IN THE SUPREME COURT OF
CALIFORNIA

FOX PAINE & COMPANY, LLC, et al.,
Plaintiffs and Appellants,
v.
TWIN CITY FIRE INSURANCE COMPANY et al.,
Defendants and Respondents.

S287404

First Appellate District, Division Two
A168803

San Francisco City and County Superior Court
CGC17557275

July 27, 2026

Chief Justice Guerrero authored the opinion of the Court, in
which Justices Liu, Kruger, Groban, Evans, DeSantos,* and
Feinberg** concurred.

*
Associate Justice of the Court of Appeal, Fifth Appellate
District, assigned by the Chief Justice pursuant to article VI,
section 6 of the California Constitution.
**
Associate Justice of the Court of Appeal, Third Appellate
District, assigned by the Chief Justice pursuant to article VI,
section 6 of the California Constitution.
 FOX PAINE & COMPANY, LLC v. TWIN CITY FIRE
INSURANCE COMPANY
S287404

Opinion of the Court by Guerrero, C. J.

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

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Opinion of the Court by Guerrero, C. J.

causes of action against three insurers that had issued excess
insurance policies to the firm. The operative complaint alleges
that the excess insurers breached the policies by not
indemnifying plaintiffs for expenses they incurred in the earlier
litigation. Plaintiffs also assert that the failure to pay them
policy benefits and other conduct by the excess insurers that
allegedly favored the other faction over theirs violated the
covenant of good faith and fair dealing that is implicit within the
excess policies. In addition to seeking damages, plaintiffs
request a series of judicial declarations, including declarations
that their insurance claims are covered by the excess policies
and must be paid by the excess insurers.
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

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Opinion of the Court by Guerrero, C. J.

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.
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

1
In addition to Fox and FPC, the plaintiffs in this case
are Fox Paine Capital Fund II International, L.P.; FP
International LPH, L.P.; and Fox Paine International GP, Ltd.

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Opinion of the Court by Guerrero, C. J.

contend that the claim should have been understood as having
been submitted on their behalf and resulted in substantial
insurance payouts to them, but that as yet, they have received
nothing under any of the excess policies.
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

2
The complaint describes these related parties as “two Fox-
owned entities.”
3
The complaint alleges that FPC was sued only
“nominally.”

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Opinion of the Court by Guerrero, C. J.

Counterclaims) against the Fox Parties. The Delaware
litigation, including the Paine Counterclaims, was quickly
resolved through settlement, only to be followed by new
litigation. This follow-on litigation, which the complaint refers
to as the “Continuing Paine Claims,” continued for several
years.
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

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Opinion of the Court by Guerrero, C. J.

insurance, whether through full payment of all underlying
insurance up to the policy limits (as provided in the Twin City
and St. Paul policies) or through such payment or all underlying
insurers “being held liable to pay in legal currency the full
amount of the Underlying Limit of Liability as loss” (as specified
in the policy issued by Liberty Mutual). 4
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

4
The exhaustion provision in Twin City’s policies provides
that “[i]t is expressly agreed that liability for any loss shall
attach to the Underwriters only after the Primary and
Underlying Excess Insurers shall have paid the full amount of
their respective liability . . . or the Insured(s) shall have paid the
full amount of such liability due to the financial insolvency of an
insurer of the Underlying Insurance. The Underwriters shall
then be liable to pay only such additional amounts up to the
Limit of Liability set forth in [the policy].” St. Paul’s policy
specifies that “[t]he Insurer shall only be liable to make payment
under this policy after the total amount of all Underlying Limits
of Liability has been paid in legal currency by the issuers of all
Underlying Insurance as covered loss thereunder.” Liberty
Mutual’s policy contains language providing, “Except as
provided in paragraph 4.1 [addressing the insolvency of an
insurer], this Policy only provides coverage when the
Underlying Limit of Liability is exhausted by reason of the
insurers of the Underlying Policies paying or being held liable
to pay in legal currency the full amount of the Underlying Limit
of Liability as loss.”

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Opinion of the Court by Guerrero, C. J.

insurers failed to provide the Fox Parties, including FPC, with
a coverage analysis relating to those claims, that they did not
properly communicate with the Fox Parties about these claims,
and that they closed their files once the Delaware litigation
concluded.
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.

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Opinion of the Court by Guerrero, C. J.

