaustion of underlying insurance is not necessary for an actual controversy to exist regarding coverage under an excess insurance policy
We first address whether, as St. Paul argues, plaintiffs were required to allege that all of the insurance coverage underlying its policy had been exhausted in order to satisfy the “actual controversy” requirement for declaratory relief. (
An actual controversy over insurance coverage may exist even when coverage depends on the satisfaction of a future contingency or contingencies. (See
Consistent with these general principles, a lack of exhaustion does not categorically make a coverage dispute involving an excess policy unduly abstract or hypothetical. Imposing a blanket exhaustion prerequisite for the recognition of an actual controversy would place too much emphasis on the fact that a contingency exists, and too little on the likelihood it will occur.
In many respects, the circumstances here bear the basic hallmarks of a concrete dispute over insurance coverage that would support a claim for declaratory relief. 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. Plaintiffs also allege generally that they have performed all of the obligations assigned to them under the policies except to the extent the excess insurers prevented them from doing so. In cases involving a single insurance policy, courts have found that similar allegations established a ripe dispute regarding coverage under the policy. (See, e.g., Aetna Life Ins. Co. v. Haworth (1937) 300 U.S. 227, 242 (Haworth) [an actual controversy permitting declaratory relief existed where an insurance claim was made and disputed; the dispute was
The fact that this case involves several layers of excess insurance, each with its own exhaustion requirement, introduces a wrinkle but does not foreclose the existence of an actual controversy. A dispute can be ripe, and a court can provide sufficiently clear and directive declarations of rights and responsibilities under multiple excess policies, even though coverage under these policies is contingent on the exhaustion of all underlying insurance.
Here, viewed at the time of the ruling on the demurrers, the array of claims alleged by plaintiffs against the excess insurers was conducive to the issuance of useful declarations regarding the excess policies. Plaintiffs asked for a determination regarding whether the HCC policy is exhausted; they alleged a breach of contract claim against Twin City, the first-excess-layer insurer; and they requested findings regarding the liability of each excess insurer. The trial court was well positioned to determine matters of coverage common to all policies, rule on defenses to coverage, and ascertain each excess insurer‘s liability, if any. It could have then issued appropriately tailored declarations enforceable as final judgments. (
St. Paul‘s argument that exhaustion is required before there is a ripe dispute also implicates the hardship component of the actual controversy inquiry. Treating a lack of exhaustion as sufficient on its own to defeat a claim for declaratory relief would impose a significant hardship on insureds such as plaintiffs, require unnecessary and wasteful proceedings, and lead to potentially inconsistent outcomes. If that were the rule, insureds seeking recovery against multiple excess insurers would have to engage in piecemeal litigation, scaling the tower of excess insurance policy-by-policy by securing a favorable judgment against each excess insurer, executing upon it, filing a new lawsuit against the next insurer in the queue, and repeating this process until they reached the summit. Such onerous, time-consuming, and expensive proceedings would pose a serious risk of deterring insureds from ever pursuing their rights against excess insurers and compromise the ability of insureds to vindicate these rights.
Granted, there is some risk that allowing claims for declaratory relief against excess insurers to proceed while litigation against lower-layer insurers remains pending will require the former to remain enmeshed in litigation that might prove unnecessary as to them. This potential inconvenience can be minimized by the trial court, however (see Rutherford v. Owens-Illinois, Inc. (1997) 16 Cal.4th 953, 967 (Rutherford) [“courts have . . . [the] inherent power to control litigation before them“]), and is more than counterbalanced by the hardships
Moreover, as noted by amicus curiae United Policyholders, a rule requiring seriatim proceedings when excess insurance is involved might impose an inconvenience on insureds and insurers alike. Requiring individual actions to be brought against individual insurers at different times and, potentially, in different jurisdictions poses a heightened risk of conflicting rulings that could make the parties’ rights and responsibilities under insurance policies more difficult to ascertain and act upon. Particularly in disputes such as this, involving excess insurance policies that “follow form” as to the primary policy, it invites mischief to require multiple courts, at multiple times, to interpret the very same provisions appearing within the primary policy, as is necessary to determine the existence of coverage under the excess policies.
