Filed: Jun. 09, 2016
Latest Update: Mar. 02, 2020
Summary: 2, Mt. Vernon advised VisionAid that, in its opinion, Counts I, through III of Sullivan's complaint (styled as claims for unlawful, termination in violation of the covenant of good faith and fair, dealing, breach of contract, and promissory estoppel) were not, covered by the Policy. defense .
United States Court of Appeals
For the First Circuit
No. 15-1351
MOUNT VERNON FIRE INSURANCE COMPANY,
Plaintiff, Appellee,
v.
VISIONAID, INC. f/k/a H.L. Boulton Co. Inc.,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Thompson, Circuit Judge,
Souter, Associate Justice,*
and Barron, Circuit Judge.
Kenneth R. Berman, with whom Heather B. Repicky and Nutter,
McClennen & Fish LLP were on brief, for appellant.
James J. Duane III, with whom Scarlett M. Rajbanshi and
Peabody & Arnold LLP were on brief, for appellee.
June 9, 2016
* The Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
THOMPSON, Circuit Judge. This dispute between an insurance
company and its insured has potentially wide-reaching implications
for how liability insurers must conduct themselves in the
Commonwealth of Massachusetts. The controversy here revolves
around whether an insurer may be required to, as part of its
defense of a claim against its insured, provide and pay for counsel
to prosecute its insured's counterclaim against the claimant.
In this case, the insured, VisionAid, Inc. ("VisionAid"), is
a defendant in a state court suit filed by a former employee, Gary
Sullivan, who alleges that his termination was the product of
illegal age discrimination. VisionAid's defense includes, among
other bases, a claim that it terminated Sullivan not because of
his age, but because it discovered that he had misappropriated
several hundred thousand dollars of corporate funds. But VisionAid
does not want to simply rely on this as a defense. It wants to
sue Sullivan for misappropriation in an attempt to recover those
funds. Importantly for our purposes, it wants its insurer, Mount
Vernon Fire Insurance Company ("Mt. Vernon"), who is covering the
defense against the age-discrimination claim, to also cover the
prosecution of the misappropriation claim. Whether or not Mt.
Vernon has to do this is the crux of this case.
To resolve this issue, we have to look to Massachusetts law,
which governs in this diversity action. When we do that, it
becomes clear that the dispositive state law questions here have
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not been resolved by the Massachusetts Supreme Judicial Court
("SJC"). As a result, we respectfully certify the questions for
resolution by the SJC. See Mass. S.J.C. Rule 1:03.1
I.
Although the facts in the underlying dispute are contested,
the ones bearing on the issues before us today are not. We'll
give a rundown to put the legal issues into perspective.
VisionAid is a Massachusetts-based company, which
manufactures and distributes (among other things) lens cleaning
and eye safety products. At the times that matter to us, VisionAid
was insured, under an "employment practices" liability policy (the
"Policy"), by Mt. Vernon.
In October 2011, VisionAid fired Sullivan, its then-Vice
President of Operations. About a year later, Sullivan brought
VisionAid before the Massachusetts Commission Against
Discrimination ("MCAD"), alleging that VisionAid's termination of
him was based on his age and, therefore, illegal. VisionAid told
Mt. Vernon about the MCAD claim, and Mt. Vernon appointed counsel
to defend VisionAid in that forum. Counsel sought to defend the
1 Neither party requested that we certify questions to the
SJC; VisionAid did ask the district court to do so but the court
denied the motion. The parties were, however, advised that this
court was inclined to seek certification on its own initiative, as
it is permitted to do, and, at our request, they provided proposed
certification questions. See Mass. S.J.C. Rule 1:03 § 2 (providing
that this court may invoke this rule upon its own motion).
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claim by arguing that VisionAid fired Sullivan because of
legitimate non-discriminatory reasons, namely his sub-par
performance and misappropriation of company funds.
