The 1994 Northridge, California earthquake that caused billions of dollars in damages across Southern California also drew unscrupulous lawyers and public adjusters seeking fast money. Investigation was limited and because of the catastrophe many unnecessary and spurious suits were filed. Insurance fraud was rampant and insurers paid rather than fight. In addition insurers 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, four years after expiration of the statute and eight 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 some 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In an unpublished opinion the California Court of Appeal dealt a serious blow to an attorney who filed an apparently malicious and unfounded lawsuit against Scottsdale Insurance Company (Scottsdale). 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.CA.0003625(Cal.App. Dist.2 05/02/2006)] In bringing the action Scottsdale took an important step that will protect insurers against lawyers and public adjusters who use the courts as a bludgeon - whether proper or not - to force insurers to pay to avoid the costs of litigation. If they take the case to trial and prove the malice a punitive damages award against the lawyer and the public adjuster 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 action began in 1994 after the Northridge earthquake when Regency Royale Homeowners Association (Regency) 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 five 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, Kapilow & Son (Kapilow), 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 (Waldman).

 

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 Kapilow 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 Kapilow''s representation that Scottsdale insured Regency for the earthquake risk in filing the complaint. Kapilow likewise had not independently investigated whether Scottsdale was the proper insurer. In January 2002, Scottsdale informed Kapilow that Regency''s policy did not provide coverage until six 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 six months after the earthquake. In November 2002, Kapilow 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 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 (1978) 80 Cal.App.3d 823, 827] 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 Zelig and Kapilow conspired to commit a malicious prosecution that resulted in damage to Scottsdale.

 

These allegations are sufficient to state a cause of action against Zelig. The trial will go forward. Zelig, Kapilow and their client are looking at a probable judgment for $30,000 in attorneys fees and as much as nine times that amount in punitive damages. Conclusion Scottsdale 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 Scottsdale to defend a lawsuit that could not possibly succeed. That it gave Zelig and Kapilow 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. Scottsdale's reasonable conduct and attempt to resolve the situation in a non-confrontational manner was rewarded by abuse and a refusal by Zelig to be confused with facts.

 

The Court of Appeal was neither confused nor cowed. The results of the trial should be interesting. Insurers victimized by 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.