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SLAPP: malpractice coverage impacted increasingly by recent decisions.

Certain lawsuits create a snarl of considerations that require an adjustor to carefully assess the ramifications of the dispute and litigation in a way that effectively weighs the future costs against the ongoing exposure to bad faith and the implications of dealing with insured and uninsured claims within the context of the negotiations. This article focuses on the issues confronting these assessments in the mediation context where the claims blend coverage issues, exclusions, and imminent future litigation.

Assessing Coverage Issues

These issues become especially pointed when trying to assess coverage issues surrounding malpractice claims against lawyers when the carrier is dealing with the adverse results in an anti-SLAPP motion. In California, SLAPP (Strategic Litigation Against Public Participation) actions are brought where the claims are deemed protected because they implicate an infringement of constitutional rights, typically involving free speech. The SLAPP statute is codified under California Code of Civil Procedure section 425.16, which provides in relevant part as follows:

(a) The Legislature finds and declares that there has been a disturbing increase in lawsuits brought primarily to chill the valid exercise of the constitutional rights of freedom of speech and petition for the redress of grievances...

(b)(1) A cause of action against a person arising from any act of that person in furtherance of the person's right of petition or free connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.

(c)(1) Except as provided in paragraph (2), in any action subject to subdivision (b), a prevailing defendant on a special motion to strike shall be entitled to recover his or her attorney's fees and costs. If the court finds that a special motion to strike is frivolous or is solely intended to cause unnecessary delay, the court shall award costs and reasonable attorney's fees to a plaintiff prevailing on the motion, pursuant to Section 128.5.

However, the scope of SLAPP has been broadly extended in the last 20 years and each month a series of cases are published, which further define the scope of SLAPP. For example, Midland Pacific Building Corp. v. King, 157 Cal.App.4th 264, 267 (2007)(the anti-SLAPP statute can apply to breach of contract claims); Carpenter v. lack In The Box Corp., 151 Cal.App.4th 454, 472 (2007) (statements made as to an employer's investigation of an employee's alleged sexual harassment were not protected as an official proceeding authorized by law or as an issue of public interest); Jespersen v. Zubiate-Beuchamp, 114 Cal.App.4th 624, 632 (generally, legal malpractice actions are not subject to the anti-SLAPP statute); Navarro v. IHOP Properties, Inc., 134 Cal.App.4th 834, 842 (2005) (claims based upon statements made in the context of negotiating a settlement fall within the anti-SLAPP statute); Paul v. Friedman, 95 Cal.App.4th 853, 865 (2002) (claims based upon conduct occurring outside arbitration, and not made in connection with an issue under consideration or review in arbitration, are unprotected by the anti-SLAPP statute).

Attorneys representing plaintiffs bringing lawsuits are confronted with anti-SLAPP motions, especially in cases where the suit brought involves libel, slander or the prosecution of an underlying claim, which was deemed unmeritorious, or in malicious prosecution actions. In such cases, where an unsuccessful plaintiff turns around and sues their own lawyer for failure to properly advise on the potential of a SLAPP lawsuit, the coverage issues will be relatively straightforward.

However, situations arise whereby the opposing party will bring a malicious prosecution cause of action against both plaintiff and plaintiff's counsel alleging that the malicious prosecution lies in the bringing of such a lawsuit, which should not have been brought in the first place.

Where a defendant brings such an action, insurance carriers have typically relied on the malicious prosecution exclusion under the errors and omissions (E&O) policy to deny indemnification to the insured lawyer. However, such a simplistic approach to the coverage issues can dramatically increase the costs of the litigation and, at the same time, expose the carrier to bad faith allegations because of the multi-tiered analyses that is sometimes sidestepped.

These issues were brought to the forefront in connection with a recently published decision in California, Moore. v. Kaufman, 189 Cal.App.4th 604 (2010). A reading of the Moore decision is confusing to the extent that the reader is unfamiliar with the case whose procedural history spanned over nine years. The case involved a plaintiff who brought an action against a lawyer alleging, inter alia, malpractice in connection with the lawyer's advice rendered to a board of a medical clinic.

In the simplest form, the defendant argued that the allegations constituted protected activity and thus brought an anti-SLAPP motion, which was granted. The grant of the motion included a statutory award of attorney's fees, which ultimately was made a judgment of the court against the plaintiff and her counsel, Francis Diaz. Defendant's counsel proceeded to seek enforcement of the judgment by instituting post-judgment collection proceedings against the underlying plaintiff's counsel, Diaz, contending that the court's order of attorney's fees against her, as counsel for plaintiff, violated the facial language of the statute.

