April 11, 2018Nelson Mullins’ Michael Hollingsworth Selected for ‘Who’s Who Legal: M&A and Governance’
June 23, 2017
On June 22, 2017, the Massachusetts Supreme Judicial Court (“SJC”) held that a liability insurer’s duty to defend does not include a duty to pay for the prosecution of an affirmative counterclaim against the plaintiff. The SJC ruled that neither the common law “in for one, in for all” theory (requiring an insurer to defend all claims asserted against its insured so long as at least one is covered under the insurance policy) nor standard policy language requires that an insurer prosecute the counterclaim. Mount Vernon Ins. Co. v. Visionaid, Inc., SJC-12142 (June 22, 2017).
Mount Vernon Insurance Company (“Mount Vernon”) issued an employment practices liability policy to Visionaid. Visionaid terminated an employee after reportedly uncovering evidence of misappropriation of funds. The employee asserted a claim against Visionaid for wrongful termination based on age discrimination, first before the Massachusetts Commission Against Discrimination, then in state court. Mount Vernon initially defended Visionaid in both actions under a reservation of rights which it subsequently withdrew after Visionaid threatened to obtain independent counsel.
The coverage dispute between Mount Vernon and Visionaid arose out of Visionaid’s desire to assert a counterclaim for misappropriation of funds against the employee. Mount Vernon’s panel counsel selected to represent Visionaid did not file the counterclaim with Visionaid’s answer. Mount Vernon rejected Visionaid’s demand that it direct panel counsel to file the counterclaim and pay for its prosecution.
Mount Vernon then filed a declaratory judgment action against Visionaid in Massachusetts federal district court, which held that Mount Vernon did not owe a duty to prosecute the counterclaim. Visionaid appealed to the United States Court of Appeals for the First Circuit. The First Circuit certified to the SJC the questions of whether Mount Vernon owed a duty to prosecute the counterclaim under the “in for one, in for all” rule or under the policy language.
In a 5-to-2 decision, the SJC answered the certified questions in favor of Mount Vernon. The majority opinion (written by Justice Gaziano) focused on the policy language requiring that the insurer only “defend” its insured. The SJC agreed with a number of other jurisdictions finding that “defend” does not reasonably include “affirmative prosecution” of a counterclaim.
The SJC rejected Visionaid’s position that an insurer’s duty to defend includes “anything a reasonable defense attorney would do to reduce the liability of the insured” which would include the obligation to bring any counterclaim that is factually “inextricably intertwined” with the claim against the insured. According to the SJC, adopting that position would rewrite duty to defend policy provisions to include additional duties not described in the actual language.
The SJC majority also found that the “in for one, in for all” rule does not require an insurer to assert affirmative claims on behalf of its insured. The SJC reasoned that, while the rule expands the class of cases an insurer is required to defend to include non-covered claims, it does not expand the meaning of “defend” to include “prosecute.” The SJC concluded that an insurer therefore also has no obligation to pay for prosecution of counterclaims under the definition of “defense costs” under the liability policy.
Chief Justice Gants (joined by Justice Lenk) wrote a dissenting opinion in which he reasoned that the policy rationale behind the “in for one, in for all” rule requires that the insurer pay for a counterclaim. The dissent reasoned that the rule is intended to prevent the inefficiencies and impracticalities created by having one insured represented by two separate counsel, one defending covered claims, the other non-covered claims. Under the SJC’s ruling here, Visionaid will have two counsel--one defending the employee’s claims, the other prosecuting the counterclaim—which (according to the dissent) may impede an effective overall “defense.”
The dissent also found that Visionaid’s misappropriation counterclaim was so inextricably intertwined with its defense against the wrongful termination claim that “no reasonable attorney” would fail to assert it. According to the dissent, proving the employee’s misappropriation would demonstrate that Visionaid did not fire him because of his age, so any counterclaim developed by the insurer’s defense may substantially reduce or eliminate any payout of indemnity under the policy.
The dissent concluded that the majority’s focus on the single term “defend” was too narrow; defense of a “claim” reasonably requires that the insurer pay for such prosecution as it aids the insurer’s ability to “defend.”
The majority opinion appears to be fairly broad in its reach and insurers will likely rely on it to resist any future demands by insureds for counterclaim prosecution under all types of liability policies.
Please contact email@example.com with any questions.
These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.