On June 22, 2017, the Supreme Judicial Court of Massachusetts (“SJC”) decided Mount Vernon Fire Insurance Company v. VisionAid, Inc, a case that a federal court thought could have had “potentially wide-reaching implications for how liability insurers must conduct themselves in the Commonwealth of Massachusetts.”
The VisionAid case arose from a request by the federal First Circuit for the Court of Appeals (“First Circuit”) to the SJC to answer three undecided questions Massachusetts insurance contract law relating to an insurer’s duty to prosecute a counterclaim against the party suing the insured. These questions paraphrased (exact questions from First Circuit follow this article) were:
- Does an insurer owe a duty to its insured to prosecute the insured’s counterclaim for damages against a claimant suing an insured in a lawsuit the insurer defends?
- Does an insurer owe a duty to its insured to fund the prosecution of the insured’s counterclaim for damages where the insurance contract requires the insurer to cover “Defense Costs?”
- If there is a duty to for the insurer prosecute the insured’s counterclaim does a conflict of interest arise that entitles the insured to use independent counsel to defend the claim and prosecute the counterclaim?
Five out of the seven of five the SJC ruled that if an insurer must defend a claim initiated against the insured, the insurer’s duty to defend that claim does not require it to prosecute any counterclaims its insured is legally required to file. The Chief Justice, joined by another justice, wrote a dissenting opinion.
Question of prosecuting counterclaim arose out of employer’s practices liability policy
The VisionAid case before the First Circuit arose out of an employer’s practices liability policy issued by Mt. Vernon to a Massachusetts company, VisionAid, in Wareham. VisionAid was formerly known as H.L. Bouton Co. Inc.
In October 2011 VisionAid fired its then–Vice President of Operations, Gary Sullivan. In response, Mr. Sullivan filed a discrimination complaint with the Massachusetts Commission Against Discrimination (“MCAD”) alleging that VisionAid had terminated him because of his age.
VisionAid reported the MCAD claim under its employment practices liability policy issued by Mt. Vernon. Mt. Vernon appointed counsel it selected to defend VisionAid at the MCAD. In the MCAD proceeding, VisionAid alleged that it fired Mr. Sullivan not because of his age, but because of his subpar performance and his misappropriation of company funds.
Insured refusal to waive claim against former employee brings lawsuit
After VisionAid refused to exchange mutual releases with neither party paying anything to the other, Mr. Sullivan dismissed his MCAD complaint and filed an age discrimination lawsuit in the Massachusetts Superior Court.
VisionAid had to answer Mr. Sullivan’s suit file any “compulsory counterclaims” it had against Mr. Sullivan. Since VisionAid’s claim for misappropriation of company funds arose out of the same transactions or occurrences alleged in Mr. Sullivan’s suit, VisionAid had to file its own claim as a counterclaim in response to Mr. Sullivan’s lawsuit. If VisionAid did not file its compulsory counterclaim in Mr. Sullivan’s lawsuit, VisionAid would lose the right to sue Mr. Sullivan for his alleged misappropriation.
Insurer withdraws reservation of rights and files declaratory judgment
Mt. Vernon at first tried to defend the Superior Court suit against VisionAid under a reservation of rights. However, Mt. Vernon withdrew the reservation when VisionAid demanded, as Massachusetts law allows, to choose its own counsel to be paid for by Mt. Vernon.
Still, Mt. Vernon’s letter withdrawing its reservation of rights specifically asserted that any counterclaim that VisionAid wished to bring against Mr. Sullivan had to be filed and prosecuted by attorneys hired and paid for by VisionAid.
VisionAid disagreed and Mt. Vernon filed a declaratory judgment in the United States District Court for Massachusetts seeking a ruling it had no obligation under its policy to prosecute any counterclaim for VisionAid arising out of or related to Mr. Sullivan’s lawsuit.
At the district court level, Mt. Vernon prevailed. On summary judgment, the district court found that “according to the plain language of the Policy, Mt. Vernon was not required to fund an affirmative counterclaim and that this result did not run afoul of any Massachusetts Rule of Law or create any conflict of interest.”
