The First Circuit Court of Appeals certified questions to the Massachusetts Supreme Judicial Court (SJC) on whether the insurer's duty to defend required paying for the insured's pursuit of counterclaims. Mount Vernon Fire Ins. Co. v. VisionAid, Inc., 2016 U.S. App. LEXIS 10464 (1st Cir. June 9, 2016).
VisionAid fired its Vice President of Operations, Gary Sullivan. A year later, Sullivan filed a claim with the Massachusetts Commission Against Discrimination (MCAD), alleging that VisionAid had terminated him because of age. Mt. Vernon, VisionAid's employment practices liability carrier, appointed counsel to defend VisionAid. The claim was defended on the basis that Sullivan's performance was sub-par and he had misappropriated company funds. Although Sullivan initially demanded $400,000, he eventually agree to walk away with no money if VisionAid would sign a mutual release. VisionAid did not agree because it wanted to pursue Sullivan for money he had allegedly stolen. Sullivan then voluntarily dismissed his MCAD complaint.
A few months later, Sullivan filed an age discrimination complaint against VisionAid. Mt. Vernon continued to defend under a reservation of rights. VisionAid informed Mt. Vernon it wanted to pursue a counterclaim against Sullivan and asked Mt. Vernon to pay for counsel to do so. Mr. Vernon responded that the policy was strictly for defense and it was not required to pay for the prosecution of counterclaims. Mt. Vernon advised VisionAid it could hire and pay for its own lawyer to pursue the counterclaim.
Mt. Vernon then filed suit for a declaratory judgment seeking a determination on whether it was required to pay for the prosecution of VisionAid's proposed counterclaim. The parties cross-moved for summary judgment. The district court granted Mt. Vernon's motion and denied the motion filed by VisionAid.
On appeal, VisionAid argued that while "Defense Costs" as "fees and expenses incurred by [Mt. Vernon]. . . to defend [VisionAid]," the policy did not elaborate on what was included in such a defense. Mt. Vernon responded that the term "Defense Costs" was not ambiguous and was specifically limited to expenses resulting from the defense of a claim as defined by the policy.
Because Massachusetts courts had not weighed in on whether an insurer's duty to defend included affirmative claims by the insured and what the scope of that duty might be, the First Circuit certified questions to the Massachusetts SJC as follows:
1) Does an insurer owe a duty to prosecute an insured's counterclaim(s) for damages, where the policy provides that the insurer has a "duty to defend any Claim"?
2) Does an insurer owe a duty to fund the prosecution of the insured's counterclaim(s) for damages, where the policy requires the insurer to cover "Defense Costs"?
3) Assuming the existence of a duty to prosecute the insured's counterclaim(s), if the insurer has an interest in devaluing or otherwise impairing such counterclaim(s), does a conflict of interest arise that entitled 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 counterclaim(s)?