Insurer Not Obligated to Play Two Ways

In a recent case of first impression, the Massachusetts Supreme Judicial Court (SJC) answered certified questions presented by the United States Court of Appeals for the First Circuit. The questions focused on whether an insurer’s duty to defend (play defense) requires the insurer to pay for legal counsel to prosecute an affirmative counterclaim (play offense) on behalf of the insured. A divided SJC ruled that the insurer does not have to prosecute the insured’s counterclaim. The case is Mount Vernon Fire Insurance Company v. Visionaid, No. SJC-12142 (June 22, 2017).

Mount Vernon Fire Insurance Company insured Visionaid under an employment practices liability insurance policy, which covered, among other things, wrongful termination claims. 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’s employment. In February 2013, Sullivan filed suit against Visionaid for wrongful termination alleging, among other things, age discrimination. Mount Vernon provided defense and answered the complaint asserting that Sullivan’s employment had been terminated as a result of poor job performance, insubordination, and misappropriation of company funds. Visionaid wished to include a counterclaim for misappropriation but Mount Vernon maintained that its duty to defend did not require it to prosecute such counterclaim. Mount Vernon brought a declaratory judgment action seeking to uphold its interpretation of its obligations under the insurance policy.

The SJC, in a 5-2 decision, agreed with Mount Vernon and determined that the plain meaning of the insurance policy required only that Mount Vernon “defend” Visionaid against the claim brought by Sullivan, but did not require it to prosecute the affirmative counterclaim, no matter how advantageous that counterclaim would be for Visionaid. Although the policy did obligate Mount Vernon to pay “defense costs,” those costs were, by the terms of the policy, coextensive with the duty to defend and were not susceptible to the interpretation urged by Visionaid, namely, to include all the work a defense lawyer would typically do in the defense of a client, including prosecuting counterclaims that would defeat liability or diminish damages. Visionaid would have to pay for the costs of prosecuting its counterclaim as such costs were not covered by the policy.

The majority was not persuaded that the Massachusetts “in for one, in for all” rule would shift those costs to Mount Vernon. This rule requires that where an insurer is obligated to defend an insured on one of the counts alleged against it, the insurer must defend the insured on all counts, including those that are not covered. Although the majority recognized that this rule may expand the class of actions that an insurer is obligated to defend, it does not change the meaning of the word “defend.”

Parties to an insurance contract are free to provide expressly for an expanded duty to defend in the contract, however, Massachusetts courts will not impose this duty under the standard policy terms and it is unlikely that an individual insured will be able to obtain such favorable terms, at least without some increase in the standard premium.