California Bad Faith Claims Cannot Be “Slapped”

The California Court of Appeal recently disposed of a novel attack on bad faith law launched by Zurich American Insurance Company. In Miller Marital Deduction Trust, et al. v. Zurich American Insurance Company, 2019 DJDAR (October 23, 2019), Zurich was called upon to defend a cross complaint arising in connection with long-tail pollution claims. Despite an extensive reservation of rights and a conflict of interest, Zurich refused to pay for independent counsel (Cumis counsel, in California parlance) and instead appointed panel counsel to defend. While the underlying environmental case was pending in federal court, the Millers filed a state court action against Zurich asserting that the insurer’s appointment of counsel answerable to the insurance company, in violation of the Millers’ right to independent counsel, constituted breach of contract and a breach of the covenant of good faith and fair dealing.

In response to the state court complaint, Zurich filed a so-called “anti-SLAPP” motion seeking summary dismissal of the bad faith action. The California SLAPP (“Strategic Lawsuit Against Public Participation”) statute exists to allow early dismissal of an action filed to intimidate the defendant’s exercise of the right of free speech or petition—and the right of “petition” can include the filing of lawsuits or other conduct in litigation. If the defendant can show that the statute applies, the trial court is obligated to dismiss the claim if the plaintiff cannot show a probability of success on the merits.

Zurich’s motion asserted that the state court bad faith claims arose from the allegations about the conduct of the panel counsel it had selected for the underlying federal case. The trial court decided that a bad faith cause of action could be the subject of an anti-SLAPP motion, but then denied the motion, deciding that the Millers had met their burden to show a probability of prevailing on the merits. Zurich appealed.

The Court of Appeal affirmed, but departed from the trial court’s reasoning. Instead, the Court of Appeal concluded that a cause of action for breach of the covenant of good faith and fair dealing is not subject to an anti-SLAPP motion. The involvement of lawyers and legal proceedings did not immunize Zurich from liability for its bad faith conduct, because the bad faith claim involved a breach of duty that did not depend on Zurich’s exercise of a constitutional right. In effect, the court determined that insurers do not have a constitutional right to appoint panel counsel. If an insurer insists on appointing panel counsel in the face of a conflict of interest arising from a reservation of rights, nothing in the anti-SLAPP statute will protect it from exposure to claims alleging bad faith.

Under California law (and more generally), insureds have a right to independent counsel where the insurer has a conflict of interest. This decision further supports insureds’—and their policyholder counsel’s—ability to assert that right and reject a conflicted defense.