USA – CALIFORNIA Trends and Developments Contributed by: Louisa Weix, Monique Ferraro and Hope Williams, TittmannWeix
TittmannWeix LLP 350 South Grand Ave. Suite 1630 Los Angeles CA 90071 USA Tel: (415) 595-1559 Email: Lweix@tittmannweix.com Web: www.tittmannweix.com
California is one of the most closely watched insur- ance litigation markets in the country following the January 2025 Los Angeles area wildfires. California courts are expected to issue fire and smoke decisions through 2026 on what “direct physical loss” means, how causation and earth movement exclusions apply to post-fire mudslides, and whether insurers can recover payments from the utilities implicated in the fires’ origin. Alongside that docket, California courts issued three decisions reshaping the timing of bad faith coverage suits and payments. The Supreme Court clarified the pleading standard for bad faith claims against excess insurers in Fox Paine & Co ., LLC v Twin City Fire Insur- ance Co ., No S287404 (Cal. July 27, 2026). The Fourth District addressed whether coverage litigation can proceed inside the underlying liability case in City of Riverside v RLI Insurance Co ., 119 Cal. App. 5th 405 (2026). And the Second District addressed the effect of an insurer’s eventual payment on a bad faith claim in Bornoff v State Farm General Insurance Co ., No B339796 (Cal. Ct. App. May 1, 2026). Bad Faith Litigation The Supreme Court’s decision in Fox Paine came as a surprise to many excess insurers. The Court held that an insured may state a claim for declaratory relief and bad faith even where the underlying (lower layer) insur- ance has not yet been exhausted, removing exhaus- tion as a threshold pleading barrier and consolidating what would otherwise be serial proceedings against successive excess layers into one case.
Under California law, an insurer’s unreasonable failure to pay a valid claim exposes it to both contract and tort liability, which can expose the insurer to damages beyond the policy limits and to the fees an insured incurs to obtain wrongfully withheld benefits. The covenant of good faith and fair dealing inherent in all contracts prevents a contracting party from engag- ing in conduct that frustrates the other party’s rights to the benefits of the agreement. Because an excess insurer’s implied covenant not to injure an insured’s right to receive benefits exists from the inception of the contract, the Court explained, wrongful conduct from that point forward can support a bad faith claim, exposing the insurer to liability beyond the policy lim- its. The failure to plead exhaustion is not, by itself, fatal. At the pleading stage, an insured states a claim by alleging facts such as: • facts 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 miscon- duct has impaired the insured’s recovery of ben- efits owed to it under the policy. Thus, even where exhaustion is a condition precedent to coverage and no benefits are due, the insured can bring an action against its excess insurers. The practical consequence is that excess carriers may be drawn into coverage discovery before attachment is certain. That development will likely increase early disputes over reserves, communications with lower-
307 I NSURANCE L I T IGATI O N 2026
CHAMBERS.COM
Powered by FlippingBook