Settlement negotiations proved fruitless. Sullivan, who had
started with a demand of $400,000, repeatedly reduced this number
(bottoming out at $5,000) before he eventually told VisionAid's
appointed counsel that he would walk away with no money at all if
VisionAid would agree to sign a mutual release. VisionAid was
unwilling to do this as it still wanted to go after Sullivan for
the allegedly stolen money and, as such, it did not consent to the
settlement. Sullivan voluntarily dismissed his MCAD complaint in
February 2013.
A few months later, Sullivan filed an age discrimination
complaint (which asserted several additional causes of action)
against VisionAid in Massachusetts state court. Mt. Vernon
indicated that it would continue to defend VisionAid in the state
court action subject to a reservation of rights.2 The "reservation
of rights letter" indicated that counsel appointed in connection
with the MCAD proceedings would continue to represent VisionAid in
2
Mt. Vernon advised VisionAid that, in its opinion, Counts I
through III of Sullivan's complaint (styled as claims for unlawful
termination in violation of the covenant of good faith and fair
dealing, breach of contract, and promissory estoppel) were not
covered by the Policy. Mt. Vernon did admit, though, that Count
IV's allegations of unlawful age discrimination set forth a claim
that was covered.
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the state court action "unless and until such time that it is
determined that there is no coverage under this policy" and that
VisionAid had the right to accept or reject this defense.
VisionAid reacted. It asserted that it did not accept Mt.
Vernon's reservation of rights and that it would exercise its right
to choose its own attorney. Mt. Vernon responded via letter. It
withdrew its reservation of rights and, because of this, indicated
that appointed counsel would remain VisionAid's defense counsel.
The letter also stated that while Mt. Vernon was aware that
VisionAid wished to pursue a counterclaim against Sullivan, Mt.
Vernon's position was that the Policy was strictly a defense-
liability policy and that it was not required pursuant to the
Policy to pay for the prosecution of counterclaims or affirmative
actions. Mt. Vernon told VisionAid to hire (and pay for) its own
lawyer if it wished to pursue the counterclaim.
Mt. Vernon then filed the underlying suit for a declaratory
judgment seeking to have the district court decide whether it was
required to pay for the prosecution of VisionAid's proposed state-
court misappropriation counterclaim.3 VisionAid answered and
3 The parties to the state court action agreed to stay the
action while the coverage issues were worked out. But faced with
statute of limitations issues, VisionAid went ahead and answered
Sullivan's complaint and filed the counterclaim. The answer was
drafted and signed by appointed panel counsel retained by Mt.
Vernon. Mt Vernon's panel counsel, however, refused to draft or
sign the counterclaim. VisionAid had its independent counsel do
this.
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counterclaimed. It sought a declaration that Mt. Vernon's duty to
defend against Sullivan's lawsuit included the duty to prosecute
the misappropriation counterclaim and, on top of that, that
VisionAid had the right to be represented by independent counsel
for the entire Sullivan action at Mt. Vernon's expense. On the
latter point, VisionAid's theory was that it and Mt. Vernon's
interests were no longer aligned. VisionAid suggested that Mt.
Vernon had an interest in diminishing the value of the counterclaim
or eliminating it since the counterclaim had become an impediment
to settlement with Sullivan refusing to walk away absent a mutual
release.
The parties cross-moved for summary judgment. The district
court granted Mt. Vernon's motion, denied VisionAid's, and entered
judgment in Mt. Vernon's favor. In short, it found that according
to the plain language of the Policy, Mt. Vernon was not required
to fund an affirmative counterclaim and that this result did not
run afoul of any Massachusetts rules of law or create any conflict
of interest. VisionAid filed this appeal. Before getting into
its position, we start with the Policy.
II.
In pertinent part, the Policy states that it "covers only
those Claims first made against the Insured during the Policy
Period." The Policy goes on to state that Mt. Vernon agrees that
it "will pay on behalf of [VisionAid], . . . Loss for which this
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coverage applies that [VisionAid] shall become legally obligated
to pay because of Claims first made against [VisionAid]." That
section also says that Mt. Vernon "has the right and duty to defend
any Claim to which this insurance applies." "Claim" is defined as
"any written notice received by [VisionAid] that any person or
entity intends to hold [VisionAid] responsible for a Wrongful Act,"
or "any proceeding initiated against [VisionAid], . . . seeking to
hold [VisionAid] responsible for a Wrongful Act." "Wrongful Act"
is defined as "any actual or alleged act of" discrimination,
harassment, retaliation, etc., "committed or allegedly committed
by [VisionAid]."
