California Court of Appeal Affirms Dismissal of Claims against Excess Insurers for Insureds’ Failure to Allege Exhaustion
The California Court of Appeal, applying California law, has affirmed a trial court’s decision dismissing claims with prejudice against two excess carriers for the insureds’ failure to allege exhaustion of the underlying policies. Fox Paine & Co., LLC v. Twin City Fire Ins. Co., 2024 WL 4093921 (Cal. Ct. App. Sept. 5, 2024).
The insured, a private equity management firm, was embroiled in litigation involving a dispute between two principals of the firm regarding their interests in a private equity fund. The insured’s $10 million primary private equity professional liability policy was exhausted after the matter settled by costs paid to one of the parties involved. Other insured parties sued their three excess carriers seeking coverage for the litigation. The insurers provided $40 million in excess coverage in four layers of $10 million each. One excess policy provided that the insurer “shall only be liable . . . 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.” Another of the excess policies stated that it “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[.]” The insureds alleged in the operative complaint that they had incurred “covered ‘Loss’ and recoverable interest exceeding $43,000,000, not subject to offset, according to proof at time of trial.” The trial court dismissed the claims against the second- and third-level excess carriers with prejudice on the basis that the insureds had failed to allege exhaustion of the underlying policies.
On appeal, the insureds argued that the trial court had erred by requiring them to prove “actual exhaustion” of the underlying policies. The appellate court rejected the argument, first holding that the second and third excess policies had not yet “attached” and that the insureds had failed to establish the existence of an “actual controversy.” The insureds pointed to statements in their operative complaint that their costs were “covered Loss” that were not subject to offset and that they had incurred “recoverable interest” exceeding the limit of the tower. The court held that these contentions could not survive dismissal because they were mere conclusions of law that could not demonstrate exhaustion.
Next, the court held that the trial court also had discretion to dismiss the claims against the second and third excess carriers as “not necessary or proper at the time under the circumstances.” The court noted that the outcome of the litigation against the first excess carrier was unknown, and, to the extent the carrier’s defenses succeeded, “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.’” The court also noted the possibility of needless expense wasted by the excess carriers and the trial court. Finally, the court held that “sound policy reasons” existed to dismiss the excess carriers from the ongoing litigation, stating that “[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.”
The court also held that the trial court’s denial of leave to amend did not constitute an abuse of discretion, as there was “no factual material that could be inserted in any fourth amended complaint to remedy the defects in their causes of action.”