Twin City and St. Paul soon settled with the Paine Parties
for a total of $9 million. Approximately $6 million of this
amount was allocated to the first-excess-layer Twin City policy
and approximately $3 million was assigned to the St. Paul
policy, with both insurers claiming that the settlement proceeds
were indemnity payments under the excess policies.
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

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Opinion of the Court by Guerrero, C. J.

known as a “bad faith” claim), and aiding and abetting breaches
of fiduciary duties.
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

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Opinion of the Court by Guerrero, C. J.

plaintiffs, due to the excess insurers’ failure to properly
communicate with them they did not learn about Twin City’s
and St. Paul’s settlement with the Paine Parties until
September 2016, more than three years after the agreement was
reached. Plaintiffs allege that the excess insurers’ alleged
misconduct “prevented Plaintiffs from receiving the proceeds
and benefits of” the excess insurance policies.
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

5
The trial court had previously sustained St. Paul’s and
Liberty Mutual’s demurrers to plaintiffs’ second amended
complaint, but it had granted plaintiffs leave to amend. Twin
City’s demurrer to the second amended complaint had been
sustained in part and overruled in part.

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claims involving the third excess policy, without granting
further leave to amend.6
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

6
Plaintiffs’ claims against Twin City, as they concerned its
first-excess-layer policy, proceeded to trial. Upon St. Paul’s
request, we have taken judicial notice of the jury verdict form
and the trial court’s statement of decision following that trial.
The verdict form indicates the jury found that “Fox Paine &
Company, LLC and Saul Fox [did] suffer a loss all or part of
which was covered under the insurance policy with Twin City,”
but that “Fox Paine & Company, LLC and Saul Fox [did not]
give timely notice to Twin City in writing of a Claim as required
under the Twin City policy.” The statement of decision denied
plaintiffs’ claim for declaratory relief against Twin City
pursuant to the jury’s finding that they had not filed a timely
claim. Plaintiffs’ appeal of the resulting judgment entered in
Twin City’s favor is currently pending before the Court of
Appeal.

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and Liberty Mutual. (Fox Paine, supra, 104 Cal.App.5th at
pp. 1049–1052.) First, the appellate court determined that
plaintiffs had not adequately alleged an actual controversy
between the parties. On this point, the Court of Appeal
regarded plaintiffs’ allegation that they had “incurred covered
‘Loss’ and recoverable interest exceeding $43,000,000, not
subject to offset” as a conclusion of law that it would not assume
to be true. (Id. at p. 1050.) The court also noted that the
$43 million total included both covered loss and interest, and it
stated that Liberty Mutual did not owe interest because its
obligation to pay benefits had not yet come due. (Ibid.)
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

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Opinion of the Court by Guerrero, C. J.

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.) The Ludgate court
further explained, “Exhaustion 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.) The Court of Appeal below described the
latter statement as “pure dictum” (Fox Paine, supra,
104 Cal.App.5th at p. 1051) in light of the circumstances that
were before the Ludgate court, which included the insured’s
allegation of liabilities in excess of the primary policies’ coverage
limits and the excess insurer’s admissions that an actual
controversy existed. (Ludgate, at pp. 604–607.)
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

7
The Court of Appeal acknowledged that the trial court had
not exercised its discretion in sustaining the demurrers as to
this cause of action, but it relied on the principle that a Court of
Appeal “ ‘ “will affirm if there is any ground on which the
demurrer can properly be sustained, whether or not the trial
court relied on proper grounds or the defendant asserted a
proper ground in the trial court proceedings.” ’ ” (Fox Paine,
supra, 104 Cal.App.5th at p. 1045, citing George v. eBay, Inc.
(2021) 71 Cal.App.5th 620, 628.)

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that insurer. (Ibid.) The Court of Appeal also stressed that “the
outcome of the litigation currently proceeding against Twin City
is unknown,” and that if one of Twin City’s defenses were to
prevail, it would not have to pay its full policy limits and
exhaustion would never occur as to any of the higher-layer
policies. (Id. at p. 1053.) A declaration issued under these
circumstances, the Court of Appeal reasoned, might constitute
“a ‘purely advisory opinion based on hypothetical facts or
speculative future events,’ ” and any proceedings associated
with the declaration might ultimately prove to be a waste of time
and resources. (Ibid.) Finally, the court believed that
“burdening the excess insurers with prematurely litigating
coverage issues before exhaustion upsets insurers’ settled
expectations” regarding their responsibilities as excess, rather
than primary, insurers. (Ibid.)
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

8
The Court of Appeal also found no error in the trial court’s
dismissal of the aiding and abetting claim against St. Paul and
Liberty Mutual. (Fox Paine, supra, 104 Cal.App.5th at
pp. 1058–1060.)