The Policy also says that "Defense Costs shall be applied
against the Retention." "Defense Costs" is defined as the
"reasonable and necessary legal fees and expenses incurred by the
[Mt. Vernon], or by any attorney designated by [Mt. Vernon] to
defend [VisionAid], resulting from the investigation, adjustment,
defense and appeal of a Claim."
III.
VisionAid contends that the district court got it wrong. It
argues that the Policy language establishes that its counterclaim
against Sullivan is covered. According to VisionAid, while the
Policy provides that "Defense Costs" include the "fees and expenses
incurred by [Mt. Vernon] . . . to defend [VisionAid]," the Policy
does not elaborate on what is included in such a defense. One
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reasonable interpretation, VisionAid suggests, is that it includes
"all work a defense lawyer would typically do in the defense of a
client, including prosecuting counterclaims that would defeat
liability or diminish damages." Since "defense" is thus
susceptible to more than one reasonable interpretation, VisionAid
argues, the Policy is ambiguous and under Massachusetts law an
ambiguous insurance agreement is to be interpreted in the light
more favorable to the insured.
VisionAid also argues that under Massachusetts's "in for one,
in for all" or "complete defense" rule, Mount Vernon's duty to
defend includes prosecuting the counterclaim. Under that rule,
"an insurer must defend the entire lawsuit if it has a duty to
defend any of the underlying counts in the complaint." Liberty
Mut. Ins. Co. v. Metro. Life Ins. Co., 260 F.3d 54, 63 (1st Cir.
2001) (emphasis added); see GMAC Mortg., LLC v. First Am. Tit.
Ins. Co.,
985 N.E.2d 823, 827-28 (Mass. 2013) (providing a more
detailed description of the rule).
On top of all this, VisionAid persists that it and Mt. Vernon
have conflicting interests because the counterclaim is impeding it
from reaching an accord with Sullivan since he is unwilling to
settle without a mutual release. According to VisionAid, the only
workable solution, and indeed the one Massachusetts law dictates,
is that it be allowed to select its own attorney (whose fees shall
be paid by Mt. Vernon).
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Mt. Vernon disagrees on all points. It argues that the Policy
language clearly states that it only provides coverage for claims
brought against VisionAid and for support it points to the first
paragraph of the Policy, which states: "This Policy covers only
those Claims first made against [VisionAid] during the Policy
Period." It also suggests that the term "Defense Costs," despite
what VisionAid says, is not ambiguous and is specifically limited
to expenses resulting from the defense of a claim as defined by
the Policy.
As for Massachusetts's "in for one, in for all" rule, Mt.
Vernon theorizes that it does not include a duty to prosecute
VisionAid's counterclaim because the rule is limited to the defense
of covered and uncovered claims asserted against an insured. It
avers that the only time an insurer may be required to prosecute
a counterclaim on behalf of an insured is "when that counterclaim
will be asserted for the purpose of defeating or offsetting
liability as to the claims that trigger coverage under the policy."
And VisionAid's counterclaim, Mt. Vernon argues, is largely
unrelated to the defense of the age discrimination claim, seeks to
obtain money for VisionAid's sole benefit, and will not serve to
defeat or offset liability as to Sullivan's claims.
Finally, Mt. Vernon insists that there is no conflict of
interest between its appointed defense counsel and VisionAid such
that it should be called on to pay for VisionAid's personal
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counsel. It claims that settled Massachusetts law says that an
insured is entitled to have its personal counsel handle the defense
of a claim only when an insurer is defending under a reservation
of rights, which Mt. Vernon no longer is. Mt. Vernon also disputes
the proposition that it and VisionAid's interests don't square.