We conclude from the foregoing 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.
b. A party seeking declaratory relief regarding coverage under an excess policy must adequately allege covered losses implicating that policy
As noted, Liberty Mutual argues that plaintiffs have failed to plead an actual controversy as to coverage and liability under its policy because they have not properly alleged covered losses sufficient to reach this policy, with its $40 million attachment point.
What constitutes a sufficient allegation of covered losses for purposes of surviving a demurrer depends on the circumstances. In situations in which the total amount of an insured‘s allegedly covered losses is already known prior to the filing of a complaint, an insured seeking declaratory relief may reasonably be expected to plead this amount and what the covered losses consist of. These allegations can then be compared with the attachment point of the excess policy for which a judicial declaration is sought. Absent other grounds for concluding that the excess policy cannot attach as a matter of law, when the amount of allegedly covered losses is sufficient to reach that policy, it is certain enough for pleading purposes that the contingency of meeting the excess policy‘s attachment point will come to pass.
The situation is different when the complaint alleges that an insured‘s covered losses are fully known, or that is the only reasonable inference one can draw from the factual allegations in the complaint, and these losses do not reach an excess policy‘s
The more difficult cases involve situations in which it is unknown whether an insured‘s allegedly covered losses are enough to reach an excess policy. For example, an insured may be faced with mounting liabilities or losses that have not yet been fully ascertained; or there may be uncertainty regarding the extent to which claims presented by other insureds will draw upon lower-layer policies and contribute to their exhaustion.
Faced with such uncertainty, in evaluating whether an actual controversy exists regarding excess coverage it remains appropriate at the pleading stage to examine allegations of covered losses or liabilities in light of the pertinent policy‘s
Under this approach, as applied to uncertain liabilities, “for a declaratory judgment coverage action involving an excess policy to be ripe, it must be practically or reasonably likely that the insured‘s potential liability will reach into the excess coverage; absolute proof that the policies will be triggered is not required.” (Liberty Mutual v. Lone Star Industries (Conn. 2009) 967 A.2d 1, 31 (Lone Star); accord, E.R. Squibb, supra, 241 F.3d at p. 177; Eaton Corp. v. Westport Ins. Co. (E.D. Wis. 2021) 567 F.Supp.3d 1029, 1038; Century Indemnity Co. v. Marine Group, LLC (D.Or. 2012) 848 F.Supp.2d 1229, 1235–1236; Tocci, supra, 750 F.Supp.2d at pp. 321–323; Hoechst Celanese v. National Union Ins. (Del.Super. 1992) 623 A.2d 1133, 1137; State Farm Fire & Cas. Co. v. LiMauro (N.Y.App.Div. 1984) 103 A.D.2d 514, 518.)
In performing this ” ‘reasonable likelihood’ ” analysis, ” ‘there is no precise formula or line of demarcation, as each case presents unique facts and circumstances.’ ” (Tocci, supra, 750 F.Supp.2d at p. 322.) “[T]he ‘worst case or highest estimate of damages . . . may be used to ascertain whether or not a claim is justiciable against a particular insurer‘s policy . . . .’ ” (Lone Star, supra, 967 A.2d at p. 32.) Allegations regarding additional claimants on the underlying policies and other facts and circumstances that may affect whether an insured‘s losses or liabilities will reach an excess policy can also inform the analysis.
In undertaking the reasonable likelihood inquiry at the pleading stage, a court should not give undue weight to what are at that juncture only potential defenses to coverage that may prove successful in future proceedings and ultimately prevent exhaustion. One court, for example, has explained at this phase, “[t]hat the insured has not yet proven with certainty that the primary coverage extends to the claims against it does not render the claim [against the excess policy] unripe” (Tocci, supra, 750 F.Supp.2d at p. 323), adding that “[c]ourts have refrained from making a detailed examination of the policy terms and exclusions when determining whether there is a ‘practical likelihood’ that the primary limit could be exceeded” (ibid.). The same court observed that “[s]uch an inquiry . . . is better left to a later stage in the litigation.” (Ibid.)
