Mount Vernon Fire Insurance Company v. Visionaid Inc.

Filing 68

Judge Nathaniel M. Gorton: ORDER entered denying 48 Motion for Attorney Fees; denying 49 Sealed Motion for Summary Judgment; granting 53 Sealed Motion for Summary Judgment (Danieli, Chris)

United States District Court
District of Massachusetts
MOUNT VERNON FIRE INSURANCE
COMPANY,
Plaintiff,
v.
VISIONAID, INC.,
Defendant.

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Civil Action No.
13-12154-NMG

MEMORANDUM & ORDER
GORTON, J.
Plaintiff Mount Vernon Fire Insurance Company (“Mount
Vernon”) seeks a declaratory judgment as to its obligation, if
any, to prosecute a counterclaim defendant VisionAid, Inc.
(“VisionAid”) has asserted against a former employee who sued
VisionAid for wrongful termination.

VisionAid responded with

its own claim for declaratory judgment to establish the scope of
Mount Vernon’s duty to defend and VisionAid’s right to appoint
independent counsel.
Pending before the Court are the parties’ cross-motions for
summary judgment and VisionAid’s motion for attorney’s fees.

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For the reasons that follow, the Court will allow Mount Vernon’s
motion for summary judgment and deny VisionAid’s cross-motion.1
I.

Background
A.

Underlying Insurance Policy

VisionAid is a manufacturer of eyewash and lens cleaning
products.

Mount Vernon provides VisionAid with employment

practices liability insurance.

Specifically, Mount Vernon

issued a liability policy (“the Policy”) to H.L. Bouton, Inc.,
the operating name of VisionAid until shortly after the issuance
of the policy that was in effect from May, 2011 through May,
2012.
The Policy provides, in relevant part, that Mount Vernon
will pay on behalf of [VisionAid], Loss ... for which
this coverage applies that [VisionAid] shall become
legally obligated to pay because of Claims first made
against [VisionAid].
It proceeds to describe Mount Vernon’s affirmative obligation to
defend VisionAid if any employment practices claim is asserted
against it and defines the “Defense Costs” which Mount Vernon
must pay as
reasonable and necessary legal fees and expenses
incurred by [Mount Vernon] or by any attorney
designated
by
[Mount
Vernon]
...
to
defend
[Visionaid], [that] result[s] from the ... defense ...
of a Claim.

1

Because the Court will deny VisionAid’s motion for summary
judgment, its pending motion for attorney’s fees will also be
denied.
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Finally, the Policy notes that a “Claim” encompasses a
proceeding “initiated against” VisionAid in which a party seeks
to hold it liable for a purported wrongful act.
Notably, the Policy includes no obligation of Mount Vernon
to assert, or pay for, affirmative claims on behalf of
VisionAid.
B.

Suit against VisionAid in State Court

In October, 2011, VisionAid terminated the employment of
its Vice President of Operations, Gary Sullivan (“Sullivan”).
In December, 2011, Sullivan brought suit against VisionAid in
the Massachusetts Commission Against Discrimination (“MCAD”),
alleging wrongful termination on the basis of age
discrimination.

After receiving notification of the MCAD suit,

Mount Vernon appointed counsel to represent VisionAid.

During

the pendency of that action, appointed counsel filed pleadings
which denied any discrimination against Sullivan and asserted
three non-discriminatory reasons for his termination, one of
which was that Sullivan had misappropriated corporate funds.
VisionAid’s alleged knowledge of the misappropriations emanated
from a September, 2011 forensic accounting report it received
which detailed a variety of dubious personal transactions made
by Sullivan with corporate funds.
Mount Vernon explains that VisionAid accepted its defense
in that matter for 18 months without objection.
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It contends

that because VisionAid knew of the misappropriation before
September, 2011, it could have elected to bring an affirmative
action against Sullivan to recoup the allegedly misappropriated
funds at any time after his termination but elected not to do
so.

VisionAid responds that, under the original MCAD claim,

there had been no need to allege the counterclaim for
misappropriation.

In February, 2013, Sullivan dismissed his

MCAD complaint and shortly thereafter filed suit in the
Massachusetts Superior Court for Plymouth County.
At the outset of the second state suit, VisionAid requested
that Mount Vernon prosecute a counterclaim for misappropriation
of funds against Sullivan.

