One of the primary objections I hear from insurance agents about captives is that commercial policies are comprehensive. But, the devil is really in the details here — or, more specifically, in the legal precedent interpreting the policies.
For example, how comprehensive is a duty to defend? On the surface, the wording looks pretty iron clad. But there’s a big split among the states as to what duties this actually encompasses:
Does the duty to defend require an insurer to prosecute an insured’s counterclaims or fund the insured’s counterclaims? The First Circuit certified these questions to the Massachusetts Supreme Judicial Court. In Mount Vernon Fire Insurance Company v. Visionaid, Inc., issued on June 22, 2017, the Massachusetts Supreme Judicial Court answered them, concluding that the duty to defend – under either contract or the common law – encompasses no duty either to prosecute a counterclaim or to fund the prosecution of a counterclaim.
Some states view it as an unambiguous word, excluding representation for claims by the insured. Other jurisdictions view “defend” as ambiguous, requiring insurers to prosecute affirmative counterclaims in some instances, such as where the counterclaim would reduce liability on, or is factually intertwined with, the underlying claim. Massachusetts now firmly stands with those states following the literal and narrow reading of “defend.” This opinion also resolves any ambiguity about the scope of defense cost payments under Massachusetts law by clearly stating that the duty to defend and the duty to pay defense costs are co-extensive.
If the company had a captive, they probably would have underwritten a legal liability policy, which would have indemnified them for this loss.