Insurers also denied claims they should not have denied. Their errors caused
the state of California to pass a law allowing insureds to sue their insurers
as late as 2002, 4 years after expiration of the statute and 8 years after expiration
of the private limitations of action provision of most policies. This change
in the limitation period brought about many proper suits and many spurious actions.
In an unpublished opinion, the California Court of Appeal dealt a serious
blow to an attorney who filed an apparently malicious and unfounded lawsuit
against an insurer. The court of appeal decided that an attorney must stand
trial on an action from an insurer for malicious prosecution because it was
highly probable that the suit would be successful (Scottsdale
Insurance Co. v. Zelig, No. B181761, 2006, Cal. 0003625 (Cal. App. Dist.
2, May 2, 2006)). In bringing the action, Scottsdale took an important step
that will protect insurers against lawyers and public adjusters who use the
courts—whether properly or not—as a bludgeon to force insurers to pay to avoid
the costs of litigation. If the case goes to trial and malice is proved, with
punitive damages awarded against the lawyer and the public adjuster, this will
go far to chill the proclivity of some lawyers to file suit without sufficient
facts on the assumption that everything an insurer does is wrong and in bad
faith.
The Factual Background
The action began in 1994 after the Northridge earthquake when Regency Royale
Homeowners Association claimed it sustained damage. Five months later, Regency
submitted an application to Scottsdale for earthquake insurance and represented
that it was insured through Homestead Insurance Company and had sustained no
losses during the previous 5 years. Scottsdale relied on those representations
in issuing a policy to Regency providing coverage from July 1, 1994, to July
1, 1995.
On December 26, 2001, Regency's public insurance adjuster requested that
Scottsdale assign an adjuster to investigate Regency's claim of earthquake damage
under the policy. On December 31, 2001, Zelig filed suit in Los Angeles Superior
Court against Scottsdale on behalf of Regency, entitled Waldman et al. v. Golden Bear et al., case No.
BC265308.
The complaint was filed under a statute that revived time-barred Northridge
earthquake insurance claims, provided the insured had contacted his insurer
prior to January 1, 2000, and the lawsuit was filed prior to January 1, 2002.
Zelig was provided the Regency file from Regency's adjuster, with insufficient
time prior to the filing deadline under the revival statute to undertake an
independent investigation of whether Scottsdale was the proper insurer. Zelig
claimed he relied on the public adjuster's representation that Scottsdale insured
Regency for the earthquake risk in filing the complaint. Regency's adjuster
likewise had not independently investigated whether Scottsdale was the proper
insurer.
In January 2002, Scottsdale informed Regency's adjuster that Regency's policy
did not provide coverage until 6 months after the Northridge earthquake and
that Homestead Insurance was likely the proper insurer. Scottsdale also advised
that Regency had not initiated a claim prior to January 1, 2000, as required
under the revival statute.
Regardless, Zelig served the Waldman complaint on Scottsdale on July 8, 2002.
In October 2002, Scottsdale responded to Regency's request for documents in
part by producing the declarations page of the insurance policy it had issued
to Regency for inception 6 months after the earthquake. In November 2002, Regency's
adjuster informed Zelig's office that Farmers and State Farm carried coverage
on the Regency property at the time of the earthquake.
Scottsdale had additional communications with Zelig in April and July asserting
it had not insured the risk of the earthquake. After Scottsdale filed its motion
for summary judgment, new counsel, associated in on behalf of Regency, acknowledged
that Scottsdale was not the proper insurer. That counsel dismissed Scottsdale
without prejudice before the summary judgment hearing. Scottsdale incurred in
excess of $30,000 in attorney fees in the evaluation and defense of the Waldman
action.
The Malicious Prosecution Suit
Scottsdale sued Zelig, Regency, and Regency's public adjuster for malicious
prosecution and civil conspiracy on September 10, 2004, to recoup attorney fees
and costs expended in the prior lawsuit and punitive damages. In separate hearings,
the trial court denied all motions, ruling that the complaint did not allege
an attorney-client conspiracy and that the action below was favorably terminated
and otherwise showed a sufficient probability of success to proceed with the
malicious prosecution claim. Zelig appealed.
Zelig contended that the complaint should have been dismissed with prejudice.
In its lawsuit, Scottsdale alleged that the attorney, in addition to conspiring
with Regency's adjuster, made a malicious prosecution claim against the attorney
in his individual capacity. Scottsdale conceded that the anti-SLAPP provision
could apply to complaints for malicious prosecution. It then bore the burden
to demonstrate it would likely succeed on its malicious prosecution claim. To
do so, it had to demonstrate:
- A judicial proceeding favorably terminated;
- Lack of probable cause; and
- Malice.
The Elements Established
The trial court held that the voluntary dismissal without prejudice in the
prior action was a favorable termination.
The reasons underlying the voluntary dismissal must be reviewed in each case.
The focus is on whether the termination reflected on the merits of the case.
The court concluded that evidence that reflects "the opinion of the prosecuting
party that, if pursued, the action would result in a decision in favor of the
defendant is evidence of a favorable termination (Minasian
v. Sapse, 80 Cal. App. 3d 823, 827 (1978)).
By demonstrating that, during the pendency of Scottsdale's motion for summary
judgment, new counsel for Regency dismissed the complaint, coupled with the
evidence tending to show that Scottsdale was not the proper insurer, this dismissal
reflected on the merits of the case. The court found such information damning
and was satisfied that a "favorable termination" was demonstrated by Scottsdale.
The court found that Zelig waived his argument about no probable cause or malice by providing no facts
or law to back his contentions on appeal. The essence of allegations of Scottsdale's
suit is malicious prosecution. The suit also claimed that the attorney and the
adjuster conspired to commit a malicious prosecution that resulted in damage
to Scottsdale. These allegations are sufficient to state a cause of action against
the attorney.
The trial will go forward. The attorney, the public adjuster, and their client
are looking at a probable judgment for $30,000 in attorney fees and as much
as 9 times that amount in punitive damages.
Conclusion
The insurer is properly taking an aggressive stand against a lawyer and public
adjuster who they believe so blatantly abused the process of the court and maliciously
forced the insurer to defend a lawsuit that could not possibly succeed. That
it gave the attorney and the public insurance adjuster the opportunity to avoid
the suit by informing them of the true nature of the policy, its effective dates,
and that it would be impossible for it to respond with indemnity to a claim
for damages occurring before the policy came into effect, was kind. Kindness
returned with aggression.
The insurer's reasonable conduct and attempt to resolve the situation in
a nonconfrontational manner was rewarded by abuse and a refusal by the attorney
to be confused with facts. The court of appeal was neither confused nor cowed.
The results of the trial should be interesting.
Insurers who have been the victim of similar spurious lawsuits should consider
seeking a return of their costs against those who brought the suit. The lawyer
and the client that maliciously prosecute a spurious lawsuit should pay damages
to those they harm.
Without a downside to such spurious lawsuits, they will continue to be filed.
© Barry Zalma 2006