VisionAid appealed and the federal appellate court (First Circuit) decided VisionAid had a point.
First Circuit finds no Massachusetts law supports either party’s position
The First Circuit decided that the legal and contractual arguments presented by both sides seemed to cancel themselves out with neither side having any clear Massachusetts legal precedent that would decide the dispute. Since federal courts do not break new ground in deciding cases based on state law but only apply state law as it exists, the First Circuit unilaterally referred the decision to the SJC under a formal process called “Certification.”
Under the certification rule, the SJC permits federal courts to certify questions of state law that are “determinative of the cause then pending in the certifying court” but for which there is no controlling precedent by the SJC.
The majority of SJC’s justices decide no duty to prosecute compulsory counterclaims
The majority of the SJC conclude in response to the First Circuit’s certified questions that:
- an insurer with a contractual duty to defend an insured is not required to prosecute an affirmative counterclaim on the insured’s behalf
- an insurer with a contractual duty to pay defense costs is not required to pay the costs of prosecuting a counterclaim on behalf of the insured; and
- because the Court’s majority answered the first two questions in the negative, the answer to the third question was moot.
SJC justices find language of policy unambiguous
VisionAid’s employment practices liability insurance policy obligated Mount Vernon to “defend” VisionAid against any “Claim.” The policy defined the meaning of “Claim” but did not define the term “defend.”
The majority opinion of the SJC noted the dictionary definition of “defend” means to “deny or oppose the right of a plaintiff in . . . a suit or wrong charged” while “Defense” is defined as “a defendant’s denial, answer, or plea . . . an opposing or denial of the truth or validity of the plaintiff’s . . . case.”
“Prosecute,” however, the dictionary defines as “to institute legal proceedings against; [especially] to accuse of some crime or breach of law or to pursue for redress or punishment of a crime or violation of law in due legal form before a legal tribunal.”
Based on the majority of the court agreeing on the dictionary definitions of the terms “defend,” and “prosecute,” the majority ruled:
…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 agreement in this case, memorialized in the written insurance policy, required Mount Vernon to ‘defend’ VisionAid in any claim ‘first made against [it] during the Policy Period,’ and no more.
Court rejects VisionAid’s arguments
VisionAid argued that an insurer should have to prosecute an affirmative counterclaim on behalf of its insured. The justices ruling against VisionAid found the policy’s language did not permit the interpretation that VisionAid suggested. The majority opinion found that “to adopt this interpretation would require us to read in a number of provisions that the parties did not include in the policy.” The justices added “Parties who wish to require such calculations are of course free to do so in their written contracts.”
Also, the judges noted that courts in several other jurisdictions have considered similarly worded insurance policies and concluded that the duty to “defend” does not require insurers to prosecute an affirmative claim against the plaintiff arising out of the transactions alleged in the underlying suit, no matter how advantageous that claim would be to the insured.
The “in for one, in for all” rule did not require insurer to prosecute counterclaim
Massachusetts follows the “in for one, in for all” rule for insurers defending liability claims. This rule requires that, where an insurer must defend one count of a multi-count complaint against its insured, it must defend the insured on all counts, including those that are not covered.
VisionAid argued that because the “in for one, in for all” rule expands the duties of an insurer beyond those explicitly set forth in the contract, the policy also expands the insurer’s duty to include the obligation to prosecute an affirmative counterclaim.
The majority justices agreed that while the “in for one, in for all” rule expanded the class of actions that an insurer must defend, it did not change the meaning of the word “defend.” We are persuaded that the better course under the “in for one, in for all” rule is to require an insurer to defend claims brought against its insured, but not to require an insurer to assert affirmative claims on behalf of that insured.
On second question VisionAid fares no better than it did on the first
The second question from the First Circuit asked whether, under Massachusetts law, an insurer’s obligation to pay for an insured’s “defense costs” required the insurer to fund counterclaims on behalf of the insured.
