Court Opinion

ID: 3211699
Source: CourtListenerOpinion
Date Created: 2016-06-09 21:00:34.703771+00
Date Added: 2024-06-11T07:39:31.495625
License: Public Domain

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).

                                   - 3 -
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.

                                      - 4 -
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

                                - 6 -
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).

                                 - 8 -
      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

                                     - 10 -
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.

                                    - 11 -
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

                                   - 12 -
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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