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Vol. 6, Iss. 9
December 13, 2017

Mount Vernon Fire Insurance Co. v. VisionAid, Inc., 76 N.E.3d 204 (Mass. 2017)

Insurer’s Duty To Defend Does Not Include The Duty To Pay To Prosecute The Insured’s Counterclaim

In March 2015 a Massachusetts federal district 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. In Mount Vernon Fire Insurance Co. v. VisionAid the parties could not see eye to eye so they marched off to court.

VisionAid, a manufacturer of eye wash, terminated an employee for alleged misappropriation of funds. The employee filed suit against VisionAid alleging wrongful termination. Mt. Vernon undertook VisionAide’s defense under an employment practices policy. VisionAid sought to file a counterclaim against the employee for misappropriation of funds. Mt. Vernon withdrew its reservation of rights and informed VisionAid that it would not fund the counterclaim. VisionAid’s answer was filed by appointed counsel, who worked with VisionAid’s personal counsel, who filed the counterclaim.

That Massachusetts federal court, following a lengthy analysis, held that Mt. Vernon was not obligated to fund VisionAid’s counterclaim. VisionAid was the most detailed opinion I’d ever seen that addressed whether an insurer was obligated to fund an insured’s counterclaim. For that reason, VisionAid was an easy pick, even as a federal district court opinion, for inclusion in the 2015 Ten Most Significant Coverage Decisions of the Year article. But, alas, it was appealed to the First Circuit. So that took it out of consideration for the 2015 Top 10. So it would have to wait until 2016.

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. But with the Massachusetts high court being the last stop on the train, 2017 had to be the year. And it is.

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)?

The Massachusetts SJC answered “no” to questions one and two. The court provided various reasons for its decision. For purposes here, how they got there is not as important as the fact that they did. I’ll be brief and simply set out a couple of the court’s rationales for its decision that the duty to defend does not include the duty of an insurer to pay to prosecute the insured’s counterclaim:

“Visionaid maintains that the duty to ‘defend’ under its insurance policy may be understood as meaning anything a reasonable defense attorney would do to reduce the liability of the insured. . . . The plain language here, however, does not, by itself, permit the interpretation that Visionaid propounds. To adopt this interpretation would require us to read in a number of provisions that the parties did not include in the policy and, as the dissent puts it, place an additional duty on the insurer ‘[w]here the insured's defense is intertwined with a compulsory counterclaim, where any reasonable attorney defending that proceeding would bring such a counterclaim, and where the insured agrees that any damages awarded to the insured on that counterclaim will offset any award of damages against the insured that the insurer is required to indemnify.’ Not only is this proposition found nowhere in the language of the contract, it would result in extensive preliminary litigation to determine what claims are sufficiently intertwined, litigation that would be brought by ‘any reasonable attorney.’”

“Visionaid argues that because the ‘in for one, in for all’ rule expands the duties of an insurer beyond those explicitly set forth in the contract, the policy also expands the insurer’s duty to include the obligation to prosecute an affirmative counterclaim. While the ‘in for one, in for all’ rule did expand the class of actions that an insurer is obligated to defend, it did not change the meaning of the word ‘defend.’ Expanding the ‘in for one, in for all’ rule in the manner that Visionaid urges misaligns the interests of the party who stands to benefit from the counterclaim (the insured) and the party who bears the cost of prosecuting the counterclaim (the insurer). As a result, allowance of such a rule would increase the total number of counterclaims brought by insured parties. It also, in effect, would result in additional litigation in virtually every case involving insurance on whether a ‘reasonable’ attorney hired separately by (and paid by) the insured would file the counterclaim in the given circumstances. Such an expansion of the ‘in for one, in for all’ rule also would lead to increased litigation between insurers and insured parties on the question whether a successful counterclaim would result in reduced liability on the underlying claim. An increase in litigation between insurer and insured is precisely what ‘in for one, in for all’ seeks to avoid.”

As for question two, the court stated that, “[b]ecause the duty to pay defense costs is coextensive with the duty to defend, we apply the same analysis to question two that we applied to question one, and conclude that the duty to pay defense costs does not require an insurer to fund the prosecution of any counterclaim on behalf of the insured.”

[As a result of the SJC’s decisions on questions one and two, it had no reason to reach question three. But last month the First Circuit did and ruled against VisionAid: “Tasked with settling a dispute about Massachusetts law the way the SJC would settle it, our best assessment is: Given the particulars of the current controversy, we believe the SJC would agree that the presence of the embezzlement counterclaim — which Mount Vernon neither has to prosecute nor pay for — does not generate a conflict of interest entitling VisionAid to separate counsel to defend against Sullivan’s suit at Mount Vernon's expense.”]

VisionAid is an important decision because there are so few addressing the duty to defend-counterclaim issue, not to mention that it is from a state high court. While the issue arises with some frequency, I suspect there are few cases addressing it because it often gets worked out. As noted above, sometimes the insured agrees to pay for the prosecution of the counterclaim, without a fuss, because it ultimately benefits the defense of the insured and/or the defense and counterclaim are so intertwined that there are no additional defense costs to prosecute the counterclaim. The importance of VisionAid is that now, when a defending insurer, for whatever reason, does not desire to also fund an insured’s counterclaim, it has a high court decision, at its disposal, to assist with resolving any dispute – pre- or post-filing of litigation over it.

 

 

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