Fact of Settlement Communications in Underlying Lawsuits is Not Ground for Anti-SLAPP Motion in Subsequent Bad Faith Lawsuit

Christopher Kendrick and Valerie A. Moore | Haight Brown and Bonesteel

In Trilogy Plumbing, Inc. v. Navigators Specialty Ins. Co. (No. G057796, filed 5/27/20, ord. pub. 6/18/20), a California appeals court ruled that an insurance bad faith lawsuit alleging a variety of claim handling misconduct in defending the insured was not subject to an insurer’s special Strategic Lawsuit Against Public Participation (SLAPP) motion to strike because, while the alleged acts were generally connected to litigation, they did not include any written or oral statement or writing made in connection with an issue under consideration or review by a judicial body and, therefore, did not constitute protected activity under California’s anti-SLAPP statute.

In Trilogy Plumbing, the policyholder was sued in 33 different construction defect lawsuits, some of which Navigators defended, and others which were denied or had the defense withdrawn. The Navigators’ policies were subject to a $5,000 deductible, and Trilogy alleged that Navigators breached the contracts by “demanding deductible reimbursement amounts greater than the policies’ $5,000 stated deductible, and by seeking reimbursement of ordinary defense fees and expenses as if they were subject to deductible reimbursement,” “claiming a right to seek reimbursement from Trilogy for defense fees and expenses Navigators paid for the benefit of third-party additional insureds,” “providing conflicted defense counsel who took instructions only from Navigators without disclosing conflicts of interest,” “failing to reasonably settle cases and by withdrawing [the] defense as a strategic means of trying to force Trilogy to fund its own settlements,” “misrepresenting its deductible provisions,” “refusing to account for deductible amounts it charges and collects,” and others.

Based on the anti-SLAPP statute, Code of Civil Procedure section 425.16, Navigators moved to strike over a dozen allegations from Trilogy’s amended complaint, all basically centered on alleged conflicts of interest by the attorneys appointed to defend Trilogy in relation to the policies’ deductibles, exemplified in such allegations as:

“Trilogy’s liability and damages exposure in the construction defect cases was generally non-existent or very, very minimal, and Trilogy was often dismissed from construction defect suits for waiver of costs or with payment of very little money. But Navigators directed its attorneys to avoid vigorously defending Trilogy and to try to use money Trilogy would have to reimburse to resolve claims.” Likewise: “Navigators breached the policies by . . . providing conflicted defense counsel who took instruction only from Navigators . . . even when their actions directly conflicted with Trilogy’s instructions and Trilogy’s interests.” Also: “Navigators used conflicted counsel to threaten Trilogy and to commit Trilogy to making payments and taking actions Trilogy did not approve,” all of which and other similar allegations Navigators sought to strike from Trilogy’s bad faith complaint using the anti-SLAPP statute.

Navigators’ motion relied on subdivision (e)(2) of section 425.16, which provides that “any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law” is an “act in furtherance of a person’s right of petition or free speech under the United States or California Constitution in connection with a public issue,” and therefore protected by the statute. Navigators argued that the specific allegations it sought to strike “involved settlement negotiations that are protected by section 425.16, subdivision (e)(2).”

The trial and appeals courts disagreed, citing numerous authorities to the contrary. The appeals court said that “conduct is not automatically protected merely because it is related to pending litigation; the conduct must arise from the litigation.” (Quoting Optional Capital, Inc. v. Akin Gump Strauss, Hauer & Feld LLP (2017) 18 Cal.App.5th 95, 113-114.) Further, “it is insufficient to assert that the acts alleged were ‘in connection with’ an official proceeding.’ [] Instead, ‘[t]here must be a connection with an issue under review in that proceeding.’” (Quoting Rand Resources, LLC v. City of Carson (2019) 6 Cal.5th 610, 620.)

Although noting that “courts have adopted ‘a fairly expansive view of what constitutes litigation related activities within the scope of section 425.16,’” the Trilogy Plumbing court went on stating that “[t]he allegations of the amended complaint that were the object of the anti-SLAPP motion do not refer to any oral or written statements or communicative conduct by anyone, whether in relation to the lawsuits in which Trilogy had been named a defendant, or in the context of settlement discussions. Instead, the anti-SLAPP motion sought to strike allegations pertaining to Navigators’ conduct generally in mishandling the claims process.”

The Trilogy court quoted at length from Miller v. Zurich American Ins. Co. (2019) 41 Cal.App.5th 247, where the plaintiff “sought relief from the insurance company, and not against any counsel, ‘based on the overarching premise that [the insurance company] did not meet its duty to defend as it failed to provide independent conflict-free counsel to represent them in defending against [a] counterclaim.’” The Miller court stated: “Despite the insurance company’s blanket contention to the contrary, not all attorney conduct in connection with litigation, or in the course of representing clients, is protected by section 425.16. There is a distinction between activities that form the basis for a claim and those that merely lead to the liability-creating activity or provide evidentiary support for the claim. Assertions that are ‘merely incidental’ or ‘collateral’ are not subject to section 425.16. Allegations of protected activity that merely provide context, without supporting a claim for recovery, cannot be stricken under the anti-SLAPP statute. While a breach of the implied covenant of good faith and fair dealing may be carried out by means of communications between the parties’ respective counsel, the fact of counsel’s communications does not transform the claim to one arising from protected activity within the meaning of section 425.16. The allegations of counsel’s communications do not concern the substantive issue of the plaintiffs’ liability as alleged in the counterclaim or any coverage matter. Instead, the communications concern procedural matters regarding discovery, correspondence with the insurance company’s claims handlers, and payments to the plaintiffs, directly related to the insurance company’s duty to defend obligations owed to the plaintiffs by appointing panel counsel to represent them in defending the counterclaim.” (Miller, supra, 41 Cal.App.5th at 257-258 (internal quotes and citations omitted).)

“Thus, what gives rise to liability is not the fact of counsel’s communications, but that the insurance company allegedly denied the plaintiffs the ‘benefit’ of panel counsel’s independent professional judgment in rendering legal services to them. Consequently, we reject the insurance company’s argument that the allegations of counsel’s communications give rise to its liability for an action for breach of the implied covenant of good faith and fair dealing. The lawsuit concerns a breach of duty that does not depend on the insurance company’s exercise of a constitutional right. In other words, and contrary to the insurance company’s contention, the allegations of counsel’s communications are only evidence that provides the context for the allegation that the insurance company unreasonably and without proper cause interfered with panel counsel’s representation of the plaintiffs in defending against the counterclaim.” (Miller, supra, 41 Cal.App.5th at 258-259 (internal quotes and citations omitted).)

And for the same reason, the Trilogy Plumbing court affirmed the denial of Navigators’ anti-SLAPP motion, stating that “references to settlement and other potentially protected activity in the allegations challenged by Navigators in the anti-SLAPP motion reflect evidence that provides context for the allegation Navigators failed to perform under the terms of the policies. Such references do not establish that Trilogy’s action arises out of any protected activity. . . . . Navigators thus failed to show the conduct described by the challenged allegations of the amended complaint constitute protected activity within the meaning of section 425.16, subdivision (e)(2).”

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