The reasonable likelihood standard harmonizes with the rationales behind the actual controversy requirement within
We therefore agree with the decisions cited above and conclude that in situations involving uncertainties material to whether an insured‘s losses or liabilities are sufficient to reach an excess policy, the reasonable likelihood approach provides an appropriate method at this stage of the proceedings for determining whether the contingency associated with reaching the policy‘s attachment point is sufficiently likely to occur. But
These principles find support in the substance of prior decisions applying California law, even though certain language within those opinions might be read to suggest different standards for determining when an actual controversy regarding excess insurance coverage has been shown.
As previously alluded to, one of these decisions, Ludgate, supra, 82 Cal.App.4th 592, stated that an insured did not have “to show a reasonable probability of exhaustion of the primary coverage before it could state a cause of action for declaratory relief against [the insurer] on its excess coverage” (id. at p. 606) and that “[e]xhaustion of underlying limits, while necessary to entitle the insured to recover on the excess policy, is not necessary to create actual controversy. Exhaustion is merely an issue of proof and entitlement to recovery, not of pleading” (ibid.).
To the extent that Ludgate determined that an insured need not allege the actual exhaustion of all underlying insurance to state a viable cause of action for declaratory relief regarding an excess insurance policy, its analysis is consistent with ours. Insofar as the language quoted above also could be read as taking the position that an insured does not have to allege a sufficient covered loss to show an actual controversy, it
Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 187 involved subsequent proceedings in the same litigation that had led to the Ludgate decision. It described Ludgate as having held that ”
Likewise, to the extent that language in Iolab Corp. v. Seaboard Surety Co. (9th Cir. 1994) 15 F.3d 1500 (Iolab) has been perceived as asserting another seemingly conflicting rule regarding the availability of declaratory relief, it too must be read in context. In Iolab, the insured settled a lawsuit for a sum less than the total amount of its primary insurance coverage. (Id. at p. 1503.) The insured then brought suit seeking indemnification from more than a dozen primary and excess insurers. (Id. at p. 1502.) The trial court dismissed the plaintiff‘s claims against some insurers and entered summary judgment in favor of the other insurers. (Id. at p. 1503.) The federal Court of Appeals affirmed. (Id. at p. 1507.) As relevant here, as to the excess insurers the appellate court found no error in the district court‘s rejection of the plaintiff‘s breach of contract claims, nor in the lower court‘s failure to recharacterize the suit as an action seeking declaratory relief. (Id. at pp. 1504–1505Iolab court stated “that under California law, [the insured plaintiff] was required to exhaust its primary coverage and to establish that the [allegedly covered] loss exceeded that coverage prior to bringing suit against the excess insurers.” (Id. at p. 1502.) Regarding declaratory relief, Iolab reasoned that requiring the excess insurers to defend against such a cause of action would impose upon them “the unnecessary cost of litigating a claim that may never trigger excess coverage.” (Id. at p. 1505.)
The analysis in Iolab has “spawned some disagreement regarding whether plausible allegations that the [insurance] claim might invade the excess coverage create a justiciable claim
Yet as with Ludgate, the Iolab court‘s disposition of the dispute before it suggests some common ground with our decision. On multiple occasions Iolab indicated that the plaintiff had not put forward facts at summary judgment sufficient to show that the excess policies would ever attach. (See Iolab, supra, 15 F.3d at pp. 1505, 1507 [stating that the plaintiff “has not established that the . . . loss will ever trigger excess coverage“].) As we have explained, it is appropriate to reject a declaratory relief claim due to the absence of an actual controversy when an insured alleges a fully known loss or liability that is insufficient to reach an excess policy‘s attachment point. (Accord, Qualcomm, supra, 161 Cal.App.4th at pp. 188, 193–203.) Iolab‘s focus on the amount of covered liability or loss therefore harmonizes with the principles we have articulated, even if some of the language in that opinion incorrectly communicated that actual exhaustion of all underlying insurance is necessary to pursue a claim for declaratory relief against an excess insurer.
