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Vol. 6, Iss. 1
January 11, 2017

Crystal Ball: Looking Ahead To The Top 10 Coverage Cases Of 2017

I know. It’s the first week of January. So why in the world am I talking about the Top 10 Coverage Cases of 2017? I don’t know. I guess because Coverage Opinions is a one man band so there’s nobody here to tell me I can’t.

It is always difficult to predict what lies ahead in the new year for significant coverage decisions. Most significant decisions come from appellate courts. And, except for the relatively few cases pending before state supreme courts, where word usually gets out, it is not easy to keep track of which cases are working through the appellate process.

There are likely to be two decisions, from state high courts in 2017, that will be strong candidates for the list of ten most significant coverage cases of the year – although for one it will likely depend on who wins. I’ll be keeping an eye out for these decisions:

Mount Vernon Fire Insurance Co. v. VisionAid, Inc., 825 F.3d 67 (1st Cir. 2016)

In March 2015 a Massachusetts federal 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 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. For that reason, it was a candidate for inclusion in the 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.”

Then, the First Circuit – with retired Supreme Court 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. 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 that took VisionAid out of consideration for the 2016 “Top 10.”

The First Circuit 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)?

Oral argument before the Massachusetts SJC was held on December 5.

Surely 2017 will be the year for Visionaide.

Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co., 834 F.3d 998 (9th Cir. 2016)

The Ninth Circuit asked the California Supreme Court to answer this question: “Whether there is an ‘occurrence’ under an employer’s commercial general liability policy when an injured third party brings claims against the employer for the negligent hiring, retention, and supervision of the employee who intentionally injured the third party?”

The Ninth Circuit explained its reason for seeking guidance as follows: “We seek the California Supreme Court’s determination as to the proper interpretation of liability insurance policies that provide coverage for injuries sustained as a result of an ‘occurrence,’ which is defined as ‘an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’ The answer to the certified question will not only determine the outcome of L&M’s appeal of the district court’s order granting Liberty’s motion for summary judgment, but also resolve an unsettled matter of insurance law in California. The certified question is of considerable importance to employers, insurers, and third parties injured by the willful acts of employees. Moreover, we note that the resolution of this question will extend beyond the employment context, affecting many insured entities and persons, and the third parties that are injured by the willful acts of those individuals supervised by the insured. Given the ubiquity of insurance policies that cover ‘occurrences’ in California, this certified question presents an issue of significant precedential and public policy importance.”

The California Supreme Court agreed to answer the question and the insured’s opening brief was filed before the high court in mid-December.

In my experience, insurers generally accept that negligent hiring (i.e., failure to prevent-type claims) is an “occurrence,” even if the bad conduct committed by the employee was not. I would expect some insurers to revisit that if the venerable California Supreme Court concluded otherwise. If so, Ledesma & Meyer would seemingly be a strong candidate to be a top 10 coverage case of 2017. If not, probably not.

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