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Plaintiffs sought review. We granted their petition to
clarify whether an insured can pursue declaratory relief and
claims for bad faith involving excess insurance policies in
circumstances where the underlying insurance coverage has not
yet been exhausted.
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 Emergency

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Medical 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.” (Code Civ. Proc., § 1060.) Such a declaration “may be
either affirmative or negative in form and effect, and . . . shall
have the force of a final judgment. The declaration may be had
before there has been any breach of the obligation in respect to
which said declaration is sought.” (Ibid.) Declaratory relief
under Code of Civil Procedure section 1060 is cumulative to
other remedies that may be available. (Id., § 1062.)
“ ‘ “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).)
“Code of Civil Procedure section 1060 does not require a
breach of contract in order to obtain declaratory relief, only an
‘actual controversy.’ Declaratory relief pursuant to this section
has frequently been used as a means of settling controversies
between parties to a contract regarding the nature of their
contractual rights and obligations.” (Meyer, supra, 45 Cal.4th

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at p. 647; see also Slobojan v. Western Travelers Life Ins. Co.
(1969) 70 Cal.2d 432, 435; Aitchison v. Founders Ins. Co. (1958)
166 Cal.App.2d 432, 440 (Aitchison).) “The ‘actual controversy’
referred to in this statute is one which admits of definitive and
conclusive relief by judgment within the field of judicial
administration, as distinguished from an advisory opinion upon
a particular or hypothetical state of facts. The judgment must
decree, not suggest, what the parties may or may not do.” (Selby
Realty Co. v. City of San Buenaventura (1973) 10 Cal.3d 110,
117.) A party seeking declaratory relief “must allege facts from
which the court may determine that an actual controversy
relating to legal rights and duties of the respective parties
exists.” (Lord v. Garland (1946) 27 Cal.2d 840, 851 (Lord).)
“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

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Opinion of the Court by Guerrero, C. J.

Foundation, supra, 33 Cal.3d at page 171. This test considers
“(1) whether the dispute is sufficiently concrete that declaratory
relief is appropriate; and (2) whether withholding judicial
consideration will result in the parties suffering hardship.”
(Stonehouse Homes, supra, 167 Cal.App.4th at p. 540.) “ ‘Under
the first prong, the courts will decline to adjudicate a dispute if
“the abstract posture of [the] proceeding makes it difficult to
evaluate . . . the issues” [citation], if the court is asked to
speculate on the resolution of hypothetical situations [citation],
or if the case presents a “contrived inquiry” [citation]. Under
the second prong, the courts will not intervene merely to settle
a difference of opinion; there must be an imminent and
significant hardship inherent in further delay.’ ” (Ibid.; see also
Otay Land Co. v. Royal Indemnity Co. (2008) 169 Cal.App.4th
556, 562 [“ ‘Before a controversy is ripe for adjudication it
“ ‘must be definite and concrete, touching the legal relations of
parties having adverse legal interests’ ” ’ ” and “ ‘ “ ‘admitting of
specific relief through a decree of a conclusive character, as
distinguished from an opinion advising what the law would be
upon a hypothetical state of facts’ ” ’ ”].)
Even if an “actual controversy” has been shown (Code Civ.
Proc., § 1060), a trial court has some latitude not to entertain a
claim for declaratory relief. A court may decline to do so “in any
case where its declaration or determination is not necessary or
proper at the time under all the circumstances.” (Id., § 1061.)
The trial court’s discretion to weed out cases in which a
declaration is not necessary or proper extends to the pleading
stage of proceedings. (See Meyer, supra, 45 Cal.4th at p. 648;
Osseous Technologies of America, Inc. v. DiscoveryOrtho
Partners LLC (2010) 191 Cal.App.4th 357, 372.) As part of the

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Opinion of the Court by Guerrero, C. J.

