A Massachusetts federal court ruled last week that Allied World Insurance Co. must pay for a Boston law firm’s defense of counterclaims asserted against it in a lawsuit over, among other things, the proper ownership of client files and materials.

The coverage action arises from a state court action whereby Governo Law Firm LLC (GLF) sued six attorneys who left GLF to start a separate law firm, CMBG3 Law LLC, after unsuccessfully attempting to purchase GLF from its founding partner, David Governo. The complaint alleges, among other things, that the dissident lawyers unlawfully took proprietary databases and file materials.

The dissident attorneys responded by filing three counterclaims against GLF, seeking a declaration that they were entitled to the client materials, damages for intentional interference with business relations, and damages for violating the Employee Retirement Income Security Act.

GLF tendered the counterclaims to Allied World for defense under its professional liability insurance policy but Allied World declined coverage, contending that the counterclaims were “either excluded from coverage or did not concern legal malpractice.” GLF brought a coverage action against Allied World in Massachusetts state court and Allied World removed the suit to federal court. In June, GLF was awarded approximately $1.2 million in the suit against CMBG3 and the dissident lawyers.

In the coverage action, Allied World argued that GLF’s claim was not covered because the counterclaims asserted against Governo and GLF are either excluded from coverage or do not concern legal malpractice and, instead, amount to a business dispute. The Court disagreed and ultimately held that Allied World should have defended the underlying action. The Court explained that “[w]hile Allied World may be correct that there is a business component to [the] alleged unprofessional handling of the matter, it is not unreasonable to interpret the alleged conduct as ‘solely’ legal services that plaintiffs undertook, or failed to undertake, on behalf of their existing clients, no matter how mercenary plaintiffs’ subjective motives were.” Thus, the court concluded that one count of the counterclaim arguably came within the scope of coverage under the Policy. And under Massachusetts law (which is like most states), where one claim arguably comes within the scope of coverage, the insurer must defend all claims asserted against the insured. The court agreed with Allied World, however, that Allied World need not cover the cost of prosecuting GLF’s affirmative claims against the dissident lawyers even where, as was alleged here, the affirmative claims were “intertwined” with the counterclaims.

The Governo decision is significant because it illustrates the breadth of an insurer’s defense obligation even in instances where a lawsuit was first initiated by the insured. The decision also serves as a reminder that defense coverage should be afforded for all claims against an insured, even if only one claim has the potential for coverage under the Policy.