Duty to defend doesn’t extend to counterclaim

An employer’s liability insurer had no obligation to prosecute a counterclaim the employer brought against an ex-employee who had charged it with age discrimination, a U.S. District Court judge has ruled.

The employer argued that the counterclaim — in which it alleged that the employee had misappropriated corporate funds — was a critical element of its defense in the age discrimination case and was therefore encompassed in the insurer’s duty to defend.

Additionally, the employer contended, its insurer had an obligation to pursue any counterclaim that could defeat or offset liability in the underlying discrimination claim.

But Judge Nathaniel M. Gorton said he agreed with the majority of state and federal courts that considered the issue and determined that an insurer “ought not to bear any obligation to prosecute affirmative counterclaims asserted by the insured.”

Such a holding finds support in the language of the policy, which provides coverage only for claims first made against the employer, Gorton said.

Forcing the insurer to fund the employer’s affirmative counterclaims seeking monetary damages for the alleged misappropriation by the former employee would fundamentally rewrite the policy, he added, granting the insurer’s motion for summary judgment.

The 17-page decision is Mount Vernon Fire Insurance Company v. VisionAid, Inc., Lawyers Weekly No. 02-115-15. The full text of the ruling can be found by clicking here.

Narrow duty to defend

Peabody & Arnold lawyers Scarlett M. Rajbanshi and James J. Duane III represented the insurer, Mount Vernon Fire Insurance Co.

To require their client to fund the prosecution of policyholder VisionAid’s counterclaim would essentially re-write the policy, Rajbanshi said.

“The policy Mount Vernon issued provides coverage only with regard to claims asserted against VisionAid. It does not require Mount Vernon to fund affirmative claims brought by VisionAid,” she said.

Boston attorneys Kenneth R. Berman and Heather B. Repicky, both of Nutter, McClennen & Fish, represented the employer, VisionAid. Neither could be reached for comment.

But while calling the decision correct as a matter of policy interpretation, Andrew F. Caplan, an insurance-coverage lawyer with offices in Boston and Swampscott, said the case also illustrates what may be an overly narrow duty to defend as offered in the marketplace.

“The value proposition is eroded because insurers fund only the defense of a lawsuit, while requiring the policyholder to hire and pay a different lawyer to handle counterclaims,” he said.

Such a narrow approach to an insurer’s duty to defend can hurt a policyholder by complicating the management of a lawsuit while ignoring the reality that the best defense is often a good offense, Caplan said. “No litigant would choose to hire two different sets of lawyers to handle different parts of the same suit.”

Michael D. Riseberg of Adler, Pollock & Sheehan in Boston said while Mount Vernon may be the first time the issue has been addressed under Massachusetts law, few insurance lawyers would be surprised by the result.

“The fact that the prosecution of an insured’s affirmative claim may create some tactical or legal advantage to the defense of the covered claim [as it might in this case] would generally not bring it within the duty to defend,” he said.

Riseberg said Mount Vernon is somewhat unusual in that the counterclaim, rather than the primary claim, fell outside coverage. It is more common to see an insured bring, for instance, a collection claim against a former customer or client and then be hit with a counterclaim for faulty workmanship or malpractice, which would be covered under the insured’s liability policy.

Most attorneys and insureds recognize that the insurer will fund only the defense of the counterclaim and not the prosecution of the primary claim, he said.

“There is no reason this conclusion should be otherwise when the counterclaim falls outside coverage,” Riseberg added.

Competing claims

Plaintiff Mount Vernon Fire Insurance Co. provided employment practices liability insurance to defendant VisionAid, Inc., a manufacturer of eyewash and lens cleaning products.

The policy stated that Mount Vernon would pay for covered losses on claims made against VisionAid.

Additionally, the policy affirmatively obligated Mount Vernon to defend VisionAid if any employment practices claim should be asserted against it and defined defense costs as “reasonable and necessary legal fees and expenses” resulting from “defense … of a claim.”

The policy further defined a “claim” as a proceeding “initiated against” VisionAid under which a party sought to hold it liable for an alleged wrongful act.

In October 2011, VisionAid fired its vice president of operations, Gary Sullivan.

Two months later, Sullivan filed an age discrimination claim against VisionAid with the Massachusetts Commission Against Discrimination.

Mount Vernon appointed counsel to represent VisionAid in that action, which Sullivan dismissed in February 2013 before filing a discrimination claim against VisionAid in Superior Court.

While the MCAD claim was pending, counsel whom Mount Vernon had appointed filed pleadings that denied any discrimination and asserted several nondiscriminatory reasons for Sullivan’s firing, including his alleged misappropriation of corporate funds. VisionAid apparently learned of the alleged misappropriations from a forensic accounting report it received a month before Sullivan’s termination.

At the outset of the Superior Court action, VisionAid requested that Mount Vernon prosecute a counterclaim against Sullivan for misappropriation of funds.

The insurer denied the request, stating that it did not fall within the policy.

VisionAid, however, insisted that the counterclaim was a critical element of its defense against Sullivan and thus fell within the insurer’s duty to defend. The policyholder also asserted that appointed counsel had a conflict of interest to the extent that VisionAid’s counterclaim would pose an obstacle to settling the age discrimination claim.

The dispute impeded settlement of the state-court case, which is still pending, and led Mount Vernon in August 2013 to file an action in U.S. District Court seeking a declaratory judgment as to its obligation, if any, to prosecute the counterclaim.

The parties subsequently filed cross-motions for summary judgment.

No obligation to prosecute

Gorton rejected VisionAid’s contention that both the insurer’s duty to defend and the “in for one, in for all” rule — under which a liability insurer must defend a policyholder against both covered and uncovered claims that are part of the same lawsuit — obligated Mount Vernon to fund its misappropriation counterclaim.

“[E]xcluding the obligation to pursue an insured’s counterclaims from an insurer’s duty to defend does not run afoul of the ‘in for one, in for all’ rule prevalent in Massachusetts,” the judge said. “That rule only imposes a broad requirement to defend any and all claims asserted against an insured, not just those covered by the policy. It is simply not implicated when the insured seeks affirmative relief.”

Gorton was similarly unpersuaded by VisionAid’s argument that an insurer must pursue a counterclaim that could defeat or otherwise offset liability, or that is necessary to the defense as a strategic matter.

First, the judge observed, VisionAid’s misappropriation counterclaim against Sullivan was not necessary to defeat his age discrimination claim. In order to defeat that claim, VisionAid merely needed to show it knew of Sullivan’s alleged misappropriation before it fired him.

“Appointed counsel need not establish each of the elements of a misappropriation claim to negate Sullivan’s discrimination claim,” Gorton wrote.

Meanwhile, a jury could find that Sullivan was wrongfully terminated based on his age even if it was established that he did, in fact, misappropriate corporate funds, the judge said.

“Thus, it can hardly be said that the affirmative relief sought in VisionAid’s counterclaim is ‘inextricably intertwined’ with a complete defense to claims asserted against it,” he said.

Accordingly, Gorton concluded that Mount Vernon had no obligation to prosecute VisionAid’s counterclaim.

CASE: Mount Vernon Fire Insurance Company v. VisionAid, Inc.

COURT: U.S. District Court

ISSUE: Was an employer’s liability insurer obligated to prosecute a counterclaim the employer had brought against an ex-employee who had charged it with age discrimination?

DECISION: No