- Some courts have adopted liberal readings of defense insurance policies where the court will find coverage when certain commonalities are present between the underlying liability claim and the subsequent claim using such language as “inextricably intertwined” or “conducted against liability doctrine.” For example: Alabama, California, Colorado, Delaware, Illinois, Kansas, Michigan, New York, North Carolina, Pennsylvania, South Carolina, South Dakota, and Wisconsin.
- Massachusetts presents a narrow and strict reading of the word “defense” limiting it to conduct that is directly defensive of a pleading against the insured. The court has acknowledged that this is a ruling contrary to the majority rule.
Relying on case law in other jurisdictions, the court in Nationwide Mutual Fire Insurance Co. v. D.R. Horton, Inc. determined that there are “special circumstances in which courts have extended the duty to defend to include  claims used as a defensive mechanism and strategy.” It concluded that the explanation in D.R. Horton, Inc.-Denver v. Mountain States Mutual Casualty Co. was persuasive. Adopting the reasoning of Great West Casualty Co. v. Marathon Oil Co., it reasoned as follows:
[T]here is a class of affirmative claims which, if successful, have the effect of reducing or eliminating the insured’s liability and that the costs and fees incurred in prosecuting such “defensive” claims are encompassed in an insurer’s duty to defend.
In California, the test of whether an activity is “conducted against liability” is neither rigorous nor restrictive. Instead, the courts use an objective standard of whether the activity amounts to “a reasonable and necessary effort to avoid or at least minimize liability.”
As Aerojet-General Corp. v. Transport Indemnity Co. recognized, an insurer may not complain if the policyholder gets additional benefit, such as bringing affirmative claims, from expenses “conducted against liability.”
KLA-Tencor Corp. v. Travelers Indemnity Co. of Illinois analyzed two underlying patent infringement actions and responsive counterclaims. The court found them intertwined with the successful defense of the disparagement counterclaims in Therma-Wave II that was, in part, conducted in a different lawsuit by proving validity and infringement of a different patents.
D.R. Horton, Inc.-Denver v. Mountain States Mutual Casualty Co. recognized that prosecution expenses for activity “conducted against liability” are recoverable as part of the insurer’s duty to defend. In D.R. Horton, a developer and general contractor for a residential community, Trimark, was sued by a homeowners’ association for construction defects. Trimark filed a third-party complaint against the subcontractors who were also named as defendants in the homeowners’ association suit. Several insurers were involved in the case, but one carrier, Mountain States, refused to pay its full contribution.
The court clarified that “the simple answer is that if Mountain States owes Trimark a defense, and if Trimark’s pursuit of third-party claims against the subcontractors was a reasonable defense strategy . . . , then those costs are part of the defense costs. Trimark’s intent was to shift as much of its potential liability as possible to the subcontractors.” The court further noted that “[a] duty to defend would be nothing but a form of words if it did not encompass all litigation by the [policyholder] which could defeat its liability[.]”
Citadel Holding Corp. v. Roven  rejected insurer arguments about the defensive prosecution of counterclaims:
In a litigation context the term “defense” has a broad meaning and Citadel has not shown that the parties intended to accord it a restrictive definition in their relationship. Again, restricting the meaning of the phrase would contravene the expressed intent of the parties to expand Roven’s protection. Accordingly, we adopt a broad reading of the phrase “in defense”. In this light, it seems clear that affirmative defenses are offered “as a reason in law or fact why the plaintiff should not recover.” . . . We therefore hold that affirmative defenses are covered by the Agreement.
Notably, the Delaware Supreme Court was interpreting an agreement for indemnity. Much like the stay order, the indemnity agreement sought to limit the scope of what defense fees might be recaptured—hence the need to fund the compulsory counterclaim.
The court in National Union v. Rhone-Poulenc  concluded that prosecution of a counterclaim was compensable because it was defensive of the suit against Rhone-Poulenc that National Union conceded must be defended.
In Del Monte Fresh Produce N.A., Inc. v. Transportation Insurance Co., the court held:
Del Monte launched a campaign to declare its pineapples were sweeter than those of its competitors, and that competitors would infringe the CO-2 patent if they marketed extra-sweet pineapples. . . . These allegations trigger “personal injury” coverage under Transportation’s policy. . . . Each complaint alleges Del Monte sent letters to competitors threatening litigation for marketing extra-sweet pineapples. Del Monte’s threats materialized into two patent infringement suits. . . . In addition, . . . Del Monte accused its competitors of “stealing” its proprietary information. . . . [E]ach underlying [class action] complaint here alleges that Del Monte threatened its competitors with litigation, and publicly accused competitors of patent infringement.
