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?