California Supreme Court Restores Policyholders' Ability to Pursue Declaratory Relief and Bad Faith Claims in Fox Paine & Co., LLC v. Liberty Mutual Ins. Co.

In a huge victory for policyholders in the Golden State, the California Supreme Court has confirmed that policyholders may proceed with declaratory relief and bad faith claims against excess insurers without pleading actual exhaustion of underlying policy limits. 

For years, California courts had held that pleading actual exhaustion of underlying policy limits was not a necessary condition for proceeding with a declaratory relief claim against excess insurers.  Yet, in a Sept. 5, 2024 decision, the First District Court of Appeal went against prior authorities and determined that policyholders could not proceed with declaratory relief claims against excess insurers — let alone associated bad faith claims — absent actual exhaustion of underlying policy limits.  Fox Paine & Co., LLC v. Liberty Mutual Ins. Co., 104 Cal. App. 5th 1034 (2024). 

The California Supreme Court granted review.  In its decision issued on July 27, 2026, the California Supreme Court ruled as follows: 

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 insurance coverage has not yet been exhausted. While insureds in this position must adequately plead their covered losses, the relevant principles governing the availability of declaratory relief do not support a strict rule that would withhold this relief whenever exhaustion has not also been alleged. We also hold that an insured suing an excess insurer for tortious breach of the implied covenant of good faith and fair dealing does not have to allege the prior exhaustion of all underlying insurance. It is sufficient to allege facts that, taken as true, show that coverage under an excess policy will attach, and that the insurer’s misconduct has impaired the insured’s recovery of benefits owed to it under the policy. 

This ruling confirms the longstanding rule in California that policyholders can successfully pursue declaratory relief and bad faith claims against excess insurers prior to actual exhaustion of underlying policy limits.  In so ruling, the California Supreme Court has protected policyholders from years of separate litigation proceedings against excess insurers implicated by claims that reach the attachment points of the excess policies, which separate litigation proceedings would have magnified expense and created the risk of inconsistent rulings. 

Instead, the California Supreme Court has cemented California’s status as a jurisdiction in which policyholders can pursue coverage where actual controversies exist without inappropriate procedural hurdles to doing so.