Insurance co.'s duty to defend doesn't include counterclaim

Massachusetts Lawyers Weekly

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An employment practices liability policy that specified a duty to “defend any claim” did not require the insurance carrier to bear the cost of a compulsory counterclaim against a former employee who sued the insured for wrongful termination, the Supreme Judicial Court has ruled in a 5-2 decision.

The defendant policyholder, Visionaid, Inc., argued that the duty to defend under the language of the policy encompassed any steps a reasonable defense attorney would take to reduce the liability of the insured, including the litigation of a counterclaim “inextricably intertwined” with the underlying liability claim.

But the SJC disagreed. In answering certified questions from the 1st U.S. Circuit Court of Appeals, the SJC concluded that the plain meaning of the policy did not impose such an obligation on the plaintiff insurer, Mount Vernon Fire Insurance Co.

“Visionaid and Mount Vernon entered into a contractual agreement that Visionaid would pay a certain amount of money to insure against a particular risk,” Justice Frank M. Gaziano wrote for the majority. “The agreement in this case, memorialized in the written insurance policy, required Mount Vernon to ‘defend’ Visionaid in any claim ‘first made against (it] during the Policy Period,’ and no more. ”

Chief Justice Ralph D. Gants wrote a dissent joined by Justice Barbara A. Lenk. Gants criticized the majority for adopting a “narrow” view of the duty to defend, particularly given that the insurance policy at issue further obligated Mount Vernon to defend its insured in “any proceeding. ”

“Where the insured’s defense is intertwined with a compulsory counterclaim, where any reasonable attorney defending that proceeding would bring such a compulsory counterclaim, and where the insured agrees that any damages awarded to the insured on that counterclaim will offset any award of damages against the insured that the insurer is required to indemnify, I conclude that an insurer’s duty to defend the insured in ‘any proceeding’ includes the duty to prosecute such a compulsory counterclaim,” Gants wrote.

‘Bright-line rule’

The decision provides a “bright-line rule” rule as to an insurer’s duty with respect to counterclaims, according to Boston attorney Scarlett M. Rajbanshi, who with James J. Duane III represented the plaintiff insurance company.

“The majority correctly recognized the policy only provides coverage for claims asserted by third parties against Visionaid,” Rajbanshi said. “The policy was not written, priced, or intended to fund prosecution of affirmative claims by the insured. ”

Kenneth R. Berman of Boston was counsel for the defendant policyholder. Berman did not respond to a request for comment.

Marshall N. Gilinsky of New York City represented amicus United Policyholders, a consumer advocate representing the interests of insureds. Gilinsky said an insurance carrier’s duty to defend should encompass counterclaims when one looks at the underlying purpose of liability policies.

“At oral argument, the attorney for the insurance company conceded it would have been negligent for the defense attorney not to file the counterclaim,” Gilinsky said. “If you have to file a counterclaim, and it’s wrapped up in the defense of the claim against the policyholder, isn’t that part of what it means to ‘defend’?”

Gilinsky expressed concern that the SJC’s decision “drives a wedge” between the policyholder and its carrier.

“Actions that clearly advance the defense of the policyholder are now no longer the responsibility of the insurance company,” Gilinsky said.

To read the full article:  Insurance co. ’s duty to defend doesn’t include counterclaim

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