California has redrawn the excess insurer exhaustion rule. In Fox Paine & Company, LLC v. Twin City Fire Insurance Company (July 27, 2026), the California Supreme Court held that an insured no longer needs to allege that all underlying insurance has been exhausted before pursuing declaratory relief or bad faith claims against higher-layer excess insurers. For anyone navigating layered insurance programs, this decision changes the game.
The case arose from a bitter dispute between the cofounders of Fox Paine & Company, an investment firm. After years of expensive litigation against his former partner, Saul Fox turned to his company’s $50 million insurance tower – a primary policy plus four layers of excess coverage – to recover tens of millions in defense costs.
But Fox hit a wall. The excess insurers had been communicating behind his back with the rival faction, paying out $10 million under the primary policy and settling $9 million more under the first two excess layers — all without ever notifying Fox. When Fox sued the second-layer (St. Paul) and fourth-layer (Liberty Mutual) excess insurers, the trial court sustained their demurrers, and the Court of Appeal affirmed, holding that because Fox hadn’t alleged exhaustion of all underlying coverage, his claims couldn’t proceed.
For policyholders with layered programs, this is a practical game-changer. Insureds can now bring all their excess carriers into a single action early, obtain judicial declarations about coverage obligations across the tower, and hold excess insurers accountable for bad-faith conduct – even conduct that occurs long before their layer is triggered. The court’s recognition that an insurer’s own bad faith might be what prevents exhaustion is particularly powerful.
For insurers, the decision injects new litigation exposure into the excess market. Expect to see more early-stage coverage disputes involving higher-layer carriers who previously enjoyed the protection of a strict exhaustion rule.
The case now returns to the Court of Appeal for further proceedings on whether Fox Paine’s specific allegations meet the new standard. But the framework is set – and it firmly favors policyholder access to the courts.
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Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Polales Horton & Leonardi LLP is experienced in handling complex insurance coverage matters on behalf of policyholders across the United States.