In July, 2013, Mount Vernon withdrew

its reservation of rights and informed VisionAid that it would
not fund VisionAid’s counterclaim because 1) it was beyond its
obligations under the Policy and 2) appointed counsel was fully
capable of exercising independent judgment while defending
VisionAid.

Moreover, Mount Vernon has repeatedly advised

VisionAid that it is free to pursue its misappropriation
counterclaim against Sullivan at its own expense.2
VisionAid continues to maintain that the counterclaim is a
critical element of its defense against Sullivan and is
therefore encompassed in Mount Vernon’s duty to defend.
2

Ultimately, VisionAid’s answer in the state case was drafted by
appointed counsel and its counterclaim was drafted by
VisionAid’s personal counsel.
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VisionAid also asserts that its appointed counsel has a conflict
of interest to the extent that VisionAid’s counterclaim presents
an obstacle to settling the age discrimination claim with
Sullivan.
The parties’ disagreement over 1) Mount Vernon’s alleged
obligation to prosecute VisionAid’s counterclaim and 2) the
purported conflict of interest of appointed counsel has
prevented any settlement of the state case, which remains
pending, and led Mount Vernon to file this suit.
C.

Procedural History

In August, 2013, Mount Vernon filed the subject complaint
for a declaratory judgment to address whether it is required to
prosecute VisionAid’s counterclaim.

In October, 2013, VisionAid

filed a counterclaim for a declaratory judgment on the same
issue but also claims that it is entitled to the appointment of
independent counsel at Mount Vernon’s expense.
In January, 2014, VisionAid filed a motion for
certification of the pending legal issues to the Massachusetts
Supreme Judicial Court (“SJC”) for a declaratory judgment.

That

motion was denied by this Court in May, 2014.
The parties filed cross-motions for summary judgment on
their respective claims for declaratory judgment in July, 2014.
They agree that the instant dispute should be ultimately
resolved at this stage.
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II.

Cross-Motions for Summary Judgment
A.

Legal Standard

The role of summary judgment is “to pierce the pleadings
and to assess the proof in order to see whether there is a
genuine need for trial.” Mesnick v. Gen. Elec. Co., 950 F.2d
816, 822 (1st Cir. 1991) (quoting Garside v. Osco Drug, Inc.,
895 F.2d 46, 50 (1st Cir. 1990)).

The burden is on the moving

party to show, through the pleadings, discovery and affidavits,
“that there is no genuine issue as to any material fact and that
the moving party is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(c).
A fact is material if it “might affect the outcome of the
suit under the governing law.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986).

“Factual disputes that are irrelevant

or unnecessary will not be counted.” Id.

A genuine issue of

material fact exists where the evidence with respect to the
material fact in dispute “is such that a reasonable jury could
return a verdict for the nonmoving party.” Id.
Once the moving party has satisfied its burden, the burden
shifts to the non-moving party to provide specific facts showing
that there is a genuine, triable issue. Celotex Corp. v.
Catrett, 477 U.S. 317, 324 (1986).

The Court must view the

entire record in the light most favorable to the non-moving
party and make all reasonable inferences in that party’s favor.
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O’Connor v. Steeves, 994 F.2d 905, 907 (1st Cir. 1993).

Summary

judgment is appropriate if, after viewing the record in the nonmoving party’s favor, the Court determines that no genuine issue
of material fact exists and that the moving party is entitled to
judgment as a matter of law.
B.

Analysis
1.

Contentions of the Parties

In its motion for summary judgment, Mount Vernon contends
that VisionAid’s request for it to prosecute an affirmative
counterclaim for misappropriation against Sullivan goes beyond
the plain language of the Policy, which only covers claims
brought against VisionAid.

Mount Vernon asserts that it is

providing, and will continue to provide, a full defense of the
age discrimination claim against VisionAid but that enlarging
the insurer’s duty to defend to encompass the prosecution of
ancillary counterclaims is both contrary to the Policy language
and unsupported by the case law.
Moreover, Mount Vernon asserts that VisionAid’s
misappropriation counterclaim would not defeat or offset any
liability with respect to the wrongful termination suit against
VisionAid and therefore ought not implicate its financial
obligation.

