Fox Paine & Co., LLC. v. Twin City Fire Insurance Co.

(Failure to Allege Exhaustion Of Underlying Policy Limits Merited Dismissal of Lawsuit Against Excess Insurers, Including Claim of Declaratory Relief)

(October 2024) - In Fox Paine & Company, LLC, et al. v. Twin City Fire Ins. Co., et al. 104 Cal.App.5th 1034 (September 5, 2024), the California First District Court of Appeal affirmed the trial court's order sustaining the demurrers of defendants St. Paul Mercury Insurance Company ("St. Paul") and Liberty Mutual Insurance Company ("Liberty Mutual") and dismissing without leave to amend a Third Amended Complaint ("TAC") filed by Fox Paine & Company ("FPC") against Liberty Mutual and St. Paul for declaratory relief, breach of contract and bad faith arising out Liberty Mutual's and St. Paul's refusal to pay or reimburse defense costs incurred in connection with the defense of an underlying counter-claim filed by business entities consisting of the Paine's Family Trust, Fox Paine Management III, LLC (FPM III) and FPC (the "Paine Parties") against FPC, Saul Fox, individually, and derivatively on behalf of FPC and two Fox related entities (the "Fox parties").

The Paine Parties and Fox parties had been engaged in an underlying business dispute involving the filing of, and settlement of, several underlying lawsuits spanning five years. The first underlying lawsuit was filed in August 2007. St. Paul and Liberty Mutual refused to pay any costs or expenses because the first layer excess policy (Twin City Fire Insurance Company) had not exhausted its limits. Because the TAC failed to allege exhaustion of such limits, the TAC did not allege claims for breach of contract and declaratory relief against St. Paul and Liberty Mutual.

In December 2006, FPC obtained a Private Equity Professional Liability Policy from Houston Casualty Company for the period of December 30, 2006 to December 30, 2007, later extended to January 2, 2008. The policy covered Insured Organizations and their directors and officers on claims-made basis. FPC also purchased excess coverage from Twin City Fire Insurance Company ("Twin City"), St. Paul and Liberty Mutual. The coverage provided $40 million in four layers excess of the Houston Casualty Company primary policy limits of $10 million. The tower of insurance looked like the following:

While the Houston policy ultimately exhausted its limits in connection with the underlying litigation between the Paine Parties and Fox parties, the Twin City policy had not paid its limits in connection with the underlying litigation. Hence, St. Paul and Liberty Mutual refused to pay any of the amounts demanded by FPC in connection with the defense of the underlying litigation. As a result, FPC filed its lawsuit against St. Paul and Liberty Mutual.

In affirming the trial court's order dismissing FPC's lawsuit, the Court of Appeal stated as follows in connection with FPC's breach of contract cause of action:

No Breach of Contract

Plaintiffs' first cause of action is breach of contract. As plaintiffs describe it in their brief, the excess insurers "breached their obligations to Plaintiffs by, among other things: (i) failing to provide consent to defense costs arising from covered claims; (ii) failing to pay or reimburse Plaintiffs' defense costs for covered claims; (iii) refusing to communicate with Plaintiffs, their insureds ... ; (iv) failing to properly investigate tendered claims; (v) communicating improperly with FPC's litigation opponents, and non-insureds...