First Circuit certifies to SJC question of whether insurer must pay attorney's fees for insured's counterclaim

This case may signal a significant development in insurance coverage law -- so significant that it almost overshadows the overwhelming chutzpah of the underlying plaintiff.  (But, as they say, innocent until etc.)  (The traditional definition of chutzpah:  A man kills his parents, then throws himself on the mercy of the court because he is an orphan.) 

In Mount Vernon Fire Ins. Co. v. VisionAid, Inc., __ F.3d __, 2016 WL 3202961 (1st Cir.), the United States Court of Appeals for the First Circuit certified to the Supreme Judicial Court of Massachusetts the question of whether an insurer is required to litigate a counterclaim on behalf of an insured. 

Gary Sullivan sued his former employer, VisionAid, alleging that his termination was the product of illegal age discrimination. VisionAid's insurer, Mt. Vernon Fire Insurance Company, is defending VisionAid.

VisionAid asserts as a defense that it fired Sullivan because he misappropriated several hundred thousand dollars of corporate funds.  No real reason to italicize that, except:  He stole several hundred thousand dollars of corporate funds and then sued his employer for discrimination.  

Sullivan filed his age discrimination claim with the Massachusetts Commission Against Discrimination.  He initially demanded $400,000 to settle his claim.  He repeatedly reduced his demand until he was asking $5,000, before he eventually offered to walk away with no money at all if VisionAid would agree to sign a mutual release.  VisionAid refused to consent to a mutual release as it wanted to go after Sullivan for the allegedly stolen money. 

Sullivan voluntarily dismissed his MCAD claim.  A few months later he filed his claim for age discrimination and other causes of action in Massachusetts state court.  Mt. Vernon agreed to defend VisionAid "unless and until such time that it is determined that there is no coverage under the policy." 

VisionAid responded that it would exercise its right to choose its own attorney.  (When an insurer defends under a reservation of its right to later deny coverage, the insured can choose its own attorney.  That attorney is paid by the insurer.)  Mt. Vernon withdrew its reservation of rights and , because of this, indicated that the counsel it appointed would remain VisionAid's defense counsel.  It stated that it was not required to pay for the prosecution of VisionAid's counterclaim against Sullivan.  Mt. Vernon told VisionAid to hire (and pay for) its own lawyer if it wished to pursue the counterclaim.

Mt. Vernon then filed a suit for declaratory judgment seeking a decision on whether it was required to pay for the prosecution of VisionAid's proposed misappropriation counterclaim.  VisionAid counterclaimed that Mt. Vernon's duty to defend against Sullivan's lawsuit included the duty to prosecute the misappropriation counterclaim, and that VisionAid had the right to be represented by independent counsel for the entire Sullivan action at Mt. Vernon's expense.  VisionAid's theory was that the interests of it and Mt. Vernon were no longer aligned because Mt. Vernon had an interest in diminishing the value of the counterclaim or eliminating it because it was an impediment to settlement. 

The First Circuit certified to the SJC the following questions:

1.   Whether, and under what circumstances, an insurer may owe a duty to its insured to prosecute through insurance defense counsel the insured's counterclaims for damages where the insurance policy provides that the insurer has a "duty to defend any claim," i.e. "any proceeding initiated against the insured."

2.  Whether, and under what circumstances, an insurer may owe a duty to its insured to fund through insurance defense counsel the prosecution of the insured's counterclaims for damages, where the insurance contract requires the insurer to cover "defense costs" or the "reasonable and necessary legal fees and expenses incurred by [the insurer], or by any attorney designated by [the insurer] to defend [the insured], resulting from the investigation, adjustment, defense and appeal of a claim."

3.  Assuming the existence of a duty to prosecute the insured's counterclaims, in the event it is determined that an insurer has an interest in devaluing or otherwise impairing such counterclaim, does a conflict of interest arise that entitles the insured to control and/or appoint independent counsel to control the entire proceeding, including both the defense of any covered claims and the prosecution of the subject counterclaims?

Captive insurers

The American Bar Association has published a fascinating article on captive insurers and how some of them are used as vehicles for tax abuse.   

Massachusetts Appeals Court holds insurer did not breach settlement duty where trial verdict resulted in excess judgment

Elsa Villanueva was injured when she was struck by a car owned and operated by Valerie Troiano.  Troiano was insured by Commerce. 


Commerce determined that Villanueva was more than fifty percent at fault in the accident (and therefore under the Massachusetts comparative negligence law Troiano was not liable) because she had stepped out from between two parked cars into a traffic lane, not into a crosswalk, on a dark, rainy morning, wearing dark clothing.  It offered $5,000 to settle the claim.


Troiano was not cited for the accident.  Villanueva, who had no memory of the accident, sued Troiano.


Shortly before trial, after several attempts Commerce was able to obtain a statement from Manuel Martinez, the only witness to the accident.  He told the Commerce investigator that Troiano was driving too fast and left fhe scene of the accident.  He also stated that he could not identify the gender of the driver because it was at night and still dark.  Commerce's investigator indicated that Martinez was a friend of Villanueva. 


Also shortly before trial Commerce received a medical report indicating that Villanueva had a permanent injury from the accident.  Villanueva rejected Commerce's offer of a high-low arbitration with a low of $5,000 and a high of $100,000. 


After Martinez appeared for a deposition Commerce offered the policy limit of $100,000.  Villanueva rejected that offer as well.


At trial, the jury awarded $414,500 to Villanueva.  It determined that Villanueva's comparative negligence was thirty-five percent in the accident.  Commerce immediately paid the policy limit of $100,000.


Villanueva then sued Commerce for unfair claims settlement practices.  After trial the judge granted Commerce judgment as a matter of law on the grounds that Villanueva did not present any expert testimony that Commerce breached its statutory duty, and that, on the facts and the law as presented at trial a reasonable fact finder could not find that Commerce had breached its statutory duty. 


On appeal, Villanueva argued that as soon as Commerce learned that Martinez faulted Troiano for the accident liability was reasonably clear and Commerce was required to make a reasonable offer of settlement.  Commerce's initial offer of $5,000 was unreasonable.  Villanueva also argued that the Commerce's subsequent pretrial offer of the $100,000 policy limit demonstrated that it knew that liability exceeded the policy limit and that its prior $5,000 was unreasonable. 


In Villanueva v. Commerce Ins. Co., 89 Mass. App. Ct. 1124 (2016) (unpublished), the Massachusetts Appeals Court affirmed the dismissal of the case against Commerce.  It held that Commerce's belief that Troiano would win on the merits of the underlying claim because Villanueva was more than fifty percent at fault was reasonable. 


Villanueva argued that the fact that Commerce set a reserve at $100,000 showed that it knew that the case should settle for that amount.  The judge disagreed, noting testimony by a witness for Commerce that the reserve represents a worst-case scenario for the insurer and is based only on a damages assessment without taking liability defenses into account. 


The court also held that the amount of the jury award in the underlying claim did not compel a finding that Commerce acted unreasonably. 


The court also affirmed the holding of the trial court that expert testimony was required to establish that Commerce breached its duty.   It held that although expert testimony may not be required in every case asserting a breach of duty to settle claims, it was needed in the present case.