Insurance Appellate Update September 2024

APPELLATE LAW UPDATE

The following published decision may be of interest to attorneys practicing insurance law:

CALIFORNIA COURT OF APPEAL

Trial court properly dismissed coverage action against excess insurers where underlying policies had not exhausted. Fox Paine & Co. v. Twin City Fire Insurance Co. (2024) __ Cal.App.5th __.

Various entities involved in a venture capital fund sued each other for breach of fiduciary duty and other claims.  The fund was covered by a $10 million private equity professional liability policy issued by Houston Casualty Company.  It was also covered by a tower of three excess policies of $10 million each, for a total of $40 million in combined limits.  Houston paid its limits to some of the parties in the underlying litigation.  Asserting the litigation would result in liabilities exceeding $40 million, other insureds involved in the underlying litigation then sued the three excess carriers for breach of contract, a declaration of coverage, and bad faith.  The excess carriers demurred.  The demurrer was overruled as to the first layer excess carrier and sustained without leave to amend as to the second and third layer excess carriers.  The insureds appealed.

The Court of Appeal (First Dist., Div. Two) affirmed.  Absent allegations that the first layer excess policy had exhausted, the second and third layer excess carriers had no present contractual obligations to the insureds.  As a result, the breach of contract claim was properly dismissed, as was the claim for declaratory relief concerning coverage.  And absent a breach of contract, there could be no liability for bad faith.  The insureds’ allegations that the insurers breached their “obligations” to the insureds by not communicating with them, improperly communicating with adverse parties, failing to investigate the claims, and not providing consent to the incurrence of defense costs could not support a breach of contract claim because those were not obligations imposed under the policies, and they could not support a bad faith claim absent a present obligation to provide coverage.  Also, the fact that one of the excess insurers had paid some funds to resolve some of the underlying claims was not a waiver of its right to insist on exhaustion of the underlying policies before it would recognize any duties to the insureds; the insurer was allowed to “buy its peace” without waiving its rights.

This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Partner of Horvitz & Levy LLP. Ms. Cuatto is a member of the Insurance Law Standing Committee of the Business Law Section of the California Lawyers Association.

Chair
Sharon A. Huerta
Fennemore
shuerta@fennemorelaw.com

Vice Chair – Publications
Tamiko A. Dunham
Nicolaides Fink Thorpe Michaelides Sullivan LLP
tdunham@nicolaidesllp.com

Vice Chair – Programs
Charles L. Crouch III
clcrouch@earthlink.net

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