On several occasions, the matter was brought before the California Court of Appeal, which held that Diaz was untimely in her assertion of her defenses. However, in 2010, the Court of Appeal reversed its earlier decisions upholding the attorney's fees award, fighting a little utilized doctrine known as "manifest injustice." The Court claimed that the continued enforcement of the award would be manifestly unjust primarily because the anti-SLAPP statutes only authorize attorney's fees to be levied in a successful anti-SLAPP motion against the plaintiff individually, not against the plaintiff's counsel. As the underlying order was being enforced against both the party and counsel, the appellate court found manifest injustice and reverse the court's orders nunc pro tunc back to the date of the original order at the trial court level granting the anti-SLAPP motion.

The appellate court brought to light a number of factors that garnered notoriety for the Moore case within the legal community and likely made it singular in its factual setting. As one example, Diaz refused to answer questions at a judgment debtor's examination, which ultimately led to her being jailed for a period of time. Moreover, Diaz threatened to bring malicious prosecution action against the counsel, Kaufman, and its counsel in the underlying action.

Finally, separate contempt proceedings were brought against Diaz in connection with the post-judgment enforcement proceedings.

One would expect a malicious prosecution action against counsel, which typically would be excluded under the terms of an E&O policy. However, such policies also provide for a defense of counsel separate and apart from the indemnification. If the carrier is resolute in relying on the malicious prosecution exclusion, this can be a dangerous course because of the inevitable cross claims. Such claims will implicate a waiver of the attorney/client privilege, which occurs in malicious prosecution actions, and a protracted litigation cycle as the counsel, and underlying counsel, will struggle over what information was provided and when. Such infighting during litigation can only serve to enhance the position of the plaintiff in the malicious prosecution action.

Consequently, the real question is how best to assess the exposure in the malicious prosecution action and determine what economic benefits can be obtained via a settlement in the mediation.

As background, in interpreting California Insurance Code section 533 (which prohibits coverage for willful conduct), courts are "reluctant to frame coverage based on isolated allegations in the underlying complaint" Markel American Ins. Co. y G.L. Anderson Ins. Services, Inc., (2010) 715 F.Supp.2d 1068, 1076, citing United W Grocers, Inc. v. Twin City Fire Ins. Co., 457 F.3d 1106, 1112. The basis is the concern that "the third party complainant, who may overstate the claims against the insured, should not be the arbiter of the policy's coverage" Id. at 1077, citing United W Grocers, Inc. at 1112, quoting Gon v. First State Ins. Co. v. First State Ins. Co. (1989) 871 F.2d 863, 869. For an act to be "willful" under the meaning of section 533, there must an intent to injure, or the act must be inherently harmful. Downey Venture v. LMI Ins. Co., (1998) 66 Cal.App.4th 478, 500. Further, section 533 "does not bar coverage for conduct which may be wrongful, but which is not intentional or willful from the standpoint of the insured. "Melugin v. Zurich Can. (1996) 50 Cal.App.4th 658, 665.

The critical analysis here involves the legal obligations, the contractual obligations and limitations, the merits of the underlying litigation, and, most significantly, the economic considerations of how to proceed in the defense of the impending claims.

Imagine a situation where the insured, a lawyer, has a claim-made E&O policy. It contains your typical exclusion for indemnity of malicious prosecution claims and provides coverage for defense costs, and is a "burning limits" policy. After filing a case, the defendant "SLAPPS" the lawsuit, i.e., files a special motion to strike alleging the lawsuit falls within the SLAPP protection. The motion is granted, and attorney fees are assessed against the client for $75,000.

The client hires a new lawyer and sends the claim to the former lawyer alleging that the former lawyer has committed malpractice by failing to advise the client adequately on revisions to the client's claims. Additionally, the judgment of fees and costs against the client should be borne by the lawyer because the client asserts that he or she would not have commenced the action had he or she adequately known of the risks involved on bringing the underlying lawsuit. This distressed lawyer also receives the lawsuit from the underlying defendant alleging malicious prosecution. These issues are part of the claims adjusters' desk of the former lawyer.