“necessary or proper” inquiry (Code Civ. Proc., § 1061), a court
may assess whether “resolution of the controversy . . . would
have little practical effect in terms of altering parties’ behavior,”
among other relevant considerations. (Meyer, at p. 648.)
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 Code of Civil Procedure section 1060 generally are
resolved in favor of granting relief” (Filarsky v. Superior Court
(2002) 28 Cal.4th 419, 433 (Filarsky)).
“ ‘Whether a claim presents an “actual controversy” within
the meaning of Code of Civil Procedure section 1060 is a
question of law that we review de novo.’ ” (Leonard Carder, LLP
v. Patten, Faith & Sandford (2010) 189 Cal.App.4th 92, 97.)
When an actual controversy exists, and a trial court has
exercised its discretion to grant or deny declaratory relief, “ ‘a

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Opinion of the Court by Guerrero, C. J.

reviewing court will not disturb that exercise of discretion
absent abuse.’ ” (Ibid.)
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.

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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. (Code
Civ. Proc., § 1060.) We consider, among other things, whether a
failure to exhaust, by itself, makes a dispute over coverage too
abstract and unsuitable for declaratory relief, and whether a
refusal to entertain claims for declaratory relief if exhaustion
has not occurred would impose a significant hardship on the
parties. (Pacific Legal Foundation, supra, 33 Cal.3d at p. 171;
Stonehouse Homes, supra, 167 Cal.App.4th at p. 540.)
An actual controversy over insurance coverage may exist
even when coverage depends on the satisfaction of a future
contingency or contingencies. (See Code Civ. Proc., § 1060 [the
court may “make a binding declaration of . . . rights or duties,
whether or not further relief is or could be claimed at the time”].)
In fact, “Actions for declaratory judgment in the insurance
context nearly always depend upon several contingencies.”
(Tocci Bldg. Corp. of New Jersey v. Virginia Sur. (D. Mass. 2010)
750 F.Supp.2d 316, 321 (Tocci); see also E.R. Squibb & Sons,
Inc. v. Lloyd’s & Companies (2d Cir. 2001) 241 F.3d 154, 177
(E.R. Squibb).) While at some point these contingencies may
become so great that no actual controversy will be found to exist
(see Centex Homes v. St. Paul Fire & Marine Ins. Co. (2015)
237 Cal.App.4th 23, 29–30), the mere fact “[t]hat . . . liability
may be contingent does not necessarily defeat jurisdiction of a
declaratory judgment action. [Citations.] Rather, courts should

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focus on ‘the practical likelihood that the contingencies will
occur . . . .’ [Citations.] Indeed, litigation over insurance
coverage has become the paradigm for asserting jurisdiction
despite ‘future contingencies that will determine whether a
controversy ever actually becomes real.’ ” (Associated Indemnity
Corp. v. Fairchild Industries, Inc. (2d Cir.1992) 961 F.2d 32, 35
(Fairchild Industries).)
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

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Opinion of the Court by Guerrero, C. J.

“definite and concrete, not hypothetical or abstract”]; Aitchison,
supra, 166 Cal.App.2d at p. 440.)
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. (Code Civ. Proc., § 1060.) Contingencies associated
with each policy’s exhaustion requirement could have been
incorporated within these declarations through appropriate
language explaining when any coverage responsibilities
recognized by the court would become due. (See Southern
Counties Gas Co. v. Ventura Pipeline Constr. Co. (1971)
19 Cal.App.3d 372, 381 [“in actions for declaratory relief future
and contingent legal rights may be encompassed by the relief

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Opinion of the Court by Guerrero, C. J.

therein granted”].) And plaintiffs’ ability to enforce these
declarations as judgments would have added to the likelihood
that these contingencies would happen.
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

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Opinion of the Court by Guerrero, C. J.

that would be imposed on insureds by forcing them to proceed
sequentially against the excess insurers.
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.

