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(Article from Insurance Law Alert, July/August 2017)

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The Massachusetts Supreme Judicial Court ruled that an insurer is not obligated under the duty to defend to fund the prosecution of an insured’s affirmative counterclaims in the underlying suit.  Mount Vernon Fire Ins. Co. v. Visionaid, Inc., 477 Mass. 343 (2017).

Visionaid tendered to Mount Vernon a wrongful termination suit filed by a former employee.  Mount Vernon defended under a reservation of rights, but refused to pay to prosecute a counterclaim against the former employee for misappropriation of funds.   In ensuing litigation, a Massachusetts federal district court ruled that Mount Vernon’s duty to defend did not require it to fund the prosecution of the counterclaim.  The district court further held that the absence of such a duty did not create a conflict of interest with Visionaid such that Mount Vernon was required to pay the costs of independent counsel.  The First Circuit concluded that the appeal raised unresolved issues under Massachusetts law and therefore certified questions to the Massachusetts Supreme Judicial Court as to an insurer’s duty to fund affirmative counterclaims.

The court ruled that an insurer’s contractual duty to defend does not obligate it to prosecute affirmative counterclaims on the insured’s behalf.  In so ruling, the court relied on the plain meaning of “defend,” rejecting Visionaid’s argument that it should be understood to include anything that reduces the liability of the insured.  The court also dismissed the notion that an insurer may be obligated to pursue a counterclaim when it is “intertwined” with the defense, stating:  “Not only is this proposition found nowhere in the language of the contract, it would result in extensive preliminary litigation to determine what claims are sufficiently intertwined.”  

The court further held that such an obligation does not arise under the common law “in for one, in for all” doctrine, which requires an insurer to defend all claims in a suit if some are potentially covered by the policy.