How do you begin assessment? First, review the E&O policy form, and confirm the terms and the rope burning limits. Next, determine the legal obligations imposed enforcing the limits and what may break open the policy restrictions to an unlimited liability based on the jurisdiction of the case. But such determination must be done very cautiously. If the adjuster claims too assiduously to the malicious prosecution exclusion, it may fuel the litigation to follow and create an economic boondoggle for the insurer. Imagine that the claim is denied on the basis of the malicious prosecution exclusion. The client's claim will still be covered under exclusions for fraud, willful violations of law, etc. The insurer is on the hook for the defense of the client's claim and must decide if it will consider one or both claims for coverage. The insurer must then retain coverage counsel to maintain the integrity of its position. The carrier will defend both claims, likely with separate counsel. Only at this point does the issue of the merits arise in relation to the underlying actions.

Is the malicious prosecution itself barred by the SLAPP statute? Did counsel adequately advise the client on the merits and risks of the underlying litigation? Although it can be counterintuitive, jumping too soon to the merits may force the insurer into an inflexible and costly position. And, if the claims adjuster relies too heavily on the enforceable malicious prosecution provision of the exclusions, it will propel the parties into litigation that begins to "burn" the policy limits of the defense costs.

The adjuster can expect demands from the former lawyer's new lawyer demanding settlement before the defense costs exceed the policy limit. In this way, the stakes are raised for the insurer because a failure to settle within the policy limits is, in most jurisdictions, grounds alone for filing a claim.

The underlying client who is now suing will likely take a stronger position against the lawyer to boost other measures of damages. The adjuster must retain coverage counsel to hold to the legitimacy of the insurer's position, whatever that may be. Since defense retained for the former lawyer is reviewing the entire underlying file, coverage counsel may want to do the same. However, all of these actions exponentially raises the cost of handling the claims.

The Benefits of Mediation

When faced with a scenario like the previous one, it's important to insist on mediation as a solution. The preliminary costs of merit and coverage analysis will involve expenses that may be sufficient to settle the entire matter before the parties even reach the discovery stage. An experienced legal malpractice adjuster knows the costs of reviewing the underlying file, which are better spent on early mediation efforts and may well result in settling the matter on favorable economic terms. When developing a mediation strategy, all defenses should be maintained and no concessions made. A careful cost assessment should be completed prior to the mediation, as it will provide the economic and business basis for any offers of settlement. To avoid revealing your economic analysis, the mediation approach should be carefully considered. Insurers differ on whether economic consideration should be a factor in negotiations. Some insurers believe only the merits will dictate what should be offered in settlement, otherwise it can fuel demand and meritless litigation. While this point can be negated in cookie-cutter litigation, it does not exist in this concept. It is critical that the costs proceeding, defending, and, ultimately, laying the groundwork for a possible trial should be central to preparation for mediation. It is essential that all relevant parties attend the early mediation.

For the purposes of example, we have chosen to highlight only one insurer participating in the settlement. In an actual setting, there will likely be more than one carrier, which involves additional sets of considerations.

To effectively handle SLAPP claims on their own or when combined with malicious prosecution claims, early mediation is critical in all cases. It may be that the parties skirmish on the information needed to effectively mediate, but those issues can be dealt with as part of the mediation process and negotiated efficiently. Early mediation is helpful for managing litigation and resolving portions. For example, the client who is suing for payment of fees and costs in the SLAPP litigation may settle and be satisfied early on. Such a settlement may help the development of the evidence in the malicious prosecution process if that action proceeds.

Effective strategies in complex mediations require a careful analysis of all future litigation costs, including separate coverage counsel on each side. Any expenses related to Possible exposure to the insured, as well as the insurer, must also be taken into account. Accurate cost assessments will allow the mediator to be more effective in communicating the exposure of all sides and encourage contributions from them toward a settlement package. This enables the mediator to communicate the coverage issues to plaintiffs, who may believe there is enough money on the claim simply due to the insurers' participation. Despite the hurdles, careful consideration and evaluation of the potential underwriting and attorneys' fees ahead of time can expedite the settlement process.

Malcolm S. McNeil is a partner at Fox Rothschild LLP, and he is co-chair of the firm's International Practice Group. McNeil's practice areas include litigation, mediation and international law, and he can be contacted at 310-598-4173 or mmcneil@fox

Ismael Bautista, Jr. is an associate at Fox Rothschild LLP, and his practice areas include litigation and insurance law. Bautista can be contacted at 310-598-4171
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Title Annotation:COVER
Author:McNeil, Malcolm S.; Bautista, Ismael, Jr.
Publication:Insurance Advocate
Article Type:Cover story
Geographic Code:1U9CA
Date:May 21, 2012
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