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June 23rd, 2017
coverage
MASSACHUSETTS HIGH COURT HOLDS DEFENSE OBLIGATION DOES NOT EXTEND TO COUNTERCLAIMS

The Massachusetts Supreme Court recently issued the most comprehensive opinion to date addressing whether an insurer’s duty to defend extends to counterclaims asserted by the insured. The court in Mount Vernon Fire Ins. Co. v. VisionAid,Inc., SJC-12142 (Mass. 2017), held that where an insurance policy provides that the insurer has the “duty to defend any claim” initiated against the insured, the insurer’s duty to defend does not require it to prosecute affirmative counterclaims on behalf of its insured.

VisionAid, Inc. is a manufacturer of lens cleaning and eye safety products. It purchased an employment practices liability policy from Mount Vernon which imposed a duty to defend VisionAid against “any claim to which this insurance applies.” The policy required that Mount Vernon pay 100% of the defense costs for any covered claim.

VisionAid terminated an employee when a forensic audit indicated the employee may have stolen hundreds of thousands of dollars from the company. The employee later sued VisionAid for wrongful termination. VisionAid demanded that Mount Vernon fund VisionAid’s affirmative counterclaim against the employee for his theft of company funds.

Mount Vernon filed a declaratory judgment action seeking a ruling that its duty to defend did not require that it pay for the prosecution of the counterclaim. VisionAid sought a competing ruling that Mount Vernon was required to fund the prosecution and that Mount Vernon’s refusal to do so created a conflict of interest that required Mount Vernon to appoint independent counsel for VisionAid.

The District Court for the District of Massachusetts issued a judgment declaring that Mount Vernon’s duty to defend did not require it to prosecute the counterclaim and that Mount Vernon was not required to pay the costs of independent counsel. 91 F. Supp. 3d 66 (D. Mass. 2015). VisionAid appealed to the First Circuit, 825 F.3d 67 (1st Cir. 2016), which issued certified questions to the Massachusetts Supreme Court. The Massachusetts Supreme Court concluded that an insurer with a contractual duty to defend an insured is not required to prosecute an affirmative counterclaim on the insured’s behalf. The court also held insurers need not pay the costs of prosecuting such counterclaims.

The court began its analysis by construing the word “defend.” Although the term was not defined in the policy at issue, the court applied the usual and accepted meaning of the word “defend,” which is opposing or denying the truth or validity of the plaintiff’s case. “Accordingly, in the language of VisionAid’s contract, the essence of what it means to defend is to work to defeat a claim that could create liability against the individual being defended.” The court further rejected VisionAid’s argument that the term “defend” was ambiguous and could be interpreted as doing anything to reduce the insured’s liability.

The court next addressed the “in for one, in for all” rule, the common law rule accepted in many jurisdictions that an insurer must defend all claims in a “mixed action” involving both covered and non-covered claims. While VisionAid claimed its position was a logical extension of the mixed-action rule, the court reasoned the definition of “defend” was controlling. Applying VisionAid’s proposal would incentivize insureds to assert counterclaims in every lawsuit, substantially increasing the amount of and complexity of litigation.

The court next recognized that the definition of defense costs (reasonable and necessary legal fees incurred by the insurer to defend the insured) is coextensive with the duty to defend. It therefore concluded its analysis by reiterating that Mount Vernon had no obligation to pay for VisionAid’s counterclaim, through either appointed counsel or independent counsel.

Insurers frequently are faced with pressure from their insureds seeking reimbursement for costs unrelated to the defense. The VisionAid decision clarifies that insurers are not obligated to fund their insureds’ affirmative counterclaims under Massachusetts law.

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