Federal 1st Cir. / Policyholder Responsible for Litigating Counterclaim

Policyholder must hire and pay for counsel to assert counterclaim in case being defended by insurer.

The First Circuit, applying Massachusetts law, held that the presence of a counterclaim, which the insurer neither is required to prosecute nor pay for, does not create a conflict of interest entitling an insured to independent counsel.  Thus, the court found that the insured was required to hire its own independent counsel to represent it with regard to the prosecution of its counterclaim, while the insurer appointed attorney continued the defense of the insured.

Mount Vernon Fire Insurance Company (“Mount Vernon”) insured VisionAid, Inc. f/k/a H.L. Boulton Co. Inc. (“VisionAid”) under an employment-practices liability policy.  VisionAid was sued by Gary Sullivan in Massachusetts state court for alleged age-discrimination after VisionAid fired him.  An attorney hired by Mount Vernon, Todd Bennett, filed VisionAid’s answer, insisting that VisionAid had fired Sullivan because of poor work performance, insubordination, and embezzlement.  Sullivan offered to drop his age-discrimination claim if VisionAid agreed not to pursue its embezzlement claim.  VisionAid did not agree and instructed Bennett to not only raise Sullivan’s embezzlement as a defense, but it also requested that Bennett file a counterclaim asserting the embezzlement allegation.  Mount Vernon refused to allow Bennett to file the counterclaim because its policy was a defense-liability policy and it had no duty to fund a counterclaim.  Mount Vernon filed a federal action seeking a declaratory judgment regarding the defense obligations of its policy.  VisionAid filed a counterclaim seeking a declaration that Mount Vernon’s duty to defend included a duty to prosecute the embezzlement counterclaim.  VisionAid also sought a declaration that, because of a conflict of interest between Mount Vernon and VisionAid, VisionAid was entitled to select one attorney to represent it in the Sullivan suit for both the defense and prosecution of the counterclaim.

According to VisionAid, Mount Vernon had an interest in diminishing the value of VisionAid’s counterclaim because the counterclaim was allegedly impeding settlement.  The First Circuit disagreed with VisionAid and found that both Mount Vernon and VisionAid had interests in a strong counterclaim and found no disqualifying conflict.  Mount Vernon argued, and the First Circuit agreed, “‘the mere existence’ of the embezzlement ‘counterclaim, which Mount Vernon has no duty to prosecute, does not give rise to a conflict of interest between Mount Vernon and VisionAid that entitles VisionAid to independent counsel at Mount Vernon’s expense’ – to hold otherwise would mean that in all cases ‘in which an insured file[s] a counterclaim,’ a conflict would result ‘that would entitle the insured to have its personal counsel defend against the plaintiff’s claim.’” Mount Vernon Fire Ins. Co. v. VisionAid, Inc. f/k/a H.L. Boulton Co. Inc., No. 15-1352 (1st Cir. Nov. 15, 2017).