When the Only Defense Is No Offense: Massachusetts High Court Holds an Insurer’s Duty to Defend Does Not Include Prosecuting Counterclaims
Business Litigation Update
Date: July 07, 2017
Massachusetts’ highest court recently held that when an insurer agrees in a policy that it has a duty to defend any claim against the insured, that duty does not include an obligation to prosecute the insured’s compulsory counterclaim. See Mount Vernon Fire Ins. Co. v. Visionaid, Inc., 477 Mass. 343, 354 (Mass. 2017). This bright-line rule now requires policyholders in Massachusetts to dip into their own pockets to pay legal fees incurred in prosecuting even compulsory counterclaims. This decision could affect whether policyholders assert counterclaims, whether they retain separate counsel to do so, and how they manage their defense.
In this case, Visionaid, Inc. (Visionaid), a manufacturer of lens cleaning products, was insured under an employment practices liability policy by Mount Vernon Fire Insurance Company (Mount Vernon). Visionaid terminated an employee after discovering that he misappropriated several hundred thousand dollars. The employee sued for age discrimination in Massachusetts state court, and Mount Vernon appointed counsel for Visionaid. A coverage dispute arose when appointed counsel refused to assert a counterclaim against the employee for the misappropriated funds. Mount Vernon sued Visionaid in federal court, seeking a declaratory judgment that it was not obligated to prosecute or fund the prosecution of a counterclaim, and Visionaid counterclaimed. The District Court held for the insurer. On appeal, the First Circuit certified three questions to the Massachusetts Supreme Judicial Court: (1) whether an insurer owes a duty under an insurance policy or the Massachusetts “in for one, in for all” rule to prosecute an insured’s counterclaim; (2) whether an insurer owes a duty to fund the prosecution of an insured’s counterclaim as part of “Defense Costs;” and (3) when such a duty might give rise to a conflict of interest, so that the insured is entitled to separate counsel at the insurer’s expense.
The Supreme Judicial Court held that when a policy provides that an insurer has a “duty to defend any claim,” neither the policy nor the “in for one, in for all” rule obligates the insurer to prosecute, or pay for the prosecution of, an insured’s counterclaim. The court opined that the unambiguous language of the policy, which stated that the insurer would “defend any claim” against the insured, means what it says: “defend the claim,” and nothing more.
The court further explained that the Massachusetts “in for one, in for all” rule requires an insurer to defend the entire lawsuit, even when some of the claims – but not all – are covered by the policy. The court concluded that the broad duty to defend imposed by the “in for one, in for all” rule did not extend to the insured’s affirmative claims because it did not change the plain meaning of the word “defend.”
On the second question, the court noted that under Massachusetts law, the insurer’s duty to pay defense costs is co-extensive with the duty to defend. As the duty to defend did not obligate the insurer to prosecute a counterclaim, the insurer was also not obligated to fund prosecuting a counterclaim. In light of its responses to the first two questions, the court did not address the third question.
In a dissent, Chief Justice Gants, joined by Justice Lenk, disagreed and explained that an insurer’s duty to defend includes prosecuting an insured’s counterclaim in the narrow set of facts here: where the compulsory counterclaim is intertwined with the insured’s defense, where any reasonable defense attorney would bring the compulsory counterclaim, and where the insured agrees that any damages awarded on the counterclaim would offset damages on the main claim. The dissent read the policy as ambiguous and focused on the definition of “claim” as “any proceeding.” The dissent concluded that the duty to defend a claim meant defending not merely one cause of action, but the entire “proceeding.” Applying the “in for one, in for all” rule, the dissent concluded that the duty to defend encompassed the obligation to prosecute compulsory counterclaims that are intertwined with the insured’s defense where the counterclaim damages offset damages on the main claim.
There is clearly a split of authority on whether an insurer’s duty to defend includes the obligation to prosecute, and fund the prosecution of, a compulsory counterclaim. See Mount Vernon, 477 Mass. at 349-53, 359-60; compare Brief of Amicus Curiae of The American Insurance Association, et al., at 11-15 with Brief of Amicus Curiae of United Policyholders, at 12-14. This Massachusetts bright-line rule will likely reduce litigation over whether the duty to defend includes the duty to prosecute a counterclaim, and an insured in Massachusetts now knows that, if it wants its insurer to prosecute and fund the prosecution of a counterclaim, it should probably negotiate for that specific term in its policy. This rule reflects the argument presented by insurers that counterclaim litigation was not contemplated in the underwriting process, as it would have resulted in higher premiums. But when an insured without specific counterclaim coverage chooses to assert a counterclaim and retains a second lawyer to do so, the question arises whether, and to what extent, the two lawyers can present a coordinated defense and whether their efforts to do so may pose problems for the insured. Only further litigation will clarify that issue.
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Catherine R. Hartman
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