It characterizes VisionAid's assertion that Mt. Vernon has an
interest in devaluing the counterclaim as counter-intuitive
because Sullivan would have little incentive to settle if the
counterclaim was weak, and, Mt. Vernon adds, there is no record
evidence to suggest that Mt. Vernon has ever sought to so weaken
the counterclaim.
With that back-drop in place, we proceed to the issues in
play.
IV.
This case requires us to consider first whether Mt. Vernon
(through appointed counsel) owes a duty to VisionAid to prosecute
its counterclaim for damages, whether in accordance with the
Massachusetts "in for one, in for all" rule or pursuant to the
Policy, which provides that the insurer has a "duty to defend any
Claim" — i.e., "any proceeding initiated against [the insured]."
Second, we must consider whether Mt. Vernon (again via
appointed counsel) owes a duty to fund the prosecution of the
counterclaim for damages, where the Policy requires the insurer to
cover "Defense Costs," or the "reasonable and necessary legal fees
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and expenses incurred by [the insurer], or by any attorney
designated by [the insurer] to defend [the insured], resulting
from the . . . defense . . . of a Claim."
Third, assuming the existence of a duty to prosecute the
counterclaim, in the event it is determined that Mt. Vernon has an
interest in devaluing or otherwise impairing the counterclaim,
does a conflict of interest arise that entitles VisionAid to select
independent counsel to handle both the defense of any covered
claims and the prosecution of the subject counterclaim?
"The SJC permits a federal court to certify questions of state
law that are 'determinative of the cause then pending in the
certifying court' but for which there is no controlling precedent
by the SJC." In re Pereira, 791 F.3d 180, 183 (1st Cir. 2015)
(quoting Easthampton Sav. Bank v. City of Springfield,
736 F.3d
46, 50 (1st Cir. 2013)). That is precisely the position we find
ourselves in. The questions posed above are of course
determinative -- their outcome is the very reason the parties are
seeking a declaratory judgement -- and they present questions of
first impression in Massachusetts. Massachusetts courts have not
weighed in on whether an insurer's duty to defend can include
affirmative claims by the insured, and what the scope of that duty
might be.
While we could attempt to "make an informed prophecy as to
the state court's likely stance," Andrew Robinson Int'l, Inc. v.
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Hartford Fire Ins. Co., 547 F.3d 48, 51 (1st Cir. 2008), the
factors at play counsel against this. See Easthampton Sav.
Bank,
736 F.3d at 52-53 (setting out some additional factors to consider
when deciding to certify). The outcome of this case could affect
scores of insurance contracts in Massachusetts, insurance is an
area of traditional state regulation, and the policy arguments
here do not clearly favor one side or the other. Certification is
the most prudent course.
V.
For the above reasons, we certify the following questions of
Massachusetts law to the SJC:
(1) Whether, and under what circumstances, an insurer
(through its appointed panel counsel) may owe a duty to its insured
-- whether under the insurance contract or the Massachusetts "in
for one, in for all" rule -- to prosecute the insured's
counterclaim(s) for damages, where the insurance contract provides
that the insurer has a "duty to defend any Claim," i.e., "any
proceeding initiated against [the insured]"?
(2) Whether, and under what circumstances, an insurer
(through its appointed panel counsel) may owe a duty to its insured
to fund the prosecution of the insured's counterclaim(s) for
damages, where the insurance contract requires the insurer to cover
"Defense Costs," or the "reasonable and necessary legal fees and
expenses incurred by [the insurer], or by any attorney designated
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by [the insurer] to defend [the insured], resulting from the
investigation, adjustment, defense, and appeal of a Claim"?
(3) Assuming the existence of a duty to prosecute the
insured's counterclaim(s), in the event it is determined that an
insurer has an interest in devaluing or otherwise impairing such
counterclaim(s), does a conflict of interest arise that entitles
the insured to control and/or appoint independent counsel to
control the entire proceeding, including both the defense of any
covered claims and the prosecution of the subject counterclaim(s)?
The Clerk of this court is directed to forward to the SJC a
copy of the certified questions and our opinion in this case, along
with copies of the parties' briefs and appendices. We retain
jurisdiction over this appeal pending resolution of the certified
questions.
So ordered.
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