Insured’s Non-Covered Counterclaim Does Not Create Conflict Entitling It to Select Independent Counsel

The United States Court of Appeals for the First Circuit, applying Massachusetts law, has held that an employment practices liability insurer was not obligated to pay for independent counsel based on the insured’s prosecution of a counterclaim that was not covered under the policy.  Mount Vernon Fire Ins. Co. v. VisionAid, Inc., 2017 WL 5476323 (1st Cir. Nov. 15, 2017).

After a former employee sued the insured for age discrimination, the insured submitted the claim under its employment practices liability policy, which afforded the insurer the right and duty to defend the insured.  The insurer initially agreed to defend under a reservation of rights and appointed defense counsel, and then later agreed to defend the claim without reservation.  In defense of the discrimination claim, the insured contended, in part, that it fired the employee because he embezzled money.  The former employee agreed to settle his discrimination claim if the insured would drop the embezzlement claim.  The insured declined and sought to assert a counterclaim against the former employee for embezzlement.  The insurer refused to fund the insured’s pursuit of the counterclaim, contending that it had no duty to fund affirmative actions.  The insured then instructed its personal counsel to proceed with the embezzlement claim.

The insurer sought a declaratory judgment that it had no duty to fund prosecution of the insured’s counterclaim.  In response, the insured sought a declaration to the contrary and a declaration that a conflict of interest between the parties entitled the insured to choose independent counsel to defend the entire suit.  The district court granted the insurer’s motion for summary judgment, and the insured appealed to the First Circuit.  As to the first issue, the appeals court sought guidance from the Massachusetts Supreme Judicial Court, which held that the insurer had no duty to fund the prosecution of the counterclaim.  The insured then asked the First Circuit to accept briefing on the second question regarding whether a conflict existed that triggered the right to select independent counsel.

The appeals court agreed with the insured that the insurer-appointed defense counsel represented both the insurer and insured, but it rejected the argument that this created a conflict entitling the insured to select counsel.  The court reasoned that the insured’s argument that a conflict existed failed because both the insurer and insured had the same incentive to defend the former employee’s suit, and there was no evidence to suggest that the insurer sought to undermine the counterclaim.  Even if the insurer did seek to undermine the counterclaim, the appeals court concluded that it would be unable to do so because the insured’s personal counsel would prosecute the counterclaim, and because the insurer could not settle without the insured’s consent.  The First Circuit also rejected the insured’s argument that a conflict existed under the Massachusetts rules of professional responsibility governing conflicts of interest.

The appeals court therefore held that the presence of the embezzlement counterclaim did not generate a conflict of interest entitling the insured to select counsel.

Wiley Executive Summary

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