In addition to insurance companies’ broad duty to defend all claims arising from complaints seeking damages potentially covered by their policies, Pennsylvania law provides an opportunity for policyholders to have their insurance companies pay for litigation costs associated with claims and/or suits that overlap or are intertwined with a suit the insurance company is already defending.
The magic words are “inextricably intertwined”
Policyholders may seek defense costs for related litigation if those claims are made as: (1) counterclaims in suits the insurance company is already defending, or (2) separate, independent lawsuits with facts or defense work that overlap with a suit the insurance company is defending. The insurance company’s duty to defend such related claims is not automatic, however. Pennsylvania courts make it clear that in both instances, the cases or claims must be “inextricably intertwined” in order to trigger the insurance company’s obligation to pay litigation costs.
While several Pennsylvania cases address the issue of an insurance company’s duty to pay for the costs of prosecuting a counterclaim related to litigation being defended by the carrier, Safeguard Scientifics, Inc. v. Liberty Mutual Insurance Co. is especially instructive. In Safeguard Scientifics, Safeguard’s subsidiaries were sued by a former president and officer of the company under various theories, including slander, defamation, and breach of contract. Safeguard filed counterclaims against the officer, including for breach of contract, breach of fiduciary duty, and breach of good faith and fair dealing. After Liberty Mutual denied coverage for the counterclaims, Safeguard filed a coverage action seeking reimbursement of costs associated with the counterclaims. The court ruled in favor of Safeguard, reasoning that the “pursuit of the counterclaims was inextricably intertwined with the defense of [the claims against Safeguard in the underlying suit] and was necessary to the defense of the litigation as a strategic matter (see TIG Ins. Co. v. Nobel Learning Cmtys., Inc.).
Safeguard Scientifics raises two important points:
- Covered counterclaims should be so wrapped up in the defense of the underlying suit that the two are virtually inseparable, and;
- Counterclaims used as a strategic defense to avoid liability are potentially covered under a policyholder’s liability insurance.
The rationale behind the second point is explained in a 2003 case from the Northern District of Illinois, Great West Casualty Co. v. Marathon Oil Co. In that case, the policyholder was seeking recovery of litigation costs incurred for third-party indemnification actions it had filed. The court determined that insurance companies were required to cover the costs of prosecuting the indemnification suits, reasoning that the idea of “defending” a policyholder, at its core, is about avoiding liability, and third party indemnification is as valid a process to avoid liability as is defense of the suit itself.
Thus, when policyholders are faced with an underlying lawsuit, they should be mindful of the fact that, in certain circumstances, costs associated with prosecuting counterclaims that help defeat alleged liability may be covered under their general liability insurance policies.
Separate, reciprocal lawsuits
It is also possible, in appropriate circumstances, to obtain coverage for separate lawsuits that are related to the defense of an underlying lawsuit. In Post v. St. Paul Travelers Ins. Co., Post (an attorney) was sued by a former client (a plaintiff in the underlying case) for malpractice and by the plaintiff’s attorney in the underlying suit for sanctions. Post responded by filing two actions independent of the malpractice and sanctions suits: an abuse of process action against the client and a defamation suit against the attorney. Travelers, Post’s malpractice carrier, agreed to defend Post in both suits against him, but denied coverage for costs related to his reciprocal suits against the client and attorney.
The court ultimately decided that the defamation suit was not “necessary to the defense of the litigation as a strategic matter” and, therefore, not covered. Nevertheless, the court held that the abuse of process action was covered, reasoning that the work done to defend Post in the malpractice and sanctions claims was “part of the same dispute” as the abuse of process claim Post made against his client.
The holding in Post should prompt policyholders to be mindful of potential coverage for related suits when litigating an underlying case.
Policyholders should be mindful of the potential coverage available for offensive claims and suits related to underlying suits they are defending. Although this option is limited, it is appropriate in the right circumstances, namely where an offensive suit or claim is “inextricably intertwined” with the underlying suit being defended. Policyholders and defense counsel should be on the lookout for opportunities to exercise this coverage.