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In addressing this argument, we reiterate that a party
seeking declaratory relief bears the burden of showing the
existence of an actual controversy. (Lord, supra, 27 Cal.2d at
p. 851; Boosman v. United Bldg. Co. (1952) 109 Cal.App.2d 486,
488.) When the declaratory relief sought involves findings
regarding coverage and liability under an excess insurance
policy, it must be adequately alleged that the insured’s covered
losses are sufficient to reach that policy. Otherwise, any
disagreement regarding coverage and liability is merely
academic because the plaintiff has provided no reason to believe
that the contingency of reaching the excess policy’s attachment
point will occur.
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

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Opinion of the Court by Guerrero, C. J.

attachment point. In that circumstance, further proceedings on
a cause of action seeking declaratory relief regarding coverage
or liability under the policy are typically unjustified, at least
when there are no additional claims from other claimants on the
underlying insurance that will boost the insured’s allegedly
covered losses up the insurance tower to reach the excess policy.
When the insured’s allegedly covered losses are fully known yet
fall short, the excess policy will not attach even assuming that
the plaintiff’s allegations are true, meaning that the request for
declaratory relief is properly rejected at the pleading stage due
to the lack of an actual controversy regarding coverage or
liability under the policy. (See Gilbert v. State of California
(1990) 218 Cal.App.3d 234, 248 [“to state a cause of action for
declaratory relief, there must arguably be a right . . . or a duty”];
cf. Childhelp, Inc. v. City of Los Angeles (2023) 91 Cal.App.5th
224, 236 [“ ‘a trial court may properly sustain a general
demurrer to a declaratory relief action without leave to amend
when . . . the controversy presented can be determined as a
matter of law’ ”].)
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

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attachment point. But in these kinds of situations courts have
viewed allegations of losses or liabilities from a somewhat
different perspective, applying a standard that allows for
recognition of an actual controversy even if it is not yet certain
that an insured’s claims will ultimately reach an excess policy.
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.

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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
Code of Civil Procedure section 1060. It does not indulge
obviously spurious controversies yet simultaneously avoids the
hardships that could result from withholding declaratory relief
in situations where an insured may be uncertain whether its
losses or liabilities will reach an excess policy but nevertheless
needs to secure a judicial determination regarding whether
there is coverage under that policy.
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

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as previously explained, a different standard applies when no
comparable uncertainties exist. In either situation, of course,
additional circumstances relevant to the existence of an actual
controversy regarding coverage or liability under an excess
policy, such as the assertion of defenses that establish as a
matter of law at the pleading stage that exhaustion cannot
occur, must also be taken into consideration when they are
properly before the court.
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

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must be understood in context. These statements were not
critical to the outcome in Ludgate because in that case the
insured’s cross-complaint “sufficiently alleged exhaustion of
underlying limits.” (Ludgate, supra, 82 Cal.App.4th at p. 606.)
Together with the excess insurer’s admissions in its own
complaint seeking declaratory relief, the insured’s allegations
regarding prior losses and anticipated liabilities well in excess
of the primary policies’ coverage limits were deemed sufficient
in Ludgate to show that an actual controversy existed, at least
for purposes of a motion for judgment on the pleadings. (Id. at
pp. 603–604, 606–608.) Notwithstanding the broader language
appearing elsewhere in its opinion, the Ludgate court ultimately
concluded only that under the circumstances “requiring [the
insured] to allege additional facts to establish reasonable
probability of exhaustion and actual controversy was
superfluous and served no useful purpose.” (Id. at p. 608, italics
added.)
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 “Code of Civil Procedure
section 1060 . . . does not require an insured to show a
reasonable probability of exhaustion of its primary coverage
before it may state a cause of action for declaratory relief against
an excess insurer.” (Id. at p. 220.) This statement must also be
understood as having the facts involved in Ludgate in mind.
Nevertheless, because language in both decisions could be read
as endorsing a pleading rule contrary to the principles we have
articulated, we disapprove both Ludgate Ins. Co. v. Lockheed
Martin Corp., supra, 82 Cal.App.4th 592, and Lockheed Martin

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Corp. v. Continental Ins. Co., supra, 134 Cal.App.4th 187, to the
extent they could be so construed.
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–
1505.) The Iolab 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

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[for declaratory relief] or whether the insured must allege that
the primary coverage actually has been exhausted.” (Sinanian
Development, Inc. v. Admiral Insurance Company (C.D.Cal.
Sept. 30, 2024, No. CV 24-232-DMG (MRWx)) 2024 WL
5316978 at p. *4.) As we have explained, actual exhaustion of
all underlying insurance is not required for an insured to pursue
a declaratory relief claim against an excess insurer.
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 [stating that the plaintiff “has not
established that the . . . loss will ever trigger excess coverage”],
1507 [making the same observation].) 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