The majority decision of the SJC noted the VisionAid policy defined “defense costs” as “reasonable and necessary legal fees and expenses incurred by [Mount Vernon] to defend [VisionAid], resulting from the investigation, adjustment, defense, and appeal of a [c]laim.” The court held by defining “defense costs” in this way, the policy created a duty to pay the costs of defense coextensive with the duty to defend.
The majority’s opinion pointed out that while an insurer’s duty to defend arises when the insurer is involved in a case at the beginning of the litigation; the duty to pay defense costs arises if the insurer becomes involved after a verdict has been reached or if there is a conflict of interest between the insurer and insured.
However, this distinction had no legal significance to the majority because, in Massachusetts, where an insurer has both the duty to defend and the duty to pay defense costs, the scope of the duty to defend and the scope of the duty to pay defense costs are identical. Since the duty to pay defense costs did not legally differ with the duty to defend under Massachusetts law, the majority of the SJC ruled, in response to the First Circuit’s second question the duty to pay defense costs does not require an insurer to fund the prosecution of any counterclaim on behalf of the insured.
Question from First Circuit returned with answers in the negative
The majority opinion ended with the response to the First Circuit’s question being:
Question one: An insurer with a contractual duty to defend an insured is not required to prosecute an affirmative counterclaim on the insured’s behalf, pursuant to either the contractual language or the “in for one, in for all” rule.
Question two: The duty to pay defense costs has the same scope as the duty to defend; accordingly, it does not require the insurer to pay the costs of prosecuting a counterclaim on behalf of the insured.
Question three: Because of our responses to the other questions, we do not reach this question.”
Dissenting justices believed insurer’s duty to defend included bringing counterclaim
The Chief Judge of the SJC and another justice dissented from the majority’s decision.
These two justices, in their dissenting opinion, read the language of the insurance policy, an insurer’s “duty to defend any claim” means the duty to defend the insured in “any proceeding initiated against any insured . . . seeking to hold such insured responsible for a Wrongful Act” as creating a broader contractual obligation than the majority’s opinion found.
These justices found that:
- where the insured’s defense is intertwined with a compulsory counterclaim,
- where any reasonable attorney defending that proceeding would bring such a compulsory counterclaim; and
- where the insured agrees that any damages awarded to the insured on that counterclaim will offset any award of damages against the insured that the insurer must indemnify
then the insurer cannot reasonably fulfill its duty to defend the insured in the proceeding without also prosecuting such counterclaims because it would be impractical and deleterious to an effective defense to fail to do so.
The two dissenting justices noted that VisionAid, through the insurer’s appointed attorney, filed an answer pleading as a defense the suspected misappropriation by Mr. Sullivan and that VisionAid’s affirmative claim for misappropriation of funds was a compulsory counterclaim that VisionAid must either timely bring or waive.
These justices opined no reasonable attorney representing a defendant in this proceeding under these circumstances would fail to file VisionAid’s compulsory counterclaim and that prosecuting such a counterclaim would be entirely consistent with VisionAid’s defense against Mr. Sullivan’s claim.
The Chief Justice writing the dissenting opinion stated:
I take a broader view of the duty to defend because I focus on what it means to defend a proceeding, which is the duty the insurer agreed to assume in the insurance contract. Because the duty to defend a “claim” under the contract means to defend the insured in any proceeding where a wrongful act is alleged, not simply to defend the insured against the causes of action alleging wrongful acts, the broader view of the duty to defend includes the duty to prosecute compulsory counterclaims that are intertwined with the insured’s defense. This broader view is consonant with what any reasonable attorney representing the insured would do to defend a proceeding; the narrower view [of the majority] is not.”
The Chief Justice ended his opinion stating, “Because I would interpret the insurer’s duty under the insurance policy to defend the insured in ‘any proceeding initiated against any insured’ to include a duty to prosecute VisionAid’s compulsory counterclaim for misappropriation of funds, I respectfully dissent.”
The exact questions the First Circuit asked the SJC to answer
The three questions the First Circuit certified to the SJC in the VisionAid case were:
- 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]”?
- 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”?
- 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)?