In Mount Vernon Fire Ins. Co. v. VisionAid, Inc., No. 15-1351P2-01A (1st Cir. Nov. 15, 2017), the First Circuit Court of Appeals ended long-running insurance coverage litigation arising from policyholder VisionAid, Inc.'s termination of a former vice president, Gary Sullivan. Sullivan sued his former employer, alleging age discrimination. VisionAid tendered the claim to its employment practices liability insurer, Mount Vernon Fire Insurance Company. Mount Vernon initially agreed to defend VisionAid, but under a reservation of rights. However, it later revoked that reservation, and agreed to fully defend and indemnify VisionAid.
Mount Vernon appointed defense counsel to defend the age discrimination claim. Defense counsel filed an answer and affirmative defenses, including that Sullivan was terminated for poor performance, insubordination, and embezzlement. In the course of the state court litigation, Sullivan agreed to drop his age discrimination claim, if VisionAid would drop its embezzlement defense. VisionAid declined the offer.
At this time, VisionAid instructed its defense counsel to file an embezzlement counterclaim against Sullivan, in addition to the affirmative defense alleging the same. However, Mount Vernon indicated it would not pay for defense counsel to prosecute an offensive counterclaim against Sullivan, as the policy only obligated Mount Vernon to provide VisionAid with a defense and indemnity against any claims against VisionAid, and nothing in the policy obligated Mount Vernon to pay for any claim VisionAid might wish to assert against Sullivan.
VisionAid disagreed, and retained its own personal counsel to prosecute the counterclaim. Mount Vernon, meanwhile, brought a declaratory judgment action in federal court, seeking a declaration that it had no obligation to pay for VisionAid's personal counsel's prosecution of the counterclaim. The federal court ruled in Mount Vernon's favor, finding that its duty to defend was limited to just that: defense of any claims against VisionAid.
VisionAid appealed. The First Circuit, recognizing that the appeal presented some novel questions under state law, certified certain questions to the Massachusetts Supreme Judicial Court, which ruled on those questions in its June decision. See Mount Vernon Fire Ins. Co. v. VisionAid, Inc., 477 Mass. 343; 76 N.E.3d 204 (2017) (holding that "an insurer with a contractual duty to defend an insured is not required to prosecute an affirmative counterclaim on...