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excess policy’s attachment point in order to state an actual
controversy involving that policy, or whether additional
considerations justify application of the reasonable likelihood
approach here. Once the appropriate standard has been
identified that court shall determine whether it has been met.
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

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Opinion of the Court by Guerrero, C. J.

that certain losses are “covered” by an insurance policy may be
rejected as a conclusion of law when it is contradicted by the
policy itself].)
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

9
The HCC policy defines “Loss” as “damages, settlements
and Costs, Charges and Expenses incurred by any of the
Insureds, including punitive, exemplary or multiplied damages;
provided, however, that such punitive, exemplary or multiplied
damages are insurable pursuant to any applicable law.” “Costs,
Charges and Expenses” is defined within the policy as
“reasonable and necessary legal fees and expenses (including
expert fees) and cost of attachment or similar bonds incurred by
the Insureds in defense of any Claim.”

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higher-layer policies to attach. The Court of Appeal understood
the complaint’s reference to “recoverable interest” as referring
to prejudgment interest on policy benefits that plaintiffs claim
to be owed. (Fox Paine, supra, 104 Cal.App.5th at p. 1050; see
Civ. Code, § 3287, subd. (a).) Plaintiffs have not argued that this
characterization was mistaken. Neither plaintiffs’ complaint
nor their briefs identify any provisions within the insurance
policies involved here or any legal authority under which
prejudgment interest owed by other insurers could cause
St. Paul’s or Liberty Mutual’s policies to attach when they
otherwise would not.10 The issue with including interest in the
$43 million figure is therefore even more fundamental than
described by the Court of Appeal. The commingling of loss and
interest obscures the number that matters for purposes of
ascertaining whether the underlying policies are capable of
being exhausted, which is the amount of covered loss.
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

10
In their merits briefing here, plaintiffs argued only that
the Court of Appeal erred in “finding interest was not
recoverable.” They did not develop an argument that interest
constitutes covered loss under the policies or that the Court of
Appeal misread this allegation and the $43 million figure
includes only loss, and not interest.

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Opinion of the Court by Guerrero, C. J.

assumed from” the rule requiring liberal construction of a
pleading “that by construction there may be inserted in a
pleading vital pretermitted averments or averments which are
neither directly set forth therein nor reasonably within the fair
import of the language of those which are set forth”].) While at
this point in the proceedings we must accept as true those
inferences that can be reasonably drawn from a complaint’s
factual allegations, whether or not plaintiffs’ allegation of $43
million of covered loss and recoverable interest is reasonably
read to imply the distinct fact that there was at least a certain
amount of covered loss remains to be determined. Plaintiffs’
argument that we must assume a sufficient covered loss would,
if accepted, create a loophole in the pleading standards that we
described earlier in this opinion by allowing parties seeking
declaratory relief to obscure the amount of covered loss in their
pleadings by alleging only similarly blended sums.
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

11
In proceedings before this court, we raised the question of
whether other allegations in the complaint describing
approximately $19 million in prior payments to the Paine
Parties may be relevant to whether plaintiffs’ allegedly covered
losses reach, or are reasonably likely to reach, the St. Paul and
Liberty Mutual policies by possibly contributing toward the
exhaustion of underlying insurance coverage. Although we
decline to address this possibility in light of plaintiffs’ failure to
develop this argument in their briefing, the topic may be
revisited on remand.

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Opinion of the Court by Guerrero, C. J.

proceedings establish that plaintiffs have not alleged an actual
controversy but plaintiffs could cure this deficiency through
amendment of their complaint, they should be granted leave to
amend. (See Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th
962, 970–971 (Aubry) [upon review of an order sustaining a
demurrer without leave to amend, a reviewing court can grant
leave to amend even without an express request that it do so].)
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,

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Opinion of the Court by Guerrero, C. J.

300 U.S. at p. 242.) Declaratory relief would be sufficiently
forward looking (see Meyer, at p. 647) insofar as it would either
recognize future payment obligations owed by the excess
insurers upon the exhaustion of underlying insurance, or
declare that they have no responsibility in the future to pay
plaintiffs benefits under their policies. Accordingly, we conclude
that the winding down of the litigation between the Fox Parties
and the Paine Parties does not mean there is no actual
controversy to resolve.
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” (Code Civ. Proc., § 1061) here. (Fox Paine, supra,
104 Cal.App.5th at pp. 1052–1053.) The Court of Appeal’s
reasoning, if accepted, could significantly limit the availability
of declaratory relief involving excess insurance policies. After
considering each of these rationales, we conclude that none is
persuasive here.
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

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Opinion of the Court by Guerrero, C. J.