c. Further proceedings on remand
We remand this cause to the Court of Appeal to reevaluate the adequacy of plaintiffs’ allegations as they bear upon the existence of an actual controversy. That court shall address whether plaintiffs must allege a covered loss that reaches an
To assist with proceedings on remand, we take this opportunity to provide further guidance regarding plaintiffs’ allegation that they “incurred covered ‘Loss’ and recoverable interest exceeding $43,000,000, not subject to offset.” The Court of Appeal rejected this allegation as a conclusion of law that it would not assume to be true. (Fox Paine, supra, 104 Cal.App.5th at p. 1050.) The Court of Appeal also found this allegation to be defective because it included interest along with covered loss. (Ibid.)
We agree with the Court of Appeal that this allegation is flawed, but only because it commingles covered loss with recoverable interest. The allegation is not objectionable insofar as it describes a particular amount of loss as “covered.” It is true that this language asserts a legal conclusion that plaintiffs’ losses are covered by the insurance policies — making it, in a sense, a conclusion of law. Nonetheless, when a representation that a loss is “covered” is supported by other allegations in a complaint that describe what the loss involves and the policy provisions that allegedly provide coverage — both of which appear in plaintiffs’ complaint — it has enough of a factual basis to be credited at the pleading stage and inform a court‘s assessment of whether the insured‘s losses will reach, or are reasonably likely to reach, an excess policy. (Cf. Endeavor Operating Co., LLC v. HDI Global Ins. Co. (2023) 96 Cal.App.5th 420, 442 [a bare allegation within a complaint
On the other hand, the allegation‘s commingling of covered loss and recoverable interest presents a problem. This averment does not allege that plaintiffs suffered over $43 million in covered loss. It alleges that plaintiffs have “incurred” over $43 million in covered loss and recoverable interest. The Court of Appeal stated that the incorporation of interest in the $43 million figure provided another reason why it could not conclude that plaintiffs’ losses reached the Liberty Mutual policy. (Fox Paine, supra, 104 Cal.App.5th at p. 1050.) It explained, “Liberty Mutual does not owe interest as a matter of law, as the underlying policies have not been exhausted, and thus Liberty Mutual‘s performance not come due.” (Ibid.)
The fundamental problem with including interest in the $43 million figure is not that Liberty Mutual does not owe interest as a matter of law, an issue we need not address here. It is that — as indicated by the distinction the allegation draws between them — covered loss and recoverable interest are two different things,9 and only covered loss contributes to the exhaustion of coverage limits and is thereby capable of causing
Plaintiffs argue that we cannot assume at this juncture their covered losses will be insufficient to reach both the St. Paul and the Liberty Mutual policies. This argument misunderstands their burden to plead an actual controversy and asks the court to read into their complaint an allegation — that they have incurred a certain amount of covered loss alone — they have not pleaded. (See American Tel. & Tel. Co. v. California Bank (1943) 59 Cal.App.2d 46, 54 [“[i]t is not to be
We leave it to the Court of Appeal to determine in the first instance whether to parse plaintiffs’ allegation of over $43 million in covered loss and recoverable interest into separate components and, if so, what amount of covered loss can reasonably be inferred from this allegation.11 If subsequent
d. An actual controversy may exist notwithstanding the absence of ongoing litigation between plaintiffs and the Paine Parties
We also address one other argument raised by St. Paul and Liberty Mutual for why no actual controversy appears here. Both insurers observe that the litigation between the Fox Parties and the Paine Parties had already concluded by the time this case was filed. Noting our statement in Meyer that ” ’ “[o]ne test of the right to institute proceedings for declaratory judgment is the necessity of present adjudication as a guide for [a] plaintiff‘s future conduct in order to preserve his legal rights” ’ ” (Meyer, supra, 45 Cal.4th at p. 647), the insurers argue that declaratory relief is unnecessary to ” ’ “guide” ’ ” plaintiffs’ ” ‘future conduct’ ” in that litigation (ibid.).
