In a dizzying week of California Supreme Court rulings, the court has overturned two appellate opinions, both with significant impact for insurers. On August 3, 2026, in Gilead Tenofovir Cases, Case No. S283862, the court ruled that product liability law does not require a drug manufacturer to innovate a safer pharmaceutical product when the original (allegedly more harmful) version of the pharmaceutical was undisputedly not defective. In a second ruling, on July 27, 2026, in Fox Paine & Co. v. Twin City Fire Ins. Co., Case No. S287404, the court ruled that an excess insurer may be sued in bad faith for its claims communications with policyholders, even when underlying insurance was never exhausted.

Gilead Tenofovir Cases

In 2001, after years of testing, Gilead Sciences, Inc. obtained government approval to market its first medication containing tenofovir disoproxil fumarate (TDF), a drug used to treat human immunodeficiency virus (HIV). Months later, Gilead also obtained government approval to begin testing a second drug to battle HIV, this one called tenofovir alafenamide fumarate (TAF).

Over the next few years, after various rounds of comparative testing, Gilead announced it was ceasing development of TAF due to efficacy concerns and that TAF was not a significant improvement from TDF, which was already being sold. Over the following years, TDF became a cornerstone of antiretroviral therapies, saving millions of lives of HIV patients and presenting a series of side effects alleged to be generally known and accepted.

Eventually, in 2010, with the expiration of Gilead’s patent on TDF a few years away, Gilead then began in earnest to complete the previous testing of TAF and aimed to introduce it as a “new, improved” replacement for TDF, according to the plaintiffs. TAF was approved for sale in 2015, just ahead of the expiration of Gilead’s patent on TDF.

In suing Gilead, the plaintiffs alleged that Gilead was aware years earlier that TAF presented a considerably reduced risk of renal, bone, and tooth injuries, as compared to TDF. Plaintiffs alleged that had the “improved” alternative drug, TAF, been introduced to the market in prior years, they would have switched to it sooner and avoided the TDF side effects. They argued that Gilead purposely delayed the development of TAF to maximize profits on TDF before presenting an improved and safer version, TAF. For its part, Gilead argued its earlier testing showed no appreciable difference between the drugs at the time the development of TAF was abandoned in 2004.

The Court of Appeal noted the unique nature of the plaintiffs’ theory, in that they were not alleging that the TDF drug they used was defective. Nevertheless, the California appellate court ruled that a product need not be defective in order for a manufacturer to be found negligent. The appellate court ruled that California Civil Code Section 1714 imposes upon manufacturers a general duty to avoid causing harm to others. Therefore, the appellate court reasoned, even though TDF was a life-saving drug that was understood to have no product defects, Gilead could nevertheless be liable in negligence for having withheld and delayed the introduction of TAF, which the plaintiffs alleged was known to cause fewer side effects than TDF.

In reversing the appellate court, the California Supreme Court explained that decades of product liability precedent dictated that a manufacturer’s duty of reasonable care is rooted in the obligation to design, manufacture, and market a product free from defects, and that a manufacturer cannot and should not be held liable for a non-defective product. The court explained that it would “upend product liability law” for a claimant to establish a manufacturer’s liability by attacking and questioning decisions relating to the development and commercialization of products not yet sold.

Such second-guessing of manufacturing decisions would be particularly problematic for drug manufacturers, whose decisions involve complex analyses of resource allocation and safety and efficacy assessments. In other words, while Section 1714 imposes upon manufacturers a duty of reasonable care not to harm individuals, there is an exception to that duty where a drug such as TAF has not undergone large-scale testing or governmental approval, such that its efficacy and safety are uncertain. The Court concluded that allowing a “negligent deprivation” claim for alternative drugs that a manufacturer was considering or developing but had not yet introduced would ultimately chill pharmaceutical innovation yet not enhance public safety.

For insurers in the product liability space, the “TAF deprivation” theory indeed would have upended product liability risks. Underwriting of product claims would have required not only loss history of injuries and claims from earlier product sales but also would require an impossible actuarial analysis of exposure for products that were not yet developed, approved, or sold. Furthermore, claims alleging no product defect, such as the claims at issue in Gilead, would have raised the issue of whether there was any bodily injury caused by the non-defective product and, if so, how damages should be allocated based on when certain claimants suffered bodily injury relative to products that were alleged not to be defective, and relative to alternative products that were not sold. Lastly, product liability claims arising from corporate decisions as to whether or when to develop, test, and manufacture new products would hopelessly blur the lines between general liability insurance, professional errors and omissions coverage, and directors and officers coverage.