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 Code Civ.
Proc., § 1060 [“The declaration may be had before there has been
any breach of the obligation in respect to which said declaration
is sought”].) More fundamentally, “The mere circumstance that
another remedy is available is an insufficient ground for
refusing declaratory relief” (Filarsky, supra, 28 Cal.4th at
p. 433) without further consideration of the adequacy of the
respective remedies and other relevant circumstances. (See,
e.g., Maguire v. Hibernia S. & L. Soc. (1944) 23 Cal.2d 719, 732
[“all agree that before a court may properly exercise its
discretion to refuse [declaratory] relief on” the ground that
another remedy exists, “it must clearly appear that the asserted
alternative remedies are available to the plaintiff and that they
are speedy and adequate or as well suited to the plaintiff’s needs
as declaratory relief”].) As already observed, the maintenance
of a single action that includes claims for declaratory relief has
significant advantages relative to the alternative of piecemeal
litigation involving serial lawsuits against the excess insurers.
(See Warren v. Kaiser Foundation Health Plan, Inc. (1975)
47 Cal.App.3d 678, 683–684 [“A lawsuit for breach of contract is
neither as speedy and adequate nor as well suited as declaratory

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Opinion of the Court by Guerrero, C. J.

relief to the plaintiff’s needs where, despite the breach . . . the
use of declaratory relief will avoid a multiplicity of suits that
may ensue if a different remedy is pursued”].)
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
declaratory relief against St. Paul and Liberty Mutual
(assuming the Court of Appeal finds these claims to have been

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Opinion of the Court by Guerrero, C. J.

adequately alleged) may no longer be necessary or proper. But
at the time of the ruling on the demurrers, the possibility that
these defenses might later prove meritorious did not provide a
sufficient reason to reject plaintiffs’ declaratory relief claims
against St. Paul and Liberty Mutual.
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.

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Opinion of the Court by Guerrero, C. J.

The Court of Appeal also opined that “there are sound
policy reasons why the excess insurers should stay on the
sidelines without incurring . . . unnecessary costs” associated
with declaratory relief proceedings brought before their policies
have attached. (Fox Paine, supra, 104 Cal.App.5th at p. 1053.)
It explained, “A strict exhaustion requirement brings stability
and predictability to the excess insurance system, both for
insurers and insureds. . . . Thus, burdening the excess insurers
with prematurely litigating coverage issues before exhaustion
upsets insurers’ settled expectations.” (Ibid.) Our holding today
imposes no undue hardship on excess insurers, who themselves
may benefit from the certainty provided by timely judicial
declarations regarding coverage under excess policies. The
requirement that an insured seeking declaratory relief allege
losses that, at a minimum, give rise to a reasonable likelihood of
coverage accommodates both the insured’s interest in securing
judicial declarations regarding coverage and liability and the
excess insurer’s interest in not being unnecessarily entangled in
litigation over an insurance policy that is highly unlikely to ever
attach. Also, with numerous decisions already having adopted
a reasonable likelihood standard (e.g., E.R. Squibb, supra,
241 F.3d at p. 177; Tocci, supra, 750 F.Supp.2d at pp. 321–323),
our holding will not disrupt any settled expectations among
insurers nationwide or destabilize the field of excess insurance.
Lastly, as we have already emphasized, any benefits that might
follow from a strict exhaustion requirement would come with
even greater drawbacks to insureds, who would face the
daunting prospect of having to file multiple separate lawsuits to
recover under a series of excess policies.

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Opinion of the Court by Guerrero, C. J.