The court determined that a statutory claim for a violation of Civil Code section 1770(a)(8) made the consumer class action claim that an insured had overpaid for a product (extra-sweet pineapples) defensive because damages for injury arising out of written publication material that disparaged another—in this case, for selling pineapples that did not have patent protection—injured the consumer.
The indirect injury was to competitors who also sold pineapples in the same markets. Their products were not valued in the same manner as those of the defendant policyholder, Del Monte. This gave rise to a mucking up of the marketplace and created a direct right of action under the 1770(a)(8) statutory scheme against Del Monte for the benefit of the parties who purportedly paid more for extra-sweet pineapples than they should have and thus were victims of unfair competition.
District of Columbia
In Rockhill Insurance Co. v. Hoffman-Madison Waterfront, LLC, the second count of the insured’s counterclaim asserted that
Rockhill breached its duty to defend under the Policy by, “refusing to recognize that it is obligated to cover the costs of the [d]eveloper [d]efendants’ defense of all claims asserted against them in the Wharf Suit as well as the inextricably interwoven costs relating to the strategy of defending the lawsuit by asserting counterclaims against the [underlying plaintiffs].” Countercl. ¶ 87. They further allege that, Rockhill breached its duty to defend by intentionally delaying payments of defense costs, id. ¶ 89, and by demanding that defendants allocate defense costs between what Rockhill believes are covered and non-covered claims.
The court did not directly address that claim but did not require segregation of fees related to the counterclaim from those for defense of the suit against the insurer. The only segregation required was of the non-insured defendant Fish Market REIT.
So understood, the defense duty could extend to the counterclaim’s prosecution in the underlying action. As the motion pursued by Rockhill Insurance Co. and no concurrent relief was sought by motion of the insured Hoffman. Adjudication that prosecution fees that are defensive are covered must await a later motion in the lawsuit.
In Hartford Fire Insurance Co. v. Vita Craft Corp., a policyholder was sued for patent infringement. In response, it counterclaimed for a declaration that the opposing patent was unenforceable. The policyholder claimed that the insurer had a duty to defend that counterclaim. The court agreed. It reasoned that the original infringement claim and counterclaim were “inextricably intertwined,” such that they were part of the defensive strategy to reduce Vita Craft’s liability. The two claims were inextricably intertwined because if the counterclaim arguing the opposing patent was unenforceable was successful, it would completely absolve the policyholder of any liability from the patent infringement suit. The court therefore ordered the insurer to defend the policyholder and pay the costs of the counterclaim.
In Mount Vernon Fire Insurance Co. v. Visionaid, Inc., the majority addressed a certified question of law from the First Circuit Court of Appeals. Admittedly, its ruling was contrary to the majority rule that defense fees could not encompass defensive prosecution activity such as an asserted compulsory counterclaim. In coming to its conclusion, the Visionaid court construed the term “defend” narrowly, contrary to California law, which embraces a broad definition of the term “defend.” The court stated that “the essence of what it means to defend is to work to defeat a claim that could create liability against the individual being defended” and that this did not include prosecuting affirmative claims.
In Oscar W. Larson Co. v. United Capitol Insurance Co., the policyholder was requesting a declaration that the defendant was requited to defend the policyholder in a state action regarding an allegedly negligent installation of a piece mechanical hardware. Germane to this discussion, the court held:
The parties also dispute whether defendant’s duty to defend requires it to assume liability for plaintiff’s claims for affirmative relief against other parties in the underlying state court action. . . . As a matter of law, the Court determines that such defense costs, as are present in this case, are expenses which are reasonable and necessary to limit or defeat liability.
Therefore, the court held that the duty to defend includes affirmative claims that are essentially defensive but pursued to eliminate the policyholder’s underlying liability.
The court in Smart Style Industries v. Pennsylvania General Insurance Co. explained why counterclaims in a trademark infringement suit were defensive of the lawsuit brought against the policyholder and thus within the scope of its insurer’s defense duty. Its rationale suggests the same logic should apply to the instant “parallel legal proceeding” in the ITC Action for the reasons Marathon concluded in analyzing indemnity claims pursued in a separate court. The court explained that
[i]mplicit in the duty to defend, for example, is the duty to respond to a complaint against an insured on a timely basis. To allow an insurer to dictate the date when the duty to defend commences would defeat, to a large degree, the purpose of the duty to defend.
