In Fox Paine & Co. v. Twin City Fire Insurance Co., the Supreme Court today holds an insured can sue their excess insurance carrier for declaratory relief and bad faith damages even if underlying coverage by other carriers has yet to be exhausted.
The court’s unanimous opinion by Chief Justice Guerrero concludes, “While insureds . . . 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.” However, the court says adequate pleading does still require alleging a “reasonable likelihood” that the insured’s potential liability will reach into the excess coverage.
The court further rules that, to plead a cause of action for tortious breach of the implied covenant of good faith and fair dealing, an insured “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.”
Justice Corrigan was recused.
The court reverses a First District, Division Two, Court of Appeal published opinion, which had dismissed as “pure dictum” a statement in the Sixth District decision in Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592 that, for declaratory relief purposes, “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.” (Id. at p. 606.)
Nonetheless, although the Supreme Court is in sync with some of Ludgate, it disapproves Ludgate and also the Sixth District’s decision in Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 187 to the extent they “could be read as endorsing a pleading rule” that is too plaintiff friendly and thus is “contrary to the principles [in today’s opinion].” It has a similar view of the Ninth Circuit Court of Appeals’ decision in Iolab Corp. v. Seaboard Surety Co. (9th Cir. 1994) 15 F.3d 1500.
There was no petition for review in Ludgate. The court denied review and a depublication request in Lockheed Martin with Justice Kennard voting to hear the case.
Horvitz & Levy filed an amicus curiae brief in support of the two defendant excess insurers.
