When is an insurer obligated to pay for the prosecution of its insured’s counterclaim? The First Circuit recently asked the Massachusetts Supreme Judicial Court to answer that question and related questions, which, in its own words, “could affect scores of insurance contracts in Massachusetts.” Mount Vernon Fire Insurance Company v. VisionAid, Inc., Docket No. 15-1351, __ F.3d __ (June 9, 2016)(Thompson, Souter, Barron). The First Circuit, with Former Supreme Court Justice David H. Souter (sitting by designation), decided that this unresolved issue was so important that certification to the SJC was a better approach than a federal appeals court making its own “informed prophecy as to the state court’s likely stance.”
VisionAid was sued by a former employee for discrimination. VisionAid brought a counterclaim against that former employee for misappropriation. VisionAid asked its liability insurer, Mount Vernon, to pay for not only the defense of the discrimination claim, but also for the prosecution of the misappropriation counterclaim. Mount Vernon declined to pay for the counterclaim and filed a declaratory judgment action in federal court seeking a determination of its obligations.
The Federal District Court for the District of Massachusetts agreed with Mount Vernon and found that the language of the policy only provided coverage for defense and not affirmative claims. 91 F. Supp. 3d 66 (D. Mass. March 10, 2015)(Gorton). VisionAid appealed, arguing that Massachusetts recently adopted the “in for one, in for all” doctrine, which requires that “an insurer must defend the entire lawsuit if it has a duty to defend any of the underlying counts in the complaint.” Liberty Mut. Ins. Co. v. Metro. Life Ins. Co., 260 F.3d 54 (1st Cir. 2001) and GMAC Mortg., LLC v. First Am. Tit. Ins. Co., 464 Mass. 733 (2013). According to VisionAid, by way of analogy (or perhaps, really, an expansion of this doctrine) an insurer should pay for the prosecution of a counterclaim that is part of a suit in which the insurer is providing a defense.
While the First Circuit decided to certify the ultimate question to the SJC, the District Court did appear to engage in at least some “informed prophecy.” It looked to other jurisdictions for guidance and noted that the courts that required insurers to pay for counterclaims involved situations where the counterclaims were “inextricably intertwined with the defense and necessary to the defense as a strategic matter.” In its decision, the District Court ruled that VisionAid’s defense and counterclaim were not inextricably intertwined. The District Court also pointed out that the policy language only expressly provided for the defense of claims.
The following are the questions that the First Circuit has asked the SJC to answer:
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)?
It is unclear whether the SJC will answer any or all of these questions. Apart from the initial question about coverage obligations, the First Circuit is concerned about related issues such as conflicts of interest and the right of an insured to select counsel. And it is also unclear whether the SJC will make an effort to establish a bright-line rule or limit its decision to the facts (and policy language) of the VisionAid case. Still, insurers and their insureds will certainly be following this matter. The SJC docketed the case on July 12, 2016 as SJC-12142 and may be one of the first cases to be considered by three new Associate Justices appointed this year by Governor Charlie Baker (former Superior Court Justices Kimberly Budd, Frank Gaziano and David Lowy).
If you have any questions about this issue, we welcome you to contact us.
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