We’ve all had this situation. An insurer is defending an insured. The insured believes that it has a counterclaim against the plaintiff. Defense counsel files the counterclaim or the insured hires separate counsel, to work with the insurer-appointed counsel, to file the counterclaim. However, the insurer does not wish to pay the legal fees associated with the counterclaim. After all, the counterclaim is not a suit filed against the insured. And a claim filed against the insured is what the duty to defend is all about. It often gets worked out. Sometimes the insured agrees to pay for the prosecution of the counterclaim. Sometimes the insurer pays it because it ultimately benefits the defense of the insured. But it does not always get worked out. In Mount Vernon Fire Insurance Co. v. Visionaid, Inc., No. 13-12154 (D. Mass. Mar. 10, 2015) it didn’t. So off to court everyone marched.

In very brief terms, VisionAid, a manufacturer of eye wash, terminated its Vice President of Operations. The employee filed suit against VisionAid alleging wrongful termination. Mt. Vernon undertook VisionAide’s defense under an employment practices policy. VisionAid sought to file a counterclaim against the employee for misappropriation of funds. Mt. Vernon withdrew its reservation of rights and informed VisionAid that it would not fund the counterclaim for two reasons: “[I]t was beyond its obligations under the Policy and appointed counsel was fully capable of exercising independent judgment while defending VisionAid.” VisionAid’s answer was filed by appointed counsel, who worked with VisionAid’s personal counsel, who filed the counterclaim.

The court, following a lengthy analysis, held that Mt. Vernon was not obligated to fund VisionAid’s counterclaim. Of note, the policy at issue defined “claim” as a proceeding initiated against VisionAid. While the “initiated against” language played a part in the court’s decision, it does not appear that it dictated the result.

What makes the VisionAid opinion useful is that the court addressed, one by one, so many of the very arguments that are often raised by insureds when seeking to have a counterclaim funded as part of a defense being provided to it by an insurer.

The Broad Duty To Defend Obligates The Insurer To Fund The Counterclaim

While insurers have a duty to defend a complaint in its entirety, including non-covered claims, Massachusetts’s so-called “in for one, in for all” rule only imposes a broad duty to defend and “is simply not implicated when an insured seeks affirmative relief.”

The Counterclaim Is An Aid To The Defense Of The Insured

Insureds often argued that insurers should fund a counterclaim because it could defeat or otherwise offset liability, i.e., the counterclaim is “inextricably intertwined with the defense.” This is also part of the argument that the best defense is an offense.

The court rejected this argument as a basis for requiring that Mt. Vernon fund VisionAid’s counterclaim: “VisionAid’s misappropriation counterclaim against Sullivan is not necessary to defeat his age discrimination claim. That is because appointed counsel for VisionAid need only present evidence of a ‘legitimate, nondiscriminatory reason for terminating’ Sullivan.” Further, in rejecting the inextricably intertwined argument, the court stated: “[T]he misappropriation counterclaim does not automatically offset VisionAid’s potential liability. Were VisionAid to prevail on its counterclaim and recoup misappropriated funds from Sullivan, Mount Vernon would not be entitled to such funds to offset its liability if Sullivan simultaneously prevails on his age discrimination claim.”

The Counterclaim Creates A Conflict For The Insurer’s Retained Counsel

The court rejected VisionAid’s argument that appointed counsel has an incentive to “devaluing or impairing the counterclaim to the point that would remove it as an obstacle to settling with [the employee].” The court stated: “Mount Vernon and appointed counsel do not have an interest in devaluing the counterclaim. The strength of VisionAid’s counterclaim both weakens the wrongful termination case against VisionAid and increases appointed counsel’s bargaining power in settlement negotiations. Devaluing the counterclaim would undermine Mount Vernon’s own interest in limiting Sullivan’s recovery for wrongful termination.”

Requiring Separate Counsel To Pursue The Counterclaim Would Make The Defense Unwieldy

Insureds often argue that insurers should fund a counterclaim, as part of the defense already being provided, because too many cooks in the courtroom can make a defense unwieldy. The court dismissed this: “[U]nlike the prospect of limiting the defense of an insured to particular claims, there is nothing inherently impractical or unwieldy about VisionAid relying on its own separate counsel to assert the counterclaim. In its answer to the state court complaint, appointed counsel drafted the answer and VisionAid’s own counsel drafted the counterclaim. That indicates an ability of separate attorneys to collaborate and yet accomplish their distinct objectives. The Court declines to acknowledge VisionAid’s parade of horribles with respect to divided representation.”