In many instances, insurers are initially sued by plaintiffs with colorable claims seeking monetary recovery. During the course of litigation and through discovery, it sometimes becomes clear that the plaintiff’s claim or claims have no merit. Yet, the plaintiff and his or her counsel continue the lawsuit hoping to extract some sort of monetary settlement from an insurer. They reason that an insurer would rather settle than expend more resources and money to answer discovery or file a motion for summary judgment or other dispositive motion. What if an insurer or its counsel had another arrow in the settlement quiver? Malicious prosecution, in the appropriate circumstance, might be just the arrow needed to achieve resolution.

Traditionally, to establish a cause of action for malicious prosecution in a civil proceeding, a plaintiff must plead and prove that the prior action “(1) was commenced by or at the direction of the defendant and was pursued to a legal termination in his, plaintiff's, favor [citations]; (2) was broughtwithout probable cause [citations]; and (3) was initiated with malice [citations].” Bertero v. National General Corp. 13 Cal.3d 43, 50, 118 Cal. Rptr. 184 (1974).

A claim for malicious prosecution will lie whether the offending pleading is an initial complaint or a cross-claim or counterclaim. 13 Cal.3d at 52-53. Further,

The malice required in an action for malicious prosecution is not limited to actual hostility or ill will toward plaintiff but exists when the proceedings are instituted primarily for an improper purpose. Malice may range anywhere from open hostility to indifference. Malice may also be inferred from the facts establishing lack of probable cause.Soukup v. Law Offices of Herbert Hafif, 39 Cal.4th 260, 292, 46 Cal.Rptr.3d 638, 139 P.3d 30 (2006) (citations and internal quotation marks omitted)

Significantly, the California Supreme Court also held in Zamos v. Stroud,32 Cal. 4th 958, 12 Cal. Rptr. 3d 54, 87 P.3d 802 (2004), that an attorney may be held liable for malicious prosecution when he commences a lawsuit properly but then continues to prosecute it after learning it is not supported by probable cause – i.e., after he discovers facts showing the lawsuit has no merit. An attorney is liable for the damages incurred “from the time the attorney reasonably should have caused the dismissal of the lawsuit after learning it has no merit . …” Id. at 970. (Copy of case attached.)

In recent litigation on behalf of an insurer, a counterclaim for bad faith was filed in response to a complaint in interpleader and partial payment of life insurance proceeds to the spouse. The issue was whether a change in beneficiary was properly tendered to the insurer and/or its agent, and whether the change could ever be effectuated since the attempted change occurred after divorce proceedings commenced between the deceased insured and spouse. In many states, commencement of divorce proceedings automatically triggers a temporary restraining order that prevents divorcing parties from changing life insurance coverage or the beneficiary.

In the subject case, when the counterclaimants and their counsel filed the counterclaim for bad faith, it may be that neither was aware the divorce proceeding triggered the automatic restraining order nullifying any attempt to change the beneficiary. However, after initial discovery, it became clear that the beneficiary change was void; that no valid bad faith claim existed, or could be asserted, against the insurer.

At mediation the insurer submitted a supplemental brief discussing the learned facts and malicious prosecution, strongly encouraging the counterclaimants and their counsel to dismiss the counterclaim or face an action for malicious prosecution. Citing Zamos, the insurer noted that an attorney may be held liable for malicious prosecution when he commences a lawsuit properly but then continues to prosecute it after learning it is not supported by probable cause. Here, discussing potential malicious prosecution helped achieve resolution once it was clear that no valid bad faith claim existed and no purpose was served by keeping the insurer in the action.