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June 23, 2017

Legal Update
Kenneth N. Thayer

SJC rules that liability insurer need not fund litigation of policyholder’s counterclaims

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In a ruling with broad consequences for liability-insurance carriers and policyholders in Massachusetts, the Supreme Judicial Court has held that an insurer’s duty to “defend” a policyholder against claims does not require the insurer to fund the prosecution of counterclaims. This decision, in Mount Vernon Fire Ins. Co. v. Visionaid, Inc., confirms the limited scope of an insurer’s duty to defend in Massachusetts, both as a matter of the plain meaning of typical policy language, and for practical reasons in the administration of liability insurance.

The case began when Visionaid discovered that one of its employees appeared to have misappropriated several hundred thousand dollars of company funds, and fired the employee. The employee brought a wrongful-termination suit against the company, claiming that he had been fired because of his age. Visionaid sought coverage from Mount Vernon under its employment practices liability insurance policy. Mount Vernon agreed to defend Visionaid and appointed counsel to do so.

In the lawsuit, Visionaid asserted that it had several non-discriminatory reasons for firing the employee, including the suspected misappropriation. Visionaid also expressed a desire to assert a counterclaim against the employee for the misappropriated funds. But Mount Vernon refused to authorize its appointed defense counsel to prosecute the counterclaim, arguing that Visionaid’s policy entitled it only to a defense against the employee’s claims. Mount Vernon filed a federal lawsuit seeking a declaratory judgment that its position was correct. A district court judge agreed, and when the case went to the First Circuit, the court recognized the issue as novel under Massachusetts law, and certified it to the SJC for answer.

In a June 22, 2017 decision, the SJC agreed with Mount Vernon that Massachusetts law and Visionaid’s policy only required Mount Vernon to defend Visionaid against claims, and this did not implicitly include a duty to prosecute affirmative counterclaims. The court interpreted the key policy term “defend” to mean only “work to defeat a claim that could create liability,” and not to entail additional actions even where they might be in the policyholder’s interests, and even where they might be actions a reasonable defense attorney would take to help limit his client’s exposure.

The court also rejected Visionaid’s argument that coverage for counterclaims was required under the principle of “in for one, in for all”—that is, the rule that if a lawsuit against a policyholder includes at least one covered claim, the insurer must provide a defense not only as to that claim but as to the entire lawsuit. In dealing with this argument and the meaning of the term “defend,” the court gave thoughtful consideration not only to the insurance policy itself, but also to the implications on the functioning of the liability-insurance system if insurers were obliged to fund counterclaims.