This argument focuses on the wrong controversy. As plaintiffs explain, here we are concerned with “the disputed insurance liability, not the party disputes in the underlying action.” The declaratory relief sought by plaintiffs would resolve a ” ’ ” ‘disputed jural relation’ ” ’ ” between plaintiffs and the excess insurers (Meyer, supra, 45 Cal.4th at p. 647) by clarifying whether liability exists under the policies to cover plaintiffs’ previously incurred litigation costs. (See, e.g., Haworth, supra,
3. Declaratory relief was neither unnecessary nor improper under the circumstances
After determining that plaintiffs had not demonstrated the existence of an actual controversy, the Court of Appeal went further and identified several reasons why the trial court could have concluded that declaratory relief was not “necessary or proper” (
First, the Court of Appeal viewed “at least two aspects of plaintiffs’ declaratory relief claim [as] derivative of other claims” (Fox Paine, supra, 104 Cal.App.5th at p. 1052), explaining, “the [third amended complaint] requests declaratory relief ‘that St. Paul‘s policy . . . is triggered by the exhaustion of the “first layer” Twin City policy and plaintiffs’ losses,’ a request obviously derivative of plaintiffs’ breach of contract claim. Likewise plaintiffs’ request for a declaration that St. Paul ‘waived’ its
right to rely on the exhaustion provision or is ‘estopped’ from requiring it.” (Ibid.)The perceived overlap in plaintiffs’ claims did not provide good reason to regard declaratory relief as unnecessary or improper here. Plaintiffs’ breach of contract claims against St. Paul and Liberty Mutual, which the Court of Appeal determined could not proceed at this time, do not overlap with their declaratory relief claims against these defendants to any great degree. Claims for declaratory relief are not dependent on whether there has been a breach of contract. (See
Next, the Court of Appeal stated that “declaratory relief [wa]s not proper” because “the outcome of the litigation currently proceeding against Twin City is unknown. That litigation includes a claim for breach of contract, as to which Twin City has asserted several defenses. And if one or more of the defenses succeed, it will mean that Twin City would not have to pay its full $10 million policy limits. So, keeping the excess insurers in the case would raise the prospect of what we described as a ‘purely advisory opinion based on hypothetical facts or speculative future events.’ ” (Fox Paine, supra, 104 Cal.App.5th at p. 1053.)
Twin City‘s mere assertion of defenses did not justify a refusal to entertain plaintiffs’ claims for declaratory relief against St. Paul and Liberty Mutual. While the successful assertion of a defense by an underlying insurer that would prevent coverage from ever attaching under a higher-layer excess policy could render nugatory further proceedings on a declaratory relief claim seeking findings regarding coverage and liability under that policy, on demurrer the trial court rejected all of Twin City‘s defenses other than its exhaustion defense (as to the third-layer excess policy) and it allowed plaintiffs’ claims against that insurer to proceed insofar as its first-excess-layer policy was involved. Of course, Twin City later prevailed on a notice defense at trial, and it remains possible that the resulting judgment will hold up on appeal. If so, plaintiffs’ claims for
Relatedly, the Court of Appeal raised concerns about having declaratory relief claims against St. Paul and Liberty Mutual proceed to trial “alongside” the claims against Twin City. (Fox Paine, supra, 104 Cal.App.5th at p. 1053.) The court observed that the adjudication of the former claims would be a waste of the insurers’ time, as well as that of the trial court, if Twin City were to prevail at trial. (Ibid.) This consideration focused entirely on what would happen if Twin City were to prevail, and thus once again placed too much emphasis on that insurer‘s assertion of defenses to liability. Furthermore, this concern is outweighed here by the potential waste of time, effort, and resources that would be involved with serial litigation, particularly considering the various tools that a trial court has to effectively manage the cases before it. (See Rutherford, supra, 16 Cal.4th at p. 967; California Bank v. Diamond (1956) 144 Cal.App.2d 387, 390 [“in a case such as this where a multiplicity of actions would result unless the rights of the parties were first declared and relief given accordingly in the same action, it would be an abuse of discretion to deny relief“].) There is no fixed requirement, for example, that all of a plaintiff‘s declaratory relief claims against multiple defendants must proceed in lockstep “alongside” each other. (Fox Paine, at p. 1053.) As appropriate, these claims can be developed and decided in another sequence that is both fair and efficient under the circumstances.
