Employment Law Daily No conflict of interest in insurer-provided attorney defending age-bias suit
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Monday, November 20, 2017

No conflict of interest in insurer-provided attorney defending age-bias suit

By Lorene D. Park, J.D.

Finding no conflict of interest to preclude an insurer-selected attorney from defending an employer against an age discrimination suit, even though the employer’s own attorney would be prosecuting a counterclaim for embezzlement (the state high court in answer to certified question held that the insurer had a duty to defend, but not to pursue counterclaims), the First Circuit found that both the insurer and the employer had an interest in a strong counterclaim. Moreover, there was no evidence that anyone connected with the insurer had ignored the employer’s wishes in litigation strategy and there was nothing unworkable about having two attorneys representing the employer in the underlying litigation. The employer imagined fights between the attorneys over strategy, but that ignored the fact that the employer was the final decisionmaker (Mount Vernon Fire Insurance Co. v. VisionAid, Inc., November 15, 2017, Thompson, O.).

Age discrimination suit. In 2011, eye product manufacturer VisionAid learned its vice president of operations may have embezzled hundreds of thousands of dollars and fired him. He filed an age discrimination charge with the Massachusetts Commission Against Discrimination. VisionAid had an employment practices liability insurance policy with Mount Vernon Fire Insurance Co., which appointed counsel to defend the employer. The attorney filed an answer raising the misappropriation of funds issue. In the face of embezzlement allegations, the employee offered to dismiss his charge if VisionAid would sign a mutual release agreeing not to pursue him for misappropriation, but VisionAid refused.

The employee voluntarily dismissed his MCAD complaint and filed an age discrimination suit against VisionAid in Massachusetts state court. The insurer indicated it would continue to defend VisionAid in court subject to a reservation of rights. In the reservation of rights letter, the insurer stated that its appointed counsel would continue to represent VisionAid in court “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 rejected the reservation of rights and asserted it would choose its own attorney. The insurer then withdrew its reservation of rights and indicated that appointed counsel would remain VisionAid’s defense counsel. However, the insurer also stated that the policy was strictly a defense liability policy and it was not required to prosecute counterclaims, including to recover the allegedly stolen money.

Dispute between insurer and insured. The insurer filed a declaratory judgment suit, seeking to have a federal court determine whether it had to pay for the prosecution of VisionAid’s proposed state court misappropriation counterclaim. In response, VisionAid filed two counterclaims, seeking declarations that: (1) the insurer’s duty to defend the employee’s suit included a duty to prosecute the counterclaim; and (2) a conflict of interest entitled VisionAid to select its own attorney to defend it in the former employee’s lawsuit. VisionAid argued that its interests and the insurer’s interests were no longer aligned, and the insurer had an interest in diminishing the value of the counterclaim to encourage the employer to settle with the employee.

Certified questions. The federal court ruled that, under the policy’s language, the insurer’s duty to defend did not require it to prosecute the counterclaim. It also rejected VisionAid’s “counter-intuitive assertion” that the insurer had an interest in devaluing the counterclaim and found “nothing inherently impractical or unwieldy about VisionAid relying on its own separate counsel to assert the counterclaim” for embezzlement. On appeal, the First Circuit found issues of state law that had not been addressed by the state’s highest court, and certified three questions—two on the duty to defend and one on the conflict of interest. The Massachusetts Supreme Court answered that the scope of an insurer’s duty to “defend” does not include a duty to prosecute counterclaims on behalf of the insured, nor did the insurer have to pay the costs of prosecuting the counterclaim. The state high court found it unnecessary to reach the conflict-of-interest issue.

No conflict of interest. Now again before the First Circuit, the parties submitted supplemental briefs on the remaining question: Does a conflict of interest exist between the parties that permits VisionAid to choose the attorney to defend a suit brought against it by an ex-employee, with the tab for that defense picked up by the insurer? Like the federal district court below, the appeals court believed the answer to be “no.”

VisionAid argued that the insurer-selected attorney would not live up to his obligation to act in good faith in representing both it and the insurer because there was an incentive to “devalue” the counterclaim to encourage VisionAid to settle the underlying discrimination suit. The former employee had wanted to drop his suit in exchange for the embezzlement counterclaim being dropped. Under the settlement scenario, argued VisionAid, it would lose out on the stolen cash and essentially be funding the settlement and relieving the insurer of its duty to defend and indemnify. According to VisionAid, an insurer-selected attorney could make strategy decisions and influence the litigation to further the insurer’s interest, but not VisionAid’s interest.

In addition, the company argued that dual representation could lead the “jury to infer the existence of insurance coverage.” VisionAid also pointed to Rule 1.7 of the state’s rules of professional conduct, which precludes a lawyer from representing a client if the representation would be directly adverse to another client or if there is a significant risk the representation would be materially limited by the lawyer’s responsibilities to another client.

Both parties want to crush the discrimination suit. Although VisionAid was correct that the attorney represents both the insurer and VisionAid, its remaining arguments were rejected by the appeals court, which found that there was no interest in devaluing the embezzlement claim. To the contrary, it appeared that both clients “want to crush” the discrimination suit and a strong counterclaim could make that happen.

Having two attorneys was workable. Even assuming that the insurer wanted to diminish the counterclaim, the appeals court found it hard to see how the insurer could pull that off, because VisionAid had its own lawyer to handle the counterclaim. And in fulfilling the duty to provide zealous representation, VisionAid’s personal attorney can make sure no one devalues the counterclaim. Moreover, VisionAid cited no evidence that anyone connected with the insurer has ignored VisionAid’s wishes to let the underlying discrimination suit play out so it can pursue the embezzlement counterclaim. The court also found nothing unworkable about having two attorneys representing VisionAid in the age discrimination suit. Though VisionAid imagined fights between the attorneys over trial strategy, this view ignored a critical fact: VisionAid would be the final decisionmaker. Given the conclusion that the insurer-chosen attorney has no disqualifying conflict, VisionAid’s Rule 1.7 arguments also failed.

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