What do the courts say about an insurer’s obligation to prosecute compulsory counterclaims on behalf of their insured? As you might expect, it depends upon the policy language and the jurisdiction.
Recently, the Supreme Judicial Court of Massachusetts held in Mount Vernon Fire Ins. Co. v. Visionaid, Inc., 76 N.E. 3d 204 (Mass. 2017) that when an insurer agrees in a policy that it has a duty to defend any claim against the insured, that duty does not extend to the insured’s compulsory counterclaims. In Visionaid, a former employee of the company brought an age discrimination and other contractual claims against Visionaid after he was terminated for, among other things, suspected misappropriation of company funds.
In reaching the conclusion that the “duty to defend” did not include prosecuting compulsory counterclaims, the Massachusetts Supreme Judicial Court concluded that the terms of the policy were clear and unambiguous. Specifically, Visionaid’s policy provided that Mount Vernon had the “right and duty to defend any Claim to which the insurance applies”; that it was obligated to “pay one hundred percent (100%) of the Defense Costs for the covered Claim” up to the policy limit; that “Claim” was defined as “any proceeding initiated against the insured seeking to hold it responsible for a Wrongful Act”; and “Defense Costs” was defined as “reasonable and necessary legal fees and expenses incurred by the insurer, or by any attorney designated by the insurer to defend the insured.” Id. at 206. In addition, since the term “defend” was not defined in the policy, the Court applied the dictionary definition of the term “to deny or oppose the right of a plaintiff in …a suit or wronged charge,” concluded that this definition was clear, and refused to deviate from its purported clear meaning. Id. at 208.
The Massachusetts Supreme Judicial Court also rejected Visionaid’s argument to extend the “in for one, in for all” rule to compulsory counterclaims. This rule provides that an insurer’s duty to defend is not limited to defending that specific causes of action covered the insurance policy, but rather encompasses the duty to defend against all the causes of action in the proceeding. Id. at 214. The rationale for such a rule is it would be impractical for an insurer to appoint counsel to defend covered claims and require the insured to hire another attorney to defend those claims that are not covered. Visionaid argued that the “in for one, in for all” rule should be extended to include compulsory counterclaims because it would be similarly impractical for an insurer to appoint counsel to defend covered claims and, at the same time, require the insured to hire another attorney to prosecute compulsory counterclaims that are intertwined with the insurer’s defense of the claims against it. Id. at 211. While Visionaid’s argument seemed logical, the Court rejected this policy argument because it deemed the terms of the policy to be clear and unambiguous.
As pointed out in the Visionaid decisions, however, courts in some jurisdictions have concluded that the meaning of the word “defend” in an insurance contract is ambiguous. Visionaid at 211. As a result, some courts have interpreted the duty to “defend” to require an insurer to prosecute compulsory counterclaims on behalf of its insured. Id.
There are a number of takeaways from the Visionaid decision: 1) courts in some jurisdictions, such as Massachusetts, are going to look to the terms of the policy and if the policy clearly and ambiguously addresses a duty to defend claims, then that duty will not be expanded to require the prosecution of compulsory counterclaims; 2) courts in other jurisdictions have a more expansive view of the term “defend” and require insurers to prosecute compulsory counterclaims on behalf of their insured; and 3) if an insured wants its insurer to prosecute and fund the prosecution of compulsory counterclaims on behalf of its insured, then this should be negotiated up front so it can be considered as part of the underwriting process and not be left up to the courts.