In 1996 Saul Fox and Dexter Paine formed Fox Paine & Company (FPC), a private equity management firm. Fox’s relationship with Paine deteriorated, and a business deal “fell apart,” resulting in the first of what would become a litany of litigation.

In December 2007, the Delaware lawsuit was settled, in a settlement agreement that was to effect a “complete divorce” between the Fox parties and FPC and the Paine parties.

Whatever the peace envisioned, it was short-lived, as in January 2008 Paine filed a pleading involving the settlement agreement. This was the first in a series of fights that would last for the next five years, as the Fox parties and Paine parties (including several former FPC directors and officers) became embroiled in lawsuits, arbitration proceedings, writs, and an appeal stemming from the August 2007 lawsuit and its settlement (the Fox-Paine litigation).

The Fox-Paine litigation ended with a settlement agreement in August 2012, which agreement represented it “resolved all outstanding issues among” Fox and Paine and “effectively put an end to the Fox-Paine Litigation.” However, there was more litigation to come.

In addition to other litigation in non-California jurisdictions, in 2017, eight plaintiffs sued several defendants including three excess insurers, which insurers provided $40 million in excess coverage in four layers of $10 million each. There were four causes of action, breach of contract, declaratory relief, breach of the covenant of good faith and fair dealing, and aiding and abetting breaches of fiduciary duty. The three excess insurers each filed demurrers,

The trial court overruled the demurrer of the first level excess insurer, but sustained the demurrers of the two other excess insurers without leave to amend, and entered judgments for them. Plaintiffs appealed.

The Court of Appeal affirmed in the published case of Fox Paine & Co., LLC, et al. v. Twin City Fire Insurance Co. et al.  -A168803 (September 2024).

Plaintiffs’ first cause of action is breach of contract. Excess insurance ‘refers to indemnity coverage that attaches upon the exhaustion of underlying insurance coverage for a claim.’

The Court of Appeal reviewed case law that established that the interpretation of an insurance policy is a question of law. And if contractual language is clear and explicit, it governs.

The trial court order addressed the question of exhaustion as to all three of the excess insurers, in a lengthy analysis. Following that analysis, the trial court sustained the demurrers of St. Paul and Liberty Mutual without leave to amend. This was correct. The St. Paul policy is triggered only if the “total amount of” underlying limits “has been paid.” And Liberty Mutual’s policy “only provides coverage” when the underlying limit of liability “is exhausted” by the underlying insurers “paying or being held liable to pay.” Such language demonstrates that the St. Paul and Liberty Mutual policies did not attach and no obligations arose. Hence, there was no breach of contract.

The trial court order addressed the question of exhaustion as to all three of the excess insurers, in a lengthy analysis. Following that analysis, the trial court sustained the demurrers of St. Paul and Liberty Mutual without leave to amend. This was correct.

Plaintiffs’ second cause of action was styled “declaratory judgment,” more accurately called “declaratory relief.” As noted, it is this cause of action it reads “the trial court erred in holding that plaintiffs had to establish actual exhaustion…”

Code of Civil Procedure section 1060 provides in pertinent part that declaratory relief is proper as to a contract “in cases of actual controversy relating to the legal rights and duties of the respective parties.” , Code of Civil Procedure section 1061 goes on to state that a court “may refuse to exercise the power” to grant declaratory relief “in any case where its declaration or determination is not necessary or proper at the time under all the circumstances.”

The Court of Appeal concluded that Code of Civil Procedure sections 1060 and 1061 both demonstrate that declaratory relief is not appropriate in this case.

“Even if plaintiffs had established the existence of an actual controversy – and they have not – the trial court had discretion to dismiss the declaratory relief cause of action if a declaration was not necessary or proper at the time under the circumstances.”

Plaintiffs’ third argument is that there was “no reason to dismiss plaintiffs’ other, unrelated tort causes of action,” referring to their claims for violation of the covenant of good faith and fair dealing and aiding and abetting breaches of fiduciary duty.

“Plaintiffs are wrong. There was good reason to dismiss these causes of action, as neither stated a claim.”

“It is clear that if there is no potential for coverage and, hence, no duty to defend under the terms of the policy, there can be no action for breach of the implied covenant of good faith and fair dealing because the covenant is based on the contractual relationship between the insured and the insurer.”