California Supreme Court Ruling: Policyholders Can Now Pursue Excess Insurers for Bad Faith Before Primary Layer Is Exhausted
In a landmark decision with sweeping implications for policyholders carrying layered insurance programs, the California Supreme Court has ruled that insured parties may seek declaratory relief and, under clearly defined circumstances, pursue bad faith claims against excess insurance carriers even before the underlying primary insurance layer has been fully exhausted. The ruling, issued in late July 2026, fundamentally alters the legal landscape for complex insurance disputes in California and is expected to have significant impact on how excess insurers engage with high-value claims across commercial lines, professional liability, and high-net-worth personal policies.
Understanding Primary and Excess Insurance Layers
Many commercial businesses, high-net-worth individuals, and large property owners carry structured, layered insurance programs. In a standard layered structure, a primary insurance policy provides the first tier of coverage up to a defined limit — for example, one million dollars. An excess insurance policy then sits above the primary layer and provides additional protection for losses that exceed that primary limit. Historically, excess insurers have argued that their duty to perform — including any obligation to investigate, negotiate, and settle claims — does not legally arise until the primary layer has been fully paid out and exhausted by an actual indemnity payment made to the insured.
The California Supreme Court’s ruling directly challenges this long-held position. The court determined that when there is a reasonable probability — based on the known facts and circumstances of the underlying claim — that a covered loss will reach and penetrate the excess layer, the excess insurer owes the policyholder a duty of good faith and fair dealing from the moment this probability becomes apparent. An excess insurer who refuses to participate meaningfully in the claims process, declines to attend mediation or settlement conferences, or fails to properly investigate the claim simply because the primary layer has not yet been formally exhausted now faces potential bad faith liability under California law.
What This Means in Practice for Large Claim Situations
For policyholders facing catastrophic losses, serious multi-party personal injury claims, or complex professional liability disputes where damages appear likely to reach or exceed primary policy limits, this ruling provides critically important leverage. You can now formally demand that your excess carrier actively participate in settlement negotiations and joint claim evaluations before the primary layer is fully paid. If the excess insurer refuses and a final judgment is later entered at a level that exceeds the primary limits — a judgment that might have been avoided through earlier, good-faith participation in settlement discussions — the excess carrier may face substantial bad faith damages exposure.
Policyholders in large claim situations should immediately notify their excess carrier in writing of the underlying claim and its potential severity. Provide regular, formal written updates on settlement demand status, litigation developments, and upcoming mediation or conference dates. Formally invite the excess carrier to participate in all settlement conferences and mediations. Document every refusal or non-response by the excess carrier in writing. This documented record of the excess insurer’s disengagement becomes the central evidence base for any subsequent bad faith action. Engaging a specialised insurance coverage attorney at the earliest possible stage of a significant claim is essential to preserving all available legal remedies under this landmark ruling.