Insureds can sue excess insurers for coverage and bad faith before the layers below are exhausted, California's Supreme Court ruled.
The July 27, 2026 decision reversed two lower courts on a pleading question that reaches every insured stacked beneath excess carriers in a coverage tower.
The fight grew out of a bitter split between the two cofounders of an investment firm, which triggered years of costly litigation. To cover the bills, the firm and related plaintiffs turned to a $50 million tower - a $10 million primary policy from Houston Casualty Company (HCC), plus four $10 million excess layers written by Twin City Fire Insurance Company (Twin City), St. Paul Mercury Insurance Company (St. Paul), Twin City again, and Liberty Mutual Insurance Company (Liberty Mutual). Each excess policy was a "follow form" policy that adopted the primary policy's terms.
The catch drove the case: each excess layer attaches only after the ones below it are used up. Twin City's policy said liability attaches "only after the Primary and Underlying Excess Insurers shall have paid the full amount of their respective liability."
The insurers, the complaint says, paid the wrong side. HCC paid the full $10 million to the plaintiffs' rivals. Twin City and St. Paul later settled with those rivals for $9 million total - about $6 million from Twin City's first layer and $3 million from St. Paul. The plaintiffs say they got nothing, even after submitting invoices for what they described as more than $43,000,000 in covered "Loss" and recoverable interest.
A trial court let one claim against Twin City's first layer proceed but dismissed the claims against St. Paul and Liberty Mutual because the layers beneath them were never exhausted. The Court of Appeal agreed, calling the gap "fatal."
The Supreme Court did not. It held that an insured need not plead exhaustion of all underlying coverage to seek declaratory relief or bring a bad faith claim against an excess carrier. Where losses are uncertain, the court said, the test is whether it is "practically or reasonably likely" that liability will reach the excess layer - not "absolute proof."
The plaintiffs did not win outright. The court faulted their $43 million figure for blending covered loss with interest, obscuring "the number that matters," and remanded for the Court of Appeal to sort out how much counts as covered loss.
For excess carriers, the takeaway is plain. Conduct after a policy is issued - not just a refusal to pay once a layer attaches - can now draw an insurer into a suit earlier than many claims teams assumed.