To summarize, whether viewed individually or collectively, the rationales advanced by the Court of Appeal and the excess insurers do not justify the rejection of plaintiffs’ declaratory relief claims at the pleading stage on the ground that such relief is not necessary or proper under the circumstances.
C. Bad Faith
The second issue presented for review concerns plaintiffs’ claims against St. Paul and Liberty Mutual for tortious breach of the implied covenant of good faith and fair dealing. The Court of Appeal determined that St. Paul‘s and Liberty Mutual‘s demurrers to these claims were properly sustained because plaintiffs “have . . . not alleged exhaustion under the excess policies, and thus no coverage, a failure fatal to their claim for bad faith.” (Fox Paine, supra, 104 Cal.App.5th at p. 1056.) The Court of Appeal rejected plaintiffs’ argument “that ‘exhaustion is [not] an element plaintiffs must prove to state a bad faith claim,” explaining that “plaintiffs concede that an element of
1. Legal principles
“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.’ [Citation.] This principle applies equally to insurance policies, which are a category of contracts.” (Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 400 (Kransco).) The covenant of good faith and fair dealing “is based on general contract law and the long-standing rule ’ “that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” ’ ” (Waller, supra, 11 Cal.4th at p. 36.) “In sum, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct that frustrates the other party‘s rights to the benefits of the agreement.” (Ibid.) “The precise nature and extent of the duty imposed by the implied covenant depends on the nature and purpose of the underlying contract and the legitimate expectations of the parties arising from the contract.” (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2025) ¶ 12:28, p. 12-8.)
The covenant of good faith and fair dealing inheres in insurance policies, like other contracts. A breach of the covenant in the insurance context is distinctive, though, in that it may allow an aggrieved insured to recover the more generous
In taking the position that plaintiffs could not state a claim for bad faith against an excess insurer without alleging exhaustion of the underlying policies, the Court of Appeal relied on our decision in Waller, supra, 11 Cal.4th 1. There, an insured premised its bad faith claim on an insurer‘s refusal to provide coverage or a defense in response to an action for damages. We concluded that there was no coverage or potential for coverage under the policy, so there was no duty to defend. (Id. at p. 23.) Addressing the plaintiff‘s claim for bad faith, we explained that when the duty to defend is involved, “[i]t is clear that if there is no potential for coverage and, hence, no duty to defend under the terms of the policy, there can be no action for breach of the implied covenant of good faith and fair dealing.” (Id. at p. 36; see id. at p. 37 [“If an insurance policy provides no potential basis for coverage, the insurer is under no duty to defend an action against the insured. . . . Because [the insurer] was under no obligation to defend or indemnify the . . . action, it did not breach the implied covenant of good faith and fair dealing“].)
Waller‘s explanation “that a breach of the implied covenant cannot occur ‘unless policy benefits are due’ refers to whether the policy will eventually cover the claim, and . . . not . . . when such coverage finally attaches.” (Schwartz v. State Farm Fire & Casualty Co. (2001) 88 Cal.App.4th 1329, 1335 (Schwartz).) This is consistent with the principle that “[a]n 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.” (Ibid.) 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. (See id. at pp. 1333–1340 [allegations that an excess insurer paid rival claimants a
2. Plaintiffs need not plead prior exhaustion of all underlying insurance to state a claim for bad faith
We agree with plaintiffs that their inability to plead that all underlying insurance has already been exhausted is not by itself fatal to their claims for bad faith.