Finally, it avers that VisionAid is not entitled to

independent counsel at Mount Vernon’s expense because it is
affording a full defense against Sullivan’s claims without a
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reservation or rights.

Mount Vernon notes that VisionAid is

free to pursue its counterclaim against Sullivan with
independent counsel and retains full authority to consent or
object to any potential settlement agreement.
In their cross-motion for summary judgment, VisionAid
asserts that 1) an insurer’s duty to defend encompasses
prosecuting its misappropriation counterclaim, 2) Mount Vernon’s
reading of the Policy’s coverage is too narrow and 3) the
counterclaim is compulsory, integral to the defense of the age
discrimination claims made against it and critical to settlement
negotiations.
VisionAid also contends that forcing it to retain and pay
for its own counsel on the misappropriation counterclaim affords
Mount Vernon an unjustified windfall and renders the case
unmanageable from a practical standpoint.

Finally, despite the

fact that Mount Vernon has withdrawn its reservation of rights,
VisionAid asserts that the parties have conflicting interests
with respect to the counterclaim that entitles it to independent
counsel paid for by Mount Vernon.
The opposition briefs, to a large extent, restate the
arguments made in the memoranda filed in support of the motions
for summary judgment.

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2.

Insurer’s Duty to Defend

Massachusetts law is settled as to the appropriate scope of
coverage of an insurance policy:
The question of the initial duty of a liability
insurer to defend third-party actions against the
insured is decided by matching the third-party
complaint with the policy provisions: if the
allegations of the complaint are “reasonably
susceptible” of an interpretation that they state or
adumbrate a claim covered by the policy terms, the
insurer must undertake the defense.
Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387,
394 (2003) (citation omitted).

Thus, to warrant coverage by an

insurer under Massachusetts law, the complaint need only show a
possibility that the claims asserted against an insured are
covered by the policy. Id.

In contrast, when the complaint

includes allegations that
lie expressly outside the policy coverage
purpose, the insurer is relieved of the
investigate or defend the claimant.
Id.

and its
duty to

When there are ambiguities and two “rational

interpretations” of a policy’s language exist, “the insured is
entitled to the benefit of the one most favorable to it.”
Colonial Gas. Co. v. Aetna Cas. & Sur. Co., 823 F. Supp. 975,
982 (D. Mass. 1993).
That is not, however, the end of the analysis because
“liability insurers have a broad duty to defend their policy
holders.” GMAC Mortg., LLC v. First Am. Title Ins. Co., 464

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Mass. 733, 738.

To further the insurer’s broad duty to defend,

Massachusetts law has adopted what is referred to as the “in for
one, in for all” or the “complete defense” rule. Id.

The rule

acknowledges that there may well be situations where a complaint
brought against an insured contains both covered and non-covered
claimed according to the plain language of the policy. Id. at
739.

Accordingly, because it would be impractical for insurer-

appointed counsel to divide representation between covered and
non-covered claims, the “in for one, in for all” rule expands
the insurer’s obligation to defend all claims brought against
the insured so long as at least one claim asserted against the
insured is covered by the policy. Id. at 738-39 (“Said
differently, if an insurer has a duty to defend one count of a
complaint, it must defend them all.”) (citation and internal
quotations omitted).
Here, according to the Policy, a covered “Claim” is any
proceeding “initiated against” VisionAid in which someone seeks
to hold it liable for a purported wrongful act.

Neither party

disputes that the state court case brought by Sullivan
encompasses claims made against VisionAid that are covered by
the Policy.

Thus, Mount Vernon is undoubtedly “in for one, in

for all” in its defense of the Sullivan suit.

Nevertheless,

that preliminary finding does not resolve this case because the

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parties sharply disagree as to Mount Vernon’s required “defense”
of the Sullivan suit.
Citing the SJC’s recent GMAC decision, VisionAid argues
that the insurer’s duty to defend and the “in for one, in for
all” rule lead to the conclusion that Mount Vernon must fund its
misappropriation counterclaim.

The Court disagrees.

In GMAC,

the SJC was faced with a question of the scope of a title
insurer’s obligation to defend a counterclaim raised by a
homeowner after the title insurer initiated suit on behalf of
the insured to reform a deed.

