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Bad Faith Blowback: Ninth Circuit Dismisses Insurer’s Anti-SLAPP Motion to Strike Bad Faith Claim

An insurer that brings an action against its insured in California where the insured asserts a counterclaim alleging bad faith may consider filing a motion to strike based on California’s anti-SLAPP statute.  However, a recent federal appellate decision suggests that the insurer will face an uphill battle to prevail on such a motion.

The Ninth Circuit U.S. Court of Appeals recently upheld a district court order denying an insurer’s motion to strike an insured’s bad faith counterclaim based on the California anti-SLAPP statute. RLI Insurance Co. v. Langan Engineering, Environmental, Surveying and Landscape Architecture, D.P.C., 834 Fed.Appx. 362 (9th Cir. 2021) (“RLI”).  The underlying dispute involves Langan Engineering, Environmental, Surveying and Landscape Architecture, D.P.C.’s (“Langan”) purchase of T&R Consolidated (“T&R”).  T&R was a geotechnical engineering firm that worked on the Millennium Tower project in San Francisco, California.  Langan was named as a defendant in various lawsuits under a theory of successor liability for T&R’s work and Langan notified RLI Insurance Company (“RLI”) of the claims.

RLI initially brought an action to rescind the insurance contracts issued to its insured, Langan, due to Langan’s alleged failure to disclose potential liability from its purchase of T&R.  Langan filed a counterclaim alleging breach of the covenant of good faith and fair dealing.  RLI brought a motion to strike Langan’s counterclaim, alleging that it violates California’s anti-SLAPP statute because the bad faith counterclaim increases the expense, hassle, and nuisance of litigation.

At the trial court level, the Northern District of California denied RLI’s motion.  The first step of the anti-SLAPP analysis requires a prima facie showing that the statement or conduct underlying the legal claims qualifies for protection under the anti-SLAPP statute; then the burden shifts to the non-moving party to demonstrate a probability of prevailing on the challenged claims. The court reasoned that RLI failed to establish the first step of showing that Langan’s counterclaim arises from RLI’s protected activity of filing litigation.  Rather, the district court held that the “substance of Langan’s counterclaim is based on the underlying controversy regarding the insurance contracts and is not based on RLI’s complaint.” RLI Insurance Co. v. Langan Engineering, Environmental, Surveying and Landscape Architecture, D.P.C., 2019 WL 6612241, *3 (N.D. Cal. December 5, 2019). RLI appealed the district court’s ruling.

The Ninth Circuit affirmed the district court’s decision, reasoning that Langan’s counterclaim was not subject to the anti-SLAPP statute because “Langan’s counterclaim is based on an alleged underlying course of bad faith conduct broader than RLI’s complaint alone, making reference to RLI’s suit merely ‘evidence related to liability.’” RLI, supra, 834 Fed.Appx. at 363-364.

This decision is illustrative of the risks that insurers face when they choose to sue their insureds in California.  The RLIcase demonstrates that a counterclaim alleging bad faith against the insurer cannot be easily dismissed under California’s anti-SLAPP statute, because well-pleaded bad faith claims are based on an insurer’s alleged course of conduct.  According to the Ninth Circuit, such course of conduct is not a “protected activity” pursuant to that statute.

We note that the RLI decision does not entirely preclude an insurer’s right to assert an anti-SLAPP motion to strike.  Where the “gravamen of the entire cross-complaint” is based on the cross-defendant’s filing of a lawsuit, the anti-SLAPP statute applies. Raining Data Corp. v. Barrenecha, 175 Cal.App.4th 1363, 1374 (2009).  If the insurer is able to establish that the counterclaim is based solely on the filing of the lawsuit and that the insured is unable to demonstrate a probability of prevailing based on the pleadings, then the insurer would be able to prevail on the motion to strike.  However, as noted in the RLI decision, a counterclaim based on the insurer’s alleged underlying course of conduct will likely result in the denial of a motion to strike based on the anti-SLAPP statute.

Thus, insurers weighing lawsuits against their insureds in California should consider the risk of bad faith counterclaims, which it appears will be difficult to defeat based on the anti-SLAPP statute.