Saul Fox and Dexter Paine co-founded investment firm Fox Paine & Company, LLC (FPC). In 2006, after Paine launched a third investment fund, Fox Paine Management III, LLC, without Fox’s full participation, the relationship between the two collapsed. In August 2007, Fox and related entities (the Fox Parties) sued Paine and related entities (the Paine Parties) in Delaware, alleging Paine poached FPC employees and misrepresented that Fox had authorized various actions; the Paine Parties countersued, and years of litigation followed. That dispute triggered claims under a tower of insurance policies covering FPC and affiliated individuals: a $10 million primary policy from Houston Casualty Company (HCC), a $10 million first-layer excess policy from Twin City Fire Insurance Company, a $10 million second-layer excess policy from St. Paul Mercury Insurance Company, a $10 million third-layer excess policy from Twin City, and a $10 million fourth-layer excess policy from Liberty Mutual Insurance Company — a $50 million tower in which each excess policy attaches only once the insurance beneath it is exhausted.

According to the operative complaint, the Paine Parties came to control the insurance claim: HCC paid the Paine Parties its full $10 million primary limit without notifying the Fox Parties, and Twin City and St. Paul later settled with the Paine Parties for a combined $9 million (roughly $6 million allocated to Twin City’s first-layer policy and $3 million to St. Paul’s), again without telling the Fox Parties, who allege they learned of these developments only years later through a third-party docket alert. Plaintiffs Fox, FPC, and related entities sued Twin City, St. Paul, and Liberty Mutual for breach of contract, declaratory relief, breach of the implied covenant of good faith and fair dealing, and aiding and abetting breach of fiduciary duty, alleging they — not the Paine Parties — held the only legitimate claim to the excess coverage and had incurred more than $43 million in covered loss and interest defending the Delaware litigation and its aftermath.

All three excess insurers demurred to the operative complaint, arguing plaintiffs’ claims against the higher-layer policies failed because plaintiffs could not allege the underlying insurance had actually been exhausted. The San Francisco County Superior Court found plaintiffs had adequately alleged exhaustion of the primary HCC policy, allowing claims against Twin City’s first-excess-layer policy to proceed, but concluded exhaustion had not occurred as to St. Paul’s policy, Twin City’s third-layer policy, or Liberty Mutual’s policy, since only $6 million of Twin City’s $10 million first layer had been paid out. On that basis, the court sustained the demurrers of St. Paul and Liberty Mutual (and Twin City’s demurrer as to its third-layer policy) without further leave to amend, resulting in a judgment of dismissal as to those insurers.

The California Supreme Court granted review to examine (Fox Paine & Co., LLC v. Liberty Mutual Ins. Co. (2024) 104 Cal.App.5th 1034), a Court of Appeal published opinion, that agreed with the trial court, and held that the absence of actual exhaustion defeated any “actual controversy” under Code of Civil Procedure section 1060, treating the case as materially identical to Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London (2008) 161 Cal.App.4th 184.

In the case of Fox Paine & Company, LLC v. Twin City Fire Insurance Company, No. S287404 (Cal. Sup. Ct., July 2026) — the California Supreme Court reversed the judgment of the Court of Appeal and remanded the cause for further proceedings.

The Supreme Court disagreed with the Court of Appeal, holding that a lack of actual exhaustion does not categorically defeat an actual controversy regarding coverage under an excess policy. Applying the ripeness framework from Pacific Legal Foundation v. California Coastal Commission (1982) 33 Cal.3d 158, the Court explained that insurance coverage disputes routinely involve future contingencies, and that courts should ask whether it is practically or reasonably likely that a contingency will occur rather than treating any unresolved contingency as fatal. Because plaintiffs alleged a loss, identified the specific policy provisions covering it, and alleged they had submitted virtually all their invoices without reimbursement, the Court found the dispute concrete enough to support declaratory relief, and held that requiring insureds to litigate excess policies one layer at a time — suing, winning, executing, and then suing the next insurer up the tower — would impose serious and unnecessary hardship.

The Court did impose a real pleading requirement going forward: a plaintiff seeking a declaration of coverage under an excess policy must adequately allege that its covered losses are sufficient to reach that policy’s attachment point, and courts must not credit complaints that impermissibly commingle covered loss with other amounts, such as prejudgment interest, that do not themselves contribute to exhaustion. Applying that standard, the Court faulted plaintiffs’ own allegation of “$43,000,000 in covered Loss and recoverable interest” for blending two different things, but remanded for the Court of Appeal to determine in the first instance how much of that figure, if any, can reasonably be read as covered loss alone, and whether a reasonable-likelihood standard should apply given the record’s uncertainties. In reaching this holding, the Court disapproved two prior Court of Appeal decisions, Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592 and Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 187, to the extent they could be read as excusing insureds from pleading any covered loss at all.

Turning to the bad faith claims, the Court also held that an insured suing an excess insurer for tortious breach of the implied covenant of good faith and fair dealing likewise need not allege prior exhaustion of all underlying insurance. The Court of Appeal had relied on Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1 for the proposition that there can be no bad faith claim absent actual coverage. The Supreme Court explained that Waller addressed whether coverage would ever be due, not when coverage attaches, and that an excess insurer’s implied duty not to injure its insured’s right to policy benefits exists from the inception of the policy, not only once exhaustion occurs. It is enough, the Court held, for an insured to allege facts showing that coverage under the excess policy will attach — or would attach but for the insurer’s own bad-faith conduct — and that the insurer’s misconduct impaired the insured’s recovery of benefits owed. The Court declined to address whether plaintiffs’ specific allegations of misconduct were adequate, leaving that question for the Court of Appeal on remand.

Finally, the Court rejected the Court of Appeal’s separate holding that declaratory relief was “not necessary or proper” under Code of Civil Procedure section 1061 even if an actual controversy existed, including that court’s concerns about entangling excess insurers in litigation whose outcome depended on unresolved claims against Twin City and about upsetting excess insurers’ settled expectations. The Court found these rationales gave undue weight to speculative future defenses and were outweighed by the hardship serial litigation would impose on insureds, particularly in disputes involving “follow form” excess policies that adopt the primary policy’s terms, where requiring multiple courts to separately interpret identical language invites inconsistent rulings. Having rejected each ground the Court of Appeal relied on, the Supreme Court reversed and remanded the case for further proceedings consistent with its opinion.

No Need to Exhaust Underlying Coverage to Sue Excess Insurers