Finally, we address the argument that the trial court could
have relied on the absence of ongoing litigation between
plaintiffs and the Paine Parties to conclude that declaratory
relief was not necessary or proper here. We find this argument
unpersuasive for essentially the same reasons we provided
earlier in this opinion in concluding that such litigation was not
essential to the existence of an actual controversy. If the
requirements for an actual controversy are met, declaratory
relief remains appropriate to resolve contested liability issues
between plaintiffs and the excess insurers even if these
declarations could not inform plaintiffs’ strategic decisions in
the earlier litigation.
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

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Opinion of the Court by Guerrero, C. J.

bad faith is that ‘all of the conditions required for defendant’s
performance had occurred,’ and one such ‘condition’ that must
have ‘occurred’ before St. Paul had a duty to ‘perform’ is that the
underlying policy, i.e., the Twin City policy, be exhausted.” (Id.
at p. 1058.)
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

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Opinion of the Court by Guerrero, C. J.

damages that are associated with tort claims. “[A]n 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.” (Wilson v. 21st Century Ins. Co. (2007)
42 Cal.4th 713, 723 (Wilson); see also Morris v. Paul Revere Life
Ins. Co. (2003) 109 Cal.App.4th 966, 973.) “The availability of
tort remedies in the limited context of an insurer’s breach of the
covenant advances the social policy of safeguarding an insured
in an inferior bargaining position who contracts for calamity
protection, not commercial advantage.” (Kransco, supra,
23 Cal.4th at p. 400, italics omitted.)
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”].)

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Opinion of the Court by Guerrero, C. J.

Waller drew from Love v. Fire Ins. Exchange (1990)
221 Cal.App.3d 1136 in further explaining that “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.” (Waller, supra, 11 Cal.4th at p. 36, citing Love, at
p. 1153.) Waller continued, “Thus, as the Love court noted,
when benefits are due an insured, ‘delayed payment based on
inadequate or tardy investigations, oppressive conduct by
claims adjusters seeking to reduce the amounts legitimately
payable and numerous other tactics may breach the implied
covenant because’ they frustrate the insured’s right to receive
the benefits of the contract in ‘prompt compensation for losses.’
[Citation.] Absent that contractual right, however, the implied
covenant has nothing upon which to act as a supplement, and
‘should not be endowed with an existence independent of its
contractual underpinnings.’ ” (Waller, at p. 36.)
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

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Opinion of the Court by Guerrero, C. J.

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].)
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

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Opinion of the Court by Guerrero, C. J.

too much, too soon, from insureds to require them to plead the
prior exhaustion of all underlying insurance before they may
pursue a bad faith claim. The proper focus at the pleading stage
is not on whether coverage under a particular excess policy has
already attached and payments under that policy are already
due. Rather, at that phase of the proceedings an insured in
plaintiffs’ position needs only to allege facts that, taken as true,
are sufficient to show that coverage under a defendant insurer’s
excess policy will attach — or that it would attach, if not for the
excess insurer’s bad-faith conduct — and that the insurer’s
misconduct has impaired the insured’s recovery of benefits owed
to it under the policy. (See Wilson, supra, 42 Cal.4th at p. 723;
Waller, supra, 11 Cal.4th at p. 36.) These allegations must be
proven for a plaintiff to recover for tortious bad faith, which may
present its own set of challenges, but that is a matter for later
proceedings if the case moves forward.12
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

12
Plaintiffs argue that in unusual circumstances involving
consequential harm to an insured a bad faith claim should be
permitted even if there is no coverage under an insurance policy.
They posit that Waller declared only a general rule and did not
contemplate such scenarios. We need not decide whether such
an exception exists to the coverage requirement announced in
Waller because plaintiffs’ complaint does not reveal sufficiently
compelling circumstances that might justify such an inquiry.

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Opinion of the Court by Guerrero, C. J.

part. Those arguments may be presented on remand. As with
plaintiffs’ claims seeking declaratory relief, if the Court of
Appeal concludes that plaintiffs’ allegations of bad faith are
inadequate as to one or both defendants but that deficiency is
capable of being cured through amendment, plaintiffs should be
granted leave to amend. (See Aubry, supra, 2 Cal.4th at
pp. 970–971.)
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 article VI,
section 6 of the California Constitution.
**
Associate Justice of the Court of Appeal, Third Appellate
District, assigned by the Chief Justice pursuant to article VI,
section 6 of the California Constitution.

50
See next page for addresses and telephone numbers for counsel who
argued in Supreme Court.

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.
Hangley Aronchick Segal Pudlin & Schiller, Ronald P. Schiller, Sharon
F. McKee; Nicolaides Fink Thorpe Michaelides Sullivan and Matthew
C. Lovell for Defendant and Respondent Liberty Mutual 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.
Counsel who argued in Supreme Court (not intended for
publication with opinion):

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