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Mount Vernon Fire Insurance Co. v. Visionaid, Inc.

Supreme Judicial Court of Massachusetts, Suffolk

June 22, 2017

MOUNT VERNON FIRE INSURANCE COMPANY
v.
VISIONAID, INC.[1]

          Heard: December 5, 2016.

          Kenneth R. Berman (Heather B. Repicky also present) for the defendant.

          James J. Duane, III (Scarlett M. Rajbanshi also present) for the plaintiff.

         The following submitted briefs for amici curiae:

          Marshall Gilinsky for United Policyholders.

          Laura Foggan, of the District of Columbia, & Rosanna Sattler for American Insurance Association & others.

          Michael F. Aylward for American International Group, Inc., & another.

          Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, Budd, & Cypher, JJ.

          GAZIANO, J.

         In this case we are called upon to answer three certified questions from the United States Court of Appeals for the First Circuit involving the scope of an insurer's duty to defend, and whether that duty extends to a counterclaim brought by the insured. For the reasons that follow, we conclude that where an insurance policy provides that the insurer has the "duty to defend any claim" initiated against the insured, the insurer's duty to defend does not require it to prosecute affirmative counterclaims on behalf of its insured.[2]

         1. Facts and prior proceedings.

         We recite the facts based on the United States District Court judge's memorandum of decision, the decision by the United States Court of Appeals for the First Circuit, and the undisputed documents in the record. Visionaid, Inc. (Visionaid), [3] is a manufacturer of lens cleaning and eye safety products. It purchased an employment practices liability insurance policy from Mount Vernon Fire Insurance Company (Mount Vernon), which covered, among other things, wrongful termination claims brought against Visionaid from May, 2011, through May, 2012.

         As relevant here, the policy imposed two duties on Mount Vernon with respect to any wrongful termination claim brought against Visionaid. The policy provided that Mount Vernon had "the right and duty to defend any Claim to which this insurance applies, " and that it was obligated to "pay one hundred percent (100%) of the Defense Costs for the [covered] Claim" up to the policy limit. Under the terms of the policy, "Claim" was defined as "any proceeding initiated against [Visionaid] . . . seeking to hold [Visionaid] responsible for a Wrongful Act." "Defense costs" was defined as "reasonable and necessary legal fees and expenses incurred by [Mount Vernon], or by any attorney designated by [Mount Vernon] to defend [Visionaid], resulting from the investigation, adjustment, defense, and appeal of a Claim."[4]

         In September, 2011, Visionaid discovered through a forensic audit that one of its employees, Gary Sullivan, appeared to have misappropriated several hundred thousand dollars of company funds. In October, 2011, Visionaid terminated Sullivan. In August, 2012, Sullivan commenced an action for wrongful termination before the Massachusetts Commission Against Discrimination (MCAD), asserting that Visionaid had terminated him due to his age. Pursuant to the insurance policy, Mount Vernon appointed panel attorney Todd Bennett to defend Visionaid.[5] Bennett filed an answer stating that Visionaid had had three nondiscriminatory reasons for terminating Sullivan's employment: his poor job performance, insubordination, and suspected misappropriation of company funds.

         Bennett then attempted to reach a settlement with Sullivan. Initially, Sullivan demanded $400, 000, but eventually agreed to dismiss his complaint if Visionaid signed a mutual release agreement that it would not pursue him for the misappropriated funds. Visionaid would not agree to the mutual release, as it intended to bring a claim against Sullivan for the misappropriation.

         In February, 2013, Sullivan filed a complaint in the Superior Court, and the MCAD action was dismissed. He asserted claims of age discrimination; unlawful termination, in violation of the covenant of good faith and fair dealing; breach of contract; and promissory estoppel. Mount Vernon again appointed Bennett to defend Visionaid, this time under a "reservation of rights, " in which Mount Vernon disputed whether Visionaid's insurance policy obligated Mount Vernon to defend against the wrongful termination claim.[6] Bennett filed an answer again asserting that Sullivan had been terminated as a result of poor job performance, insubordination, and misappropriation of Visionaid's funds. Bennett did not file a counterclaim for misappropriation.

         Visionaid informed Mount Vernon that if Bennett did not prosecute the counterclaim, it would exercise its rights pursuant to the reservation of rights, and select independent counsel for its representation, at Mount Vernon's expense. Mount Vernon then withdrew its reservation of rights, but continued to maintain that the policy did not require it to prosecute the counterclaim for misappropriation of funds, arguing that the duty to defend did not include the duty to prosecute an affirmative counterclaim.

         Mount Vernon filed a complaint for declaratory judgment in the United States District Court for the District of Massachusetts, seeking a ruling that its duty to Visionaid did not require that it prosecute or pay for the prosecution of the counterclaim for misappropriation of funds. Visionaid filed a counterclaim seeking a judgment declaring that Mount Vernon's duty to defend included an obligation to prosecute Visionaid's counterclaim for misappropriation of funds, and that Mount Vernon was required to appoint Visionaid independent counsel because Mount Vernon's position that it was not obligated to prosecute the counterclaim had created a conflict of interest with Visionaid.

         A United States District Court judge issued a judgment declaring that Mount Vernon's duty to defend Visionaid did not require it to prosecute the counterclaim for misappropriation of funds, and that the absence of such a duty did not create a conflict of interest with Visionaid, so that Mount Vernon was not required to pay the costs of independent counsel.

         Visionaid appealed to the United States Court of Appeals for the First Circuit. That court concluded that the appeal raised an issue of State law that had yet to be addressed by this court, and certified three questions to us.

         2. Discussion.

         The United States Court of Appeals for the First Circuit certified the following questions:

1. "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]'?"
2. "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'?"
3. "Assuming the existence of a duty to prosecute the insured's counterclaim(s), in the event that 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 ...

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