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May 2015

On March 10, 2015, U.S. District Court Judge Nathaniel Gorton allowed the summary judgment motion of Mount Vernon Fire Ins. Co. ("Mt. Vernon"), holding that the insurer did not have a duty to fund an insured’s prosecution of a counterclaim.

The operative facts were these.  In October 2011, Mt. Vernon’s insured, VisionAid, Inc. (“VisionAid”) terminated its Vice President of Operations, Gary Sullivan.  In February 2013, Mr. Sullivan brought suit against VisionAid in state court in Massachusetts, alleging wrongful termination (based on age discrimination).  Mt. Vernon agreed to provide VisionAid with a defense under its employment practices liability insurance policy and appointed counsel, who answered on behalf of VisionAid. (A reservation of rights was withdrawn by the insurer, presumably so that it would not have to sacrifice its right to appoint panel counsel to defend the insured.)   VisionAid requested that Mt. Vernon authorize appointed counsel to prosecute a counterclaim for misappropriation of corporate funds by Mr. Sullivan, alleging that he had used corporate monies for "dubious" personal reasons.  Mt. Vernon refused and advised VisionAid that it was free to pursue this counterclaim at its own expense.

Mt. Vernon thereupon filed a declaratory judgment action in Federal court, asking the court to confirm the correctness of Mt. Vernon’s position that it had no duty to fund VisionAid’s prosecution of a counterclaim against its former officer.  VisionAid cross-claimed for declaratory judgment on the same issue. Both parties moved for summary judgment.

In support of its motion, VisionAid raised three major points.  First, VisionAid asserted that the assertion of the counter claim was a "critical element of its defense" and thus the obligation to subsidize the assertion of the counterclaim should be deemed a legitimate component of Mt. Vernon's duty to defend under the insurance policy.  Second, according to VisionAid, the case would be "unmanageable" if VisionAid had to retain separate counsel solely to prosecute its counterclaim.  Third, VisionAid argued that defense counsel appointed by Mt. Vernon would have an inherent conflict of interest, because the discrimination claim could not be settled without undermining the misappropriation counterclaim.

Conversely, Mt. Vernon argued that the affirmative prosecution of a counterclaim goes beyond the plain language of the duty to “defend” established in the policy.  The court agreed with Mt. Vernon.  Specifically, the policy required Mt. Vernon to indemnify VisionAid for amounts it would "become legally obligated to pay because of Claims first made against [VisionAid]." (Emphasis supplied). Additionally, the policy defined the “Defense Costs” which Mt. Vernon must pay as those "reasonable and necessary legal fees... to defend[VisionAid], [that] result from the ... defense ... of a Claim." (Emphasis supplied). As such, the court held that the plain language of the policy would not allow for the result requested by VisionAid.  The court also cited to decisions in other jurisdictions nationwide, indicating that a majority of Federal and state cases hold an insurer’s duty to defend does not include an obligation to prosecute counterclaims for affirmative relief.

The court also examined application of the “in for one, in for all” rule (also known as the “complete defense” rule) adopted in Massachusetts.  This rule holds that, where a complaint has both covered and non-covered claims and it would be impractical for appointed counsel to divide representation between covered and non-covered claims, an insurer’s duty to defend is expanded to include all claims brought against the insured.  However, the court found that this rule did not apply in the case at bar, since the "in for one, in for all" rule has only been applied to claims brought against an insured, not requests for affirmative relief.

Finally, the court considered VisionAid’s argument that the counterclaim was so “inextricably intertwined with the defense” of the discrimination claim, that it was necessary to the defense as a strategic matter.  The court rejected this argument, reasoning that to defend the discrimination claim, VisionAid did not have to prove every element of a misappropriation claim.  Instead, VisionAid could mount a successful defense simply by providing evidence of any legitimate reason for Mr. Sullivan’s termination – e.g., that VisionAid was aware of the "allegation" of misappropriation of funds at the time it terminated his employment.  The court also pointed out that VisionAid could prevail on the misappropriation counterclaim, but still be found liable for wrongful termination based on age discrimination.

The VisionAid decision should provide a useful precedent for insurers to utilize in the frequently occurring instance where an insured improperly seeks to expand coverage to include the prosecution of counterclaims collaterally related to the claims for which an insurer has a duty to defend. The VisionAid decision is consistent with a previous decision by Judge Woodlock in which he held that the attorneys fees incurred for voluntarily undertaking “offensive litigation” (in the form of a third-party action seeking indemnification for the loss at issue in the case being defended by the insurer’s appointed  counsel) is not covered by the policy. That decision is Barletta Heavy Division, Inc. v. Travelers Insurance Company, Inc., C.A. No. 12-11193-DPW, Memorandum and Order on Cross Motions for Summary Judgment, Oct. 25, 2013 (Woodlock, J.)

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