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.