Applying California law, the court in Ultra Coachbuilders, Inc. v. General Security Insurance Co. found the inextricably intertwined character of the defense for covered claims a solid support for finding a counterclaim defensive of the trademark infringement lawsuit against the policyholder. It explained:
The policy provides that General Security will defend any suit likely to involve damages covered by its excess/umbrella liability policy and not covered by the underlying primary insurer.2 [Note 2: Ultra’s underlying primary insurance policy excludes coverage for all trademark infringement claims, and makes no exception for infringement of slogan.] . . . The [General Security] policy excludes coverage for any advertising injury arising out of: . . . Infringement of trademark . . . other than titles or slogans. . . .”
In Busch v. Fidelity National Insurance Co., the policyholder owned real property covered by an insurance policy. The policyholder’s neighbors claimed they possessed an easement over the property and attempted to start construction of a road over the policyholder’s property. The policyholder accordingly hired counsel to seek an immediate injunction of the construction of the road and promptly informed the insurer.
In a dispute over whether the insurer had a duty to defend and was required to pay for the counsel, the court held:
Although plaintiff commenced the underlying action, it was brought in response to claims by neighbors against his title and an imminent threat that they would begin constructing a road on his property. . . . At that time, the defendants [insurers] agreed to provide counsel to protect plaintiff’s title, and we reject their current argument that they never had any obligation to do so. Additionally, plaintiff’s counterclaims attacking his title, so defendants were obligated to defend him at least on those occasions.
In Duke University v. St. Paul Mercury Insurance Co., the underlying lawsuit addressed a proposed sale of a psychiatric hospital and consequential disbursement of funds and assets. The policyholder’s subsequent lawsuit was based on defamation, interference with contract, and unfair trade practices.
Ultimately, the court decided that the affirmative matter raised by the policyholder was truly separate from the underlying suit and therefore was not defensive so as to fall within potential coverage. Had the lawsuit been a compulsory counterclaim, the court would have found coverage. Although the court applied this rule and found that the additional lawsuit was not covered, North Carolina still follows the majority rule. The court relied on the commentator A. Windt to adopt the following rule:
As a practical matter, therefore, when hiring defense counsel, the insurer should advise counsel that it will not bear the costs of prosecuting a counterclaim, but it should not attempt to limit the attorney in connection either with investigating and evaluating possible counterclaims or with giving the insured advice with respect to such claims. If it does, it should be deemed to have breached its duty to defend and, assuming the insured had a meritorious compulsory counterclaim that was lost as a result of the insurer’s action, the insurer should be liable for the value of the barred claim.
The court in Safeguard Scientifics, Inc. v. Liberty Mutual Insurance Co. held that the costs of prosecuting counterclaims were covered because “pursuit of the counterclaims was inextricably intertwined with the defense of [the claims against the policyholder] and was necessary to the defense as a strategic matter.” The court stopped short of explaining exactly how the counterclaims were “intertwined” with the defense other than noting that the counterclaims were strategic to the general defense and countering of the underlying liability claim.
In Amquip Corp. v. Admiral Insurance Co., the court discussed this very issue and held that counterclaims would be covered, but separate lawsuits in distinct venues would not be covered. Specifically, the court held:
Instead of asserting counterclaims against Maxim in the Ohio state court, Amquip made a strategic decision to institute separate civil actions in federal and state courts in Pennsylvania. If courts were to consider the costs an insured incurred by instituting its own action for the purpose of bringing pressure on the other party under the guise of a litigation defense, it would encourage and endorse multiplicity of litigation. This is much different than requiring the insurer to reimburse the insured for the cost of prosecuting counterclaims raised in the same action.
In Episcopal Church v. Church Insurance Co., the plaintiff policyholder contended that the insurer had a duty to defend “the entire suit, including claims that may not be subject to indemnification as well as counterclaims that were inextricably intertwined and part of the defense strategy to limit or defeat liability.” This court recognized that affirmative relief claims could be pursued in a distinct legal forum from the forum in which the asserted claims gave rise for a defense reimbursement policy.
Although the court held that there was sufficient evidence on the record to support a declaration of whether the insurer was required to cover the insurer’s costs of the counterclaims, the court still adopted the general rule that recovery is “permitted . . . of fees incurred in asserting counterclaims that were ‘inextricably intertwined with the defense of [a policyholder’s] claims and necessary to the defense of the litigation as a strategic matter.’”
There court concluded, however, that there simply was not enough evidence on the record that the test was met. A question of fact arose on that issue, leading to the court deny the motion for summary judgment.
