MASSACHUSETTS SUPREME JUDICIAL COURT RULES THAT INSURER HAS NO OBLIGATION TO PAY LEGAL FEES ASSOCIATED WITH COUNTERCLAIMS

The Massachusetts Supreme Judicial Court ruled that “Where an insurance policy required the insurer to defend any claim initiated against the insured, the insurer’s duty to defend did not require it to prosecute affirmative counterclaims on behalf of its insured.”Insurance defense is often sought in condominium litigation.  When an insurer defends the lawsuit, it is obligated to pay counsel fees to defend the lawsuit.However, until now, it has not been clear whether the insurer was also required to pay for the attorney to prosecute a counterclaim.It is not uncommon that a condominium that gets sued might have a countersuit against the party that brought the lawsuit.  The Massachusetts Rules of Civil Procedure require that any countersuit that arises from the same operative facts must be brought in response to the lawsuit or be forever lost.  This is known or referred to as a compulsory counterclaim.Some lawyers have taken the position that if the countersuit is compulsory, then the insurer should have to pay for the countersuit if it is defending the original lawsuit.   In the case of Mount Vernon Fire Insurance Company v. Visionaid, Inc., SJC-12142 (June 22, 2017), the insurer balked at that proposition.  The case was being litigated in Federal Court and the First Circuit Court of Appeals referred the question to the Massachusetts Supreme Judicial Court.   The Court ruled 5-2 that the insurer does not have to pay for the prosecution of the counterclaim.   The Court’s holding was:   “We conclude that (1) an insurer with a contractual duty to defend an insured is not required to prosecute an affirmative counterclaim on the insured’s behalf, pursuant either to the contractual language in the policy at issue or the common-law ‘in for one, in for all’ doctrine; (2) the duty to pay defense costs has the same scope as the duty to defend, and thus does not require an insurer to pay the costs of prosecuting a counterclaim on behalf of the insured; and (3) because of our answers to the first two questions, we do not reach the third question.”   However, Justice Gants and Justice Lenk dissented.   Gants, C.J., with whom Lenk, J., joins. “… Where the insured’s defense is intertwined with a compulsory counterclaim, where any reasonable attorney defending that proceeding would bring such a compulsory counterclaim, and where the insured agrees that any damages awarded to the insured on that counterclaim will offset any award of damages against the insured that the insurer is required to indemnify, I conclude that an insurer’s duty to defend the insured in ‘any proceeding’ includes the duty to prosecute such a compulsory counterclaim. …   “We have held under our so-called ‘in for one, in for all’ rule that, where a proceeding includes one cause of action alleging a wrongful act covered under a general liability policy, an insurer’s duty is not limited to defending that specific cause of action but encompasses the duty to defend the insured against all the causes of action in that proceeding. …   “The same reasoning that yielded the ‘in for one, in for all’ rule compels the conclusion that the insurer’s duty to defend a proceeding includes an obligation to prosecute compulsory counterclaims that are intertwined with the insured’s defense, where any reasonable attorney defending that proceeding would bring such a compulsory counterclaim, and where the insured agrees that any damages awarded to the insured on that counterclaim will offset any award of damages against the insured that the insurer is required to indemnify. …”   While the dissent was persuasive, it is not the law, though it could signal a change in this holding in the future depending on the composition of the court.The case is important to condominiums, condominium litigators and their insurers.   Going forward this case will play a strategic role on whether or not condominiums want to or decide to pursue counterclaims in condominium lawsuits.  If they decide to pursue counterclaims, the condominiums and their counsel will need to separate and designate their billing between the lawsuit and counterclaims.For a copy of the Opinion [click here].