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Vol. 5, Iss. 8
July 27, 2016

Ugh! Justice Delayed (Again):
Are Insured’s Fees To Prosecute A Counter-Claim Covered?

 

Back in the April 8, 2015 issue of Coverage Opinions I discussed Mount Vernon Fire Insurance Co. v. Visionaid, Inc., No. 13-12154 (D. Mass. Mar. 10, 2015). The court addressed the knotty issue of an insurer, defending an insured, and the insured believes that it has a counterclaim against the plaintiff. Defense counsel files the counterclaim or the insured hires separate counsel, to work with the insurer-appointed counsel, to file the counterclaim. However, the insurer does not wish to pay the legal fees associated with the counterclaim. After all, the counterclaim is not a suit filed against the insured. And a claim filed against the insured is what the duty to defend is all about. It often gets worked out. Sometimes the insured agrees to pay for the prosecution of the counterclaim. Sometimes the insurer pays it because it ultimately benefits the defense of the insured, i.e., a good offense is part of the defense. But it does not always get worked out. That’s what happened in Visionaid and the parties marched off to court.

The Massachusetts District Court, following a lengthy analysis, held that Mt. Vernon was not obligated to fund VisionAid’s counterclaim. What makes the VisionAid opinion useful was that the court addressed, one by one, so many of the very arguments that are often raised by insureds when seeking to have a counterclaim funded as part of a defense being provided to it by an insurer. These include the broad duty to defend obligates the insurer to fund the counterclaim; the counterclaim is an aid to the defense of the insured; the counterclaim creates a conflict for the insurer’s retained counsel; and requiring separate counsel to pursue the counterclaim would make the defense unwieldy.

VisionAid is the most detailed opinion I’ve ever seen that addresses whether an insurer is obligated to fund an insured’s counterclaim. [If there’s a more detailed one I’d love to know.] For that reason, the Massachusetts federal court’s decision was a candidate for inclusion in my 2015 “10 Most Significant Coverage Decisions of the Year” article. But, alas, it was appealed to the First Circuit. So this took it out of consideration for the 2015 “Top 10.”

I was disappointed. But, in the back of my mind, I knew that the First Circuit’s decision would be a strong candidate for inclusion in the 2016 “Top 10” article. But then something happened on the way there. The First Circuit – with Justice Souter on the panel, sitting by designation – pulled a judicial go-ask-your-mother and certified the issue to the Massachusetts Supreme Judicial Court. Mount Vernon Fire Insurance Co. v. Visionaid, Inc., No. 15-1351 (1st Cir. June 9, 2016).

Come on. You gotta be kidding me. [Justice Souter – How hard can this be compared to the stuff that you saw on the Supreme Court?] So now it looks like it won’t be until 2017 (hopefully) that VisionAid gets a chance to make the Top 10.

What was it that caused the First Circuit to need help seeing in VisionAid? Nothing surprising -- what you would expect when certification occurs: no controlling precedent; the outcome of the case could affect lots of insurance disputes in Massachusetts; insurance is an area of traditional state regulation; and the policy arguments do not clearly favor one side or the other.

The First Circuit, after discussing the case (see CO April 8, 2015 for the background), certified the following questions to the Massachusetts SJC (and conveniently did so in a way that outlined the arguments of the parties):

(1) Whether, and under what circumstances, an insurer (through its appointed panel counsel) may owe a duty to its insured—whether under the insurance contract or the Massachusetts “in for one, in for all” rule—to prosecute the insured’s counterclaim(s) for damages, where the insurance contract provides that the insurer has a “duty to defend any Claim,” i.e., “any proceeding initiated against [the insured]”?

(2) Whether, and under what circumstances, an insurer (through its appointed panel counsel) may owe a duty to its insured to fund the prosecution of the insured’s counterclaim(s) for damages, where the insurance contract requires the insurer to cover “Defense Costs,” or the “reasonable and necessary legal fees and expenses incurred by [the insurer], or by any attorney designated by [the insurer] to defend [the insured], resulting from the investigation, adjustment, defense, and appeal of a Claim”?

(3) Assuming the existence of a duty to prosecute the insured’s counterclaim(s), in the event it is determined that an insurer has an interest in devaluing or otherwise impairing such counterclaim(s), does a conflict of interest arise that entitles the insured to control and/or appoint independent counsel to control the entire proceeding, including both the defense of any covered claims and the prosecution of the subject counterclaim(s)?

VisionAid – See ya in 2017.


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