In a dispute over rescinding or terminating a merger agreement, the court in IBP, Inc. v. National Union Fire Insurance Co. analyzed whether counterclaims pursued by the policyholder were covered. The court concluded that the policyholder, who was defending the underlying lawsuit, was being defended by pursuing an additional action in Delaware. The court determined:
The record contains the written pleadings in both the Arkansas and Delaware actions, which are the underlying facts that must be analyzed to determine whether the legal fees are “defense costs” as defined in the policy. Thus, the existence of liability here depends solely upon a construction of the policy and is a question of law. . . . Having concluded IBP’s legal fees in both the Arkansas and Delaware actions were “defense costs” and payable under the Policy, IBP is entitled to summary judgment on the issue of coverage.
Thus, pursuant to the court’s reasoning, affirmative relief claims could be pursued in a distinct legal forum from where the asserted claims called for a defense under this directors’ and officers’ “pay-on-behalf-of” defense reimbursement policy.
At issue in Towne Realty v. Zurich Insurance Co. was “whether an insurer, which has breached its duty to defend, is relieved from liability for legal expenses that the insured incurs in prosecuting counterclaims that were initiated prior to the dismissal of the original complaint.” Notably, there were no other Wisconsin cases to date that discussed this issue. The court concluded, nonetheless, that “if it was necessary for Towne to continue to prosecute its counterclaims to defend against the [underlying claim], these expenses are recoverable despite the fact that they were incurred after the complaint was dismissed.” Thus, the pendency of a suit in which a defense arose was not essential to ensure the defensive character of the prosecution activities.
The court found that:
prosecution of the counterclaims was found to be a strategy to defend the allegations in the Balestrieri complaint and not designed to impose liability on the Balestrieris. Therefore, we conclude that the trial court properly awarded Towne the attorney fees it expended in prosecuting its counterclaims after the Balestrieri complaint was dismissed.
Defensive affirmative claims may be a counterclaim (often compulsory) against the plaintiff or an entirely separate suit against a responsible third party, such as a claim for indemnity. Although it may be clear to the policyholder that this is the best strategy to avoid the potential exposure to liability in the underlying action, whether its litigation role that is strategically useful to the defense of potentially covered litigation is compensable raises a distinct legal concern.
David A. Gauntlett is the principal of Gauntlett & Associates in Irvine, California.
 Mr. Gauntlett, principal of Gauntlett & Associates in Irvine, California, represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He is the author of IP Attorney’s Handbook for Insurance Coverage in Intellectual Property Disputes (ABA Publishing, Section of Intellectual Property (2010)), Insurance Coverage of Intellectual Property Assets, Second Edition (Aspen Publishers 2013), and the soon to be published Second Edition 2014—Insurance Coverage of Intellectual Property Assets (forthcoming, Aspen Publishers).
 1 New Appleman Insurance Bad Faith Litigation § 3.02(2)(c)(i) (2d ed. 2019).
 Barratt Am. Inc. v. Transcontinental Ins. Co., 102 Cal. App. 848 (2002).
 Barratt American, 102 Cal. App. 860–64.
 Barratt American, 102 Cal. App. 863–64.
 Foster-Gardner, Inc. v. Nat’l Union Fire Ins. Co., 18 Cal. 4th 857, 883 (1998).
 Adobe Sys. v. St. Paul Fire & Marine Ins. Co., No. 07-385, 2007 U.S. Dist. LEXIS 83648 (N.D. Cal. Nov. 5, 2007), vacated pursuant to settlement, 2008 U.S. Dist. LEXIS 37794 (N.D. Cal. Apr. 8, 2008).
 Adobe Systems, 2007 U.S. Dist. LEXIS 83648, at *27.
 Cont’l W. Ins. Co. v. Colony Ins. Co., 69 F. Supp. 3d 1075 (D. Colo. 2014).
 Continental Western, 69 F. Supp. 3d at 1082.
 Nationwide Mutual Fire Ins. Co. v. D.R. Horton, Inc., No. 15-351-CG-N, 2016 U.S. Dist. LEXIS 160148, at *15 (S.D. Ala. Nov. 18, 2016).
 D.R. Horton, Inc.-Denver v. Mountain States Mut. Cas. Co., 69 F. Supp. 3d 1179, 1198–1200 (D. Colo. 2014).
 Great W. Cas. Co. v. Marathon Oil Co., 315 F. Supp. 2d 879, 881 (N.D. Ill. 2003).
