No Coverage for Prosecuting an Affirmative Counterclaim

A Massachusetts federal court has held that an insurer was not required to prosecute an insured’s affirmative counterclaims under a duty to defend policy.  Mt. Vernon Fire Ins. Co. v. VisionAid, Inc., No. 13-12154 (D. Mass. Mar. 10, 2015).

A former officer brought suit against his former employer for alleged wrongful termination.  The employer tendered the suit to its employment practices liability insurer, which appointed counsel to represent the employer.  The employer subsequently asked the insurer to prosecute a counterclaim for misappropriation of funds.  The insurer declined to do so, maintaining that the policy afforded specified coverage only for claims brought against an insured—not by an insured.

In the ensuing coverage action, the court granted summary judgment to the insurer.  In so holding, the court rejected the insured employer’s argument that the counterclaim was “integral to the defense” of the wrongful termination claim brought by the claimant, finding that the insurer only had a duty to defend claims, not a duty to prosecute claims. The court also observed that “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.”  While some states recognize a limited exception to this rule if the counterclaim was “inextricably intertwined” with the defense of a covered claim, the court noted that such a limited exception only applies, if at all, where the counterclaim was “necessary to defeat” the covered claim such that appointed counsel would need to establish each of the elements of the counterclaim to negate the claim it was defending.