The court held that 1) the “in

for one, in for all” rule that applies to general liability
insurers is inapplicable in the “unique title insurance context”
and 2) the title insurer had no obligation to defend the insured
against counterclaims. Id. at 739, 741-42.

The court further

noted that it “might” be inclined to conclude differently if
claims asserted in response to litigation initiated by a title
insurer were compulsory counterclaims. Id. at 743.
Simply put, the GMAC opinion does not enhance VisionAid’s
case.

In fact, VisionAid admits that the GMAC decision “did not

specifically address the duty of a liability insurer to
prosecute an insured’s counterclaim.”

Instead, it dealt with

the “unique” world of title insurance and held that title
insurers are not required to cover counterclaims raised against
the insured.

Not only is Mount Vernon a general liability
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provider but the issue here is whether an insurer’s duty to
defend includes an obligation to prosecute counterclaims
asserted by the insured rather than such claims against it in
suits initiated by the insured.
Moreover, the majority of both federal and state cases to
consider this issue have found that an insurer’s duty to defend
does not include an obligation to prosecute counterclaims for
affirmative relief. See, e.g., Bennett v. St. Paul Fire & Marine
Ins. Co., 2006 WL 1313059, at *4 (D. Me. May 12, 2006)
(collecting cases); Reynolds v. Hartford Acc. & Indem. Co., 278
F. Supp. 331, 333 (S.D.N.Y. 1967) (noting that it would be
“manifestly unfair” to require insurer to pursue affirmative
counterclaims in light of the fact that the insurance contract
did not provide for coverage of such claims); James 3 Corp. v.
Truck Ins. Exchange, 91 Cal. App. 4th 1093, 1104 (2001) (ruling
that insurer was not required to take affirmative action to
recover money, including filing counterclaims, even though
subject matter of affirmative defenses and counterclaims were
related). See also Allan D. Windt, Insurance Claims and
Disputes, § 4:41 (5th ed.) (“An insurer, being obligated only to
defend claims brought ‘against’ the insured, is not required to
bear the cost of prosecuting a counterclaim on behalf of the
insured”).

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The Court agrees that an insurer ought not to bear any
obligation to prosecute affirmative counterclaims asserted by
the insured.

Such a holding finds support in the language of

the Policy, which only provides coverage for claims first made
against VisionAid.

Forcing Mount Vernon to fund VisionAid’s

affirmative counterclaims seeking monetary damages for the
alleged misappropriation by Sullivan would fundamentally rewrite
the Policy.

The Court declines to do so. See Shoshone First

Bank v. Pac. Emp’rs Ins. Co., 2 P.3d 510, 516 (Wyo. 2000)
(holding that the court would not “torture” the policy language
to provide for coverage of insured’s counterclaim).
Furthermore, excluding the obligation to pursue an
insured’s counterclaims from an insurer’s duty to defend does
not run afoul of the “in for one, in for all” rule prevalent in
Massachusetts.

That rule only imposes a broad requirement to

defend any and all claims asserted against an insured, not just
those covered by the policy. GMAC, 464 Mass. at 738-39.

It is

simply not implicated when the insured seeks affirmative relief.
VisionAid argues, nevertheless, that the counterclaim would
aid its defense and that an insurer must pursue a counterclaim
when it could defeat or otherwise offset liability.

Moreover,

it contends that the Court should follow the few courts that
have found that an insurer’s obligation to defend an insured
extends to counterclaims that are “inextricably intertwined with
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the defense” and necessary to the defense as a strategic matter.
See Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F.
Supp. 324, 334 (E.D. Pa. 1991), rev’d in part on other grounds,
961 F.2d 209 (3d Cir. 1992).

This argument fails to convince

the Court.
First, VisionAid’s misappropriation counterclaim against
Sullivan is not necessary to defeat his age discrimination
claim.

That is because appointed counsel for VisionAid need

only present evidence of a “legitimate, nondiscriminatory reason
for terminating” Sullivan. See Blare v. Husky Injection Molding
Sys. Boston, Inc., 419 Mass. 437, 446 (1995).