It is true that the absence of prior exhaustion means it cannot yet be said, at the time a complaint has been filed, that an excess insurer is in breach of any express promise within the policy to provide coverage upon the exhaustion of all underlying insurance. 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. (See Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 373; Carson v. Mercury Ins. Co. (2012) 210 Cal.App.4th 409, 429; Schwartz, supra, 88 Cal.App.4th at p. 1339.)
When it is understood that a breach of the implied covenant of good faith and fair dealing can occur before coverage is due and prior to the breach of any obligation to pay benefits under a policy, and that in some instances it may be the insurer‘s bad faith itself that prevents an insured from fulfilling all of the conditions of coverage (see Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574–575 [recognizing a claim for bad faith in circumstances where the insured‘s failure to satisfy a condition of coverage was allegedly brought about by the insurers’ bad-faith conduct]), it becomes clear that it would ask
The Court of Appeal therefore erred by treating plaintiffs’ failure to allege exhaustion as dispositive of their bad faith claims. We reverse its judgment and remand for further proceedings for that court to apply the proper standard. We decline to address St. Paul‘s and Liberty Mutual‘s arguments that plaintiffs have not alleged facts sufficient to show unreasonable conduct amounting to tortious bad faith on their
III. DISPOSITION
We reverse the judgment of the Court of Appeal and remand the cause to that court for further proceedings consistent with this opinion.
GUERRERO, C. J.
We Concur:
LIU, J.
KRUGER, J.
GROBAN, J.
EVANS, J.
DESANTOS, J.*
FEINBERG, J.**
* Associate Justice of the Court of Appeal, Fifth Appellate District, assigned by the Chief Justice pursuant to
** Associate Justice of the Court of Appeal, Third Appellate District, assigned by the Chief Justice pursuant to
Name of Opinion Fox Paine & Company, LLC v. Twin City Fire Insurance Company
Procedural Posture (see XX below)
Original Appeal
Original Proceeding
Review Granted (published) XX 104 Cal.App.5th 1034
Review Granted (unpublished)
Rehearing Granted
Opinion No. S287404
Date Filed: July 27, 2026
Court: Superior
County: San Francisco
Judge: Andrew Y.S. Cheng
Counsel:
Reed Smith, Raymond A. Cardozo; King & Spalding, Arwen R. Johnson, Kelly Perigoe, Matthew Noller; Pillsbury Winthrop Shaw Pittman, Anne M. Voigts, Pauleen Truong; McKool Smith and Michael J. Miguel for Plaintiffs and Appellants.
Stanzler Law Group, Jordan S. Stanzler; Cohen Tauber Spievack & Wagner and Jay B. Spievack for DNAW SPV CA Vineyard LLC as Amicus Curiae on behalf of Plaintiffs and Appellants.
Covington & Burling, David B. Goodwin, Paulina Rafizadeh and Quentin A. Fisher for United Policyholders as Amicus Curiae on behalf of Plaintiffs and Appellants.
Maynard Nexsen, James J. Hockel, Christopher C. Frost, John C. Neiman, Jr., C. William Courtney, Brandt P. Hill and Braden T. Morell for Defendant and Respondent St. Paul Mercury Insurance Company.
Crowell & Moring and Kendyl A. Barnholtz for the Complex Insurance Claims Litigation Association as Amicus Curiae on behalf of Defendants and Respondents.
Horvitz & Levy, Lisa Perrochet, Benjamin P. Covington and Bradley S. Pauley for the American Property Casualty Insurance Association as Amicus Curiae on behalf of Defendants and Respondents.
Raymond A. Cardozo
Reed Smith LLP
101 Second Street, Suite 1800
San Francisco, CA 94105
(415) 543-8700
John C. Neiman, Jr.
Maynard Nexsen PC
1901 Sixth Avenue North, Suite 1700
Birmingham, AL 35203
(205) 254-1228
Ronald P. Schiller
Hangley Aronchick Segal Pudlin & Schiller
One Logan Square, 27th Floor
Philadelphia, PA 19103
(215) 496-7020