Controlling the Defense in Massachusetts

In One Beacon America Insurance Co. v. Celanese Corp., 94 Mass. App. Ct. 382, 84 N.E.3d 867 (Mass. App. 2017), the Massachusetts Court of Appeals held that insurance companies have the right to control the defense of the insured after offering to defend the insured without a reservation of rights. If an insured refuses to accept the insurance company’s defense, it loses the right to obtain reimbursement for defense costs unless it can show a sufficient conflict of interest existed.

The insured, Celanese Corporation, had been subjected to various lawsuits over a span of years involving bodily injury claims arising from asbestos and chemicals contained in Celanese’s products or disbursed at Celanese’s facilities. These lawsuits had been defended under an existing defense cost-sharing agreement which superseded the defense costs provisions of One Beacon’s policy and provided that One Beacon would pay a specific percentage of Celanese’s defense costs for specified claims. In April 2009 Celanese sent a letter to One Beacon, notifying One Beacon that it was terminating the parties’ existing defense cost-sharing agreements and was, therefore, demanding that One Beacon defend the ongoing asbestos and chemical product lawsuits. One Beacon then agreed to defend Celanese in the underlying cases without a reservation of rights. One Beacon then sought to assume full control of Celanese’s defense of those claims. However, Celanese refused to cede its control of the defense to One Beacon. Additionally, Celanese refused to replace the counsel it had employed for the past 14 years with the representation from counsel selected by One Beacon. The basis upon which Celanese refused to yield control of its defense was a “demonstrated conflict of interest” that Celanese alleged existed between Celanese and One Beacon.

One Beacon filed a declaratory judgment action seeking to establish its control over the defense of the underlying asbestos and chemical claims. One Beacon also sought a judicial ruling that One Beacon was not liable to Celanese for the defense costs that Celanese had incurred from April 13, 2009 (when Celanese elected to revert to a defense under One Beacon’s general policies as opposed to the cost-sharing agreement) through May 27, 2011 (when the trial court ruled that One Beacon had the right to control Celanese’s defense). Although the trial court did rule that One Beacon had the right to control the defense, the judge also ruled that One Beacon remained liable for reasonable and necessary defense costs incurred by Celanese during the questioned time period. The attorney fee issue was referred to a special master who eventually awarded Celanese $2,435,921.49 in attorney’s fees plus prejudgment interest. An appeal followed.

The Court of Appeals began its analysis by asking four questions: (1) does One Beacon have the right to control Celanese’s defense if One Beacon has offered to defend without a reservation of rights?; (2) does Celanese have the right to refuse One Beacon’s control of the defense if a sufficient conflict of interest exists?; (3) does a sufficient conflict of interest exist?; and (4) is One Beacon liable for defense costs where Celanese has refused One Beacon’s control of the defense?

Turning to the first question, the court held that One Beacon had the right to control Celanese’s defense because One Beacon had offered to defend Celanese against the remaining asbestos and chemical product injury claims without a reservation of rights. The right to control the defense included the authority to choose the counsel who would defend the claims, as well as to make other decisions related to the control of the defense that would traditionally be vested in the insured, as a named party in the case.

Turning to the second question, the court noted that One Beacon’s right to control the defense was not absolute. If a relevant conflict of interest existed, then One Beacon might not have the right to control Celanese’s defense. Citing to other authorities, the Court of Appeals noted that a conflict of interest could arise between the insured and the insurance company (other than a dispute over the scope of coverage): “(1) when the defense tendered is not a complete defense under circumstances of which it should have been; (2) when the attorney hired by the carrier acts unethically and, at the insurer’s direction, advances the insurer’s interests at the expense of the insureds; (3) when the defense would not, under the governing law, satisfy the insurer’s duty to defend; and (4) when, though the defense is otherwise proper, the insurer attempts to obtain some type of concession from the insured before it will defend.” 84 N.E.3d at 873 citing Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 689 (Tex. 2004). The court also noted that another type of conflict of interest could arise in situations where the defense provided by the insurance company’s appointed defense counsel was materially inadequate. Under the foregoing circumstances, an insured could be justified in refusing the insurance company’s control of the defense. Under those circumstances the insured would be entitled to coverage for the costs it incurred in hiring its own independent counsel to defend the claims. Having resolved that a conflict of interest could displace the insurer’s right to control the defense, the court then moved to the issue of whether there was a sufficient conflict between Celanese and One Beacon to justify Celanese’s rejection.

The court rejected Celanese’s argument that One Beacon’s offer to defend Celanese was only a conditional offer because One Beacon required Celanese to terminate its current counsel that had been representing Celanese in the asbestos and chemical cases for the past 14 years. The court rejected this argument because the insurance company had the right to appoint its own selected counsel and this right was an inherent right in the insurer’s control of the defense as part of its duty to defend.

Celanese argued that a conflict of interest existed because One Beacon had demonstrated through a prior case involving Celanese that it would put its own interests before Celanese’s interests in controlling the defense. The prior case involved a jury verdict finding that One Beacon and its third-party administrator were liable for unfair and deceptive practices in relationship to the parties’ prior cost-sharing agreement. However, this issue was a very finite issue concerning only the delayed payments on certain claims and did not concern the manner in which One Beacon would conduct its defense and did not lead to an inescapable conclusion that One Beacon could not fairly evaluate and defend the underlying claims on their merits. The nexus to a potential conflict of interest was further attenuated, according to the court, because Celanese had terminated the cost-sharing agreement that One Beacon was found to have breached by the previous verdict. Currently, Celanese had requested One Beacon to provide a defense under its general liability policies and not any type of cost-sharing agreement.

Celanese argued that One Beacon had a corporate policy of exhausting its liability limits rapidly in order to avoid paying defense costs. This argument came from statements that were made by One Beacon in the prior litigation. However, the court found that Celanese’s concern did not create a sufficient conflict of interest to justify the refusal of One Beacon’s control of the defense. The court noted that a conflict of interest did not exist merely because the insured and the insurer had a different view as to the insured’s potential liability because the parties still had a common interest in defense counsel providing a vigorous defense. The court also rejected Celanese’s argument that One Beacon and Celanese had disparate viewpoints as to how to defend the case. Celanese wanted to emphasize in the defense its right to protect its reputation in the ongoing asbestos and chemical product litigation. However, the opposing tactics of defense did not give rise to a sufficient conflict of interest to justify Celanese’s refusal to allow One Beacon to control the defense.

Finally, turning to the last question involving Celanese’s refusal of One Beacon’s control of the defense, the court found that because Celanese failed to demonstrate that there was a sufficient conflict of interest, the trial court’s ruling that One Beacon was liable to pay for defense costs required a reversal of the ruling. Absent a sufficient conflict of interest on the part of One Beacon, Celanese lost its right to obtain reimbursement for defense costs when it refused to accept One Beacon’s defense, which was offered without a reservation of rights.

Note: OneBeacon America was sold to Armour Group Holdings in 2014. After the acquisition, Armour renamed the company Lamorak Insurance Company.