That could be

accomplished most directly by showing that VisionAid was on
notice of the alleged misappropriation as a result of the
September, 2011 forensic accounting report that detailed the
personal transactions made by Sullivan with the use of corporate
funds.

Appointed counsel need not establish each of the

elements of a misappropriation claim to negate Sullivan’s
discrimination claim.
Alternatively, a jury could find that, despite Sullivan’s
misappropriation, he was impermissibly terminated for
discriminatory reasons.

That leads to the second, more

important point, i.e., that the misappropriation counterclaim
does not automatically offset VisionAid’s potential liability.
Were VisionAid to prevail on its counterclaim and recoup
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misappropriated funds from Sullivan, Mount Vernon would not be
entitled to such funds to offset its liability if Sullivan
simultaneously prevails on his age discrimination claim.

Cf.

Great West Cas. Co. v. Marathon Oil Co., 315 F. Supp. 2d 879,
882 (N.D. Ill. 2003) (holding that duty to defend requires
insurer to cover claims and actions seeking third-party
contribution as a “means to avoid liability”).
Thus, it can hardly be said that the affirmative relief
sought in VisionAid’s counterclaim is “inextricably intertwined”
with a complete defense to claims asserted against it. See
Bennett, 2006 WL 1313059, at *5 (rejecting argument that
counterclaim was “inextricably intertwined” and refusing to hold
insurer responsible for covering counterclaim because it
“primarily [sought] affirmative relief based on allegations ...
only tangentially related” to the complaint raised against the
insured).

To the extent VisionAid seeks affirmative relief

above and beyond a defense of the claims made against it,
VisionAid must shoulder the cost of doing so.
3.

Insured’s Right to Independent Counsel

VisionAid also posits that it is entitled to appoint
independent counsel at Mount Vernon’s expense because of an
alleged conflict of interest.

It contends that Mount Vernon, as

well as appointed counsel, has an interest in

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devaluing or impairing the counterclaim to the point
that would remove it as an obstacle to settling with
Sullivan.
Moreover, VisionAid argues that forcing it to retain separate
counsel to prosecute its counterclaim would make the litigation
unmanageable and be an incentive to appointed counsel to
“offload” defense responsibility in an effort to save costs.
The Court perceives no conflict of interest.

Contrary to

VisionAid’s counter-intuitive assertion, Mount Vernon and
appointed counsel do not have an interest in devaluing the
counterclaim.

The strength of VisionAid’s counterclaim both

weakens the wrongful termination case against VisionAid and
increases appointed counsel’s bargaining power in settlement
negotiations.

Devaluing the counterclaim would undermine Mount

Vernon’s own interest in limiting Sullivan’s recovery for
wrongful termination.
Furthermore, unlike the prospect of limiting the defense of
an insured to particular claims, there is nothing inherently
impractical or unwieldy about VisionAid relying on its own
separate counsel to assert the counterclaim.

In its answer to

the state court complaint, appointed counsel drafted the answer
and VisionAid’s own counsel drafted the counterclaim.

That

indicates an ability of separate attorneys to collaborate and
yet accomplish their distinct objectives.

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The Court declines to

acknowledge VisionAid’s parade of horribles with respect to
divided representation.
Absent a conflict of interest, in order to entitle an
insured to independent counsel at the insurer’s expense, an
insured must demonstrate that the insurer is defending it under
a reservation of rights. Herbert A. Sullivan, Inc. v. Utica Mut.
Ins. Co., 439 Mass. 387, 406-07 (2003).

VisionAid admits,

however, that Mount Vernon has already withdrawn its
reservation.

Accordingly, Mount Vernon has no obligation to

relinquish its defense of VisionAid or to permit VisionAid to
utilize independent counsel at its expense.

ORDER
For the foregoing reasons,
1)

the motion of defendant VisionAid, Inc. for attorney’s
fees (Docket No. 48) is DENIED;

2)

the motion of defendant VisionAid, Inc. for summary
judgment (Docket No. 49) is DENIED; and

3)

the motion of plaintiff Mount Vernon Fire Insurance
Company for summary judgment (Docket No. 53) is
ALLOWED.

So ordered.
_/s/ Nathaniel M. Gorton____
Nathaniel M. Gorton
United States District Judge
Dated March 10, 2015

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