At first blush this seems simple: “defend” does not mean “prosecute.” But there is a split among jurisdictions as to whether the insurer’s duty to defend includes the duty to pursue a counterclaim that is factually intertwined with the defense, or may result in an affirmative recovery that would offset any liability. Massachusetts, in a divided decision by the Supreme Judicial Court, has decided that “defend” means only defend, and does not encompass any obligation by the insurer to pursue a counterclaim.
The case arose in an employment context and involved employment practices liability insurance. The insured terminated an employee based on a determination that he had misappropriated "several hundred thousand dollars” from the company. He then brought a claim for wrongful termination based on age discrimination. The carrier appointed panel counsel, under a reservation of rights (wrongful termination, if proven, would not be covered under the policy).
Insured and insurer disputed the scope of panel counsel’s appointment vis-à-vis any affirmative claim, and the insurer then filed a declaratory judgment action to seek a court decision that it had no obligation to either pursue, or pay legal fees for pursuit of, the counterclaim. A federal district court judge ruled in favor of the insurer. The First Circuit Court of Appeal, noting that the state courts had not ruled on this issue, then certified questions to the Massachusetts SJC. In short:
1. Does a duty to defend encompass a duty to prosecute the insured’s counterclaim?
2. Does the duty to pay defense costs encompass costs of prosecuting a counterclaim?
The SJC majority held that the word “defend,” although not defined in the insurance policy, is not ambiguous and should be given its ordinary meaning. The policy called upon the carrier to respond to claims, and not to initiate them. And without any ambiguity, it ruled, the courts should not consider social policy arguments.
Even the “in for one, in for all” rule – which requires an insurer to cover defense even when only a portion of the claims may be covered by insurance – does not, per the majority, expand the duty to the point of prosecuting claims:
While the "in for one, in for all" rule did expand the class of actions that an insurer is obligated to defend, it did not change the meaning of the word "defend." We are persuaded that the better course under the "in for one, in for all" rule is to require an insurer to defend claims brought against its insured, but not to require an insurer to assert affirmative claims on behalf of that insured.
Based on that position, the SJC majority held that “defend” means only defend, and not prosecute, and the duty to fund the defense does not encompass a duty to fund prosecution of a counterclaim.
Two justices dissented, and the dissent is captured in the following sentence:
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.
Both majority and dissent cite cases in various jurisdictions going each direction. Interestingly, both majority and dissent cite to secondary sources to support a claim that their respective positions are the majority or prevailing rule in the U.S. Whatever the true majority rule may be – if there is, indeed, a prevailing rule – Massachusetts is now on the side of insurance defense including only defense, and not pursuit of affirmative claims.
The case is Mount Vernon Fire Insurance Company v. Visionaid, Inc., SJC-12142 (June 22, 2017).