The California Supreme Court, in reversing the Gilead appellate court, turned product liability law back on its feet for both policyholders and insurers.

Fox Paine & Co.

Former partners at an investment firm, the “Fox Parties,” sued the “Paine Parties” in Delaware for poaching employees. The Paine Parties filed counterclaims. That initial round of litigation settled while a new suit was filed by the Paine Parties.

In light of the competing claims and counterclaims, the investment firm, comprised of competing former partners, submitted claims for insurance to its $50 million insurance tower, which included a $10 million primary policy, $20 million in “lower excess” insurance, and also $20 million in “higher excess” insurance issued by St. Paul and Liberty.

It is alleged that the insurance tower thereafter received additional communications from the Paine Parties seeking insurance but did not inform the Fox Parties of the impending dispute over the insurance assets or the decision to pay the Paine Parties $10 million from the primary insurance. When a group of the remaining insurers later filed insurance litigation against the Paine Parties, the remaining insurers allegedly did not properly inform the Fox Parties of that coverage litigation or the subsequent decision for the “lower excess” insurers to pay the Paine Parties a $9 million settlement of their $20 million limits. The “higher excess” insurers did not pay anything to the Paine Parties, as the insurance underlying those higher excess layers was not exhausted.

The Fox Parties allege they were owed millions of dollars of excess insurance from the unreimbursed costs of the Delaware litigation and that the “higher excess” insurers, although not having their underlying insurance exhausted, nevertheless are liable for having sat silently by and not informing the Fox Parties that underlying settlements and erosion were taking place. 

The excess insurers argued that they could not be found to have breached any indemnity obligations or duties of good faith and fair dealing because there was never underlying exhaustion that would have implicated their insurance obligations. The appellate court agreed, reasoning that “burdening the excess insurers with prematurely litigating coverage issues before exhaustion upsets insurers’ settlement expectations” regarding their obligations as excess insurers.

The California Supreme Court disagreed and explained that a controversy over coverage and liability under the higher excess policies could exist even though the underlying policy coverage has not been exhausted. The Court ruled that a trial court must examine whether the policyholder has sufficiently pled facts showing that the claim threatens to reach the layer of an excess insurer before then deciding whether a declaration of rights against that excess insurer is proper. To allow a court such discretion, the ruling explains, would enable a policyholder to obtain coverage rulings at a single time against an entire tower, rather than having to litigate anew against each layer as the one beneath it exhausted.

The court remanded the suit for the Court of Appeal’s consideration as to whether the underlying pleadings introduced facts sufficient to indicate the damages at issue are sufficient to potentially reach the subject higher excess insurers. In finding the potential for a justiciable controversy against the higher excess insurers, the court also analyzed the claims of bad faith and again overturned the Court of Appeal.

Addressing bad faith, the California Supreme Court found that an insurer’s implied covenant of good faith attaches at the inception of the insurance agreement. Therefore, the court reasoned, an insurer can breach the covenant of good faith during the life of a claim, even though that excess insurer’s contractual obligations are not yet reached or implicated. The court concluded that, at the pleading stage, an insured “need only to allege facts that, taken as true, are 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.”

The court noted that, while it may be a much higher burden for a policyholder to prove bad faith in an instance where the excess insurer’s coverage was not implicated, the mere absence of underlying exhaustion is not a bar to bringing such a claim. Arguments as to whether the conduct in this case is sufficient to constitute tortious bad faith are to be heard and considered upon remand.

While the ultimate fate of the policyholder’s bad faith claims remains to be determined in this matter, the ruling does serve as a cautionary tale of the extent to which excess insurers can or should be actively involved in the handling of claims that have not yet reached their layers. It may be an unintended consequence of this ruling that both insurers and policyholders are forced to engage in communications and potentially even litigation that ultimately is proven unnecessary, thereby raising both costs and inefficiencies for policyholders, insurers, and the courts. 

Adam H. Fleischer is a partner and serves on the management committee at BatesCarey LLP.