 Nationwide Mutual Fire Ins. Co. v. D.R. Horton, Inc., No. 15-351-CG-N, 2016 U.S. Dist. LEXIS 160148, at *15 (emphasis added).
 Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38, 61, 63, 70, Cal Rptr. 2d 118, 131, 948 P.2d 209, 922 (1997).
 KLA-Tencor Corp. v. Travelers Indem. Co. of Ill., No. C-02-05641 RMW, 2004 U.S. Dist. LEXIS 15376 (N.D. Cal. Aug. 4, 2004).
 KLA-Tencor Corp.., No. C-02-05641 RMW, 2004 U.S. Dist. LEXIS 15376, at *12–13.
 D.R. Horton, Inc.-Denver v. Mountain States Mut. Cas. Co., 69 F. Supp. 3d 1179, 1182–83 (D. Colo. 2014).
 D.R. Horton, Inc.-Denver, 69 F. Supp. 3d at 1199.
 Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992).
 Citadel Holding, 603 A.2d at 824 (emphasis added).
 Nat’l Union v. Rhone-Poulenc, No. 87C-09-11, 1994 Del. Super. LEXIS 734 (Super. Ct. July 29, 1994).
 Del Monte Fresh Produce N.A., Inc. v. Transp. Ins. Co., No. Civ.A. 06 C 1658, 2006 U.S. Dist. LEXIS 58986, at *14–15, *17 (N.D. Ill. Aug. 8, 2006), aff’d, 500 F.3d 640 (7th Cir. 2007).
 Rockhill Ins. Co. v. Hoffman-Madison Waterfront, LLC, No. 18-2104, 2019 U.S. Dist. LEXIS 169173 (D.D.C. Sept. 30, 2019).
 Rockhill Insurance, 2019 U.S. Dist. LEXIS 169173, at *48, *50–51.
 Hartford Fire Ins. Co. v. Vita Craft Corp., 911 F. Supp. 2d 1164 (D. Kan. 2012).
 Mount Vernon Fire Ins. Co. v. Visionaid, Inc., 76 N.E.3d 204 (Mass. 2017).
 Oscar W. Larson Co. v. United Capitol Ins. Co., 845 F. Supp. 458 (W.D. Mich. 1993).
 Oscar W. Larson Co., 845 F. Supp. at 461 (emphasis added) (citing Fireman’s Fund Ins. Cos. v. Ex-Cell-O Corp., 790 F. Supp. 1318, 1344 (E.D. Mich. 1992), and Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F. Supp. 324 (E.D. Pa. 1991)).
 Smart Style Indus. v. Pa. Gen. Ins. Co., 930 F. Supp. 159 (S.D.N.Y. 1996).
 Smart Style Industries, 930 F. Supp. at 164.
 Ultra Coachbuilders, Inc. v. Gen. Sec. Ins. Co., No. 02 CV 675(LLS), 2002 U.S. Dist. LEXIS 13027 (S.D.N.Y. July 15, 2002).
 Busch v. Fid. Nat’l Ins. Co., 923 N.Y.S.2d 280 (N.Y. App. Div. 2011).
 Busch, 923 N.Y.S.2d at 281–82.
 Duke Univ. v. St. Paul Mercury Ins. Co., 95 N.C. App. 663 (1989).
 Duke Univiversity, 95 N.C. App. at 680 (quoting A. Windt, Insurance Claims and Disputes § 4.39 (1982)).
 Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F. Supp. 324 (E.D. Pa. 1991).
 Safeguard Scientifics, 766 F. Supp. at 333–34 (emphasis added).
 Amquip Corp. v. Admiral Ins. Co., No. 03-4411, 2005 U.S. Dist. LEXIS 5462 (E.D. Pa. Mar. 31, 2005).
 Episcopal Church v. Church Ins. Co., 53 F. Supp. 3d 816 (D.S.C. 2014).
 Episcopal Church, 53 F. Supp. 3d at 827 (emphasis added).
 Episcopal Church, 53 F. Supp. 3d at 827 (citing Ultra Coachbuilders, Inc. v. Gen. Sec. Ins. Co., 229 F. Supp. 2d 284, 289 (S.D.N.Y. 2002)).
 IBP, Inc. v. Nat’l Union Fire Ins. Co., 299 F. Supp. 2d 1024 (D.S.D. 2003).
 IBP, 299 F. Supp. 2d at 1031.
 Towne Realty v. Zurich Ins. Co., 534 N.W.2d 886 (Wis. Ct. App. 1995).
 Towne Realty, 534 N.W.2d at 894–95.
 Towne Realty, 534 N.W.2d at 894.