The scope of an insurer’s right to control the defense of an insured is an underdeveloped issue in Massachusetts case law, which the Appeals Court recently addressed in OneBeacon America Ins. Co. v. Celanese Corp., No. 16-P-203 (Oct. 16, 2017). The decision helps clarify the rights of an insurer when it has offered to provide a defense without a reservation of rights.

Briefly, the insured, a leading producer of acetyl chemical products, was subject to numerous lawsuits involving claims of bodily injury from asbestos and chemicals allegedly contained in its products and facilities. The insured retained its own counsel in those lawsuits for fourteen years, subject to a defense cost-sharing agreement with the insurer that superseded the defense cost provisions of the applicable policies. When the defense cost-sharing agreement was terminated by the insured, the insurer agreed to defend against the underlying lawsuits under the defense provisions of the policies without a reservation of rights. The insurer also sought to assume control of the lawsuits and select new counsel. However, the insured refused to cede control of the defense or replace counsel, alleging that a conflict of interest precluded the insurer’s assumption of control.

In a decision authored by Associate Justice Trainor, the Appeals Court inferred from Massachusetts case law suggesting that when an insurer issues a reservation of rights it relinquishes the right to control the defense, that inversely “when an insurer offers to defend the insured without a reservation of rights, it may retain control of that defense.” Because the insurer in Celanese offered to defend its insured without a reservation of rights, it retained the right to control the defense, including the right to appoint new counsel.

The Appeals Court next addressed the question of whether and under what circumstances might a conflict of interest justify an insured’s refusal to cede control of a defense to an insurer. In considering this question, the Appeals Court borrowed a list of factors from the Texas Supreme Court enumerated in Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004). These factors include:

  • when the defense tendered is not a complete defense under the circumstances in which it should have been;
  • when the attorney hired by the insurer acts unethically and, at the insurer’s direction, advances the insurer’s interests at the expense of the insured’s;
  • when the defense would not, under the governing law, satisfy the insurer’s duty to defend;
  • when, though the defense is otherwise proper, the insurer attempts to obtain some type of concession from the insured before it will defend; and
  • when the defense provided by the counsel selected by the insurer is materially inadequate.

In Celanese, the insured argued that a conflict existed because: (1) the insurer required it to terminate the counsel that had been representing it for fourteen years; (2) the insurer was earlier found liable for delayed payments to the insured on certain claims, which purportedly demonstrated that the insurer would put its own interests before the insured’s interests in controlling the defense; and (3) the insurer and insured disagreed about litigation tactics.

The Appeals Court rejected each of these purported conflicts. As to the first alleged conflict, the right to select new counsel “is inherent in the insurer’s control of the defense as part of its duty to defend.” Thus, the insurer’s decision to exercise that right cannot create a conflict of interest. As to the second alleged conflict, there was no nexus between the late payments and the insured’s contention that the insurer would be unable to fairly evaluate and defend the underlying claims. Finally, as to the third alleged conflict, “disparate viewpoints as to how the defense should be conducted” do not give rise to a sufficient conflict of interest because the “parties still have a common interest in defense counsel providing a vigorous defense.” Moreover, the insured’s concern for protecting its reputation in the underlying lawsuits, which formed the basis for the dispute as to litigation strategy, “was not something [the insurer] was required to insure or defend.”

As a result, the insurer had the right to control the defense, including to select new counsel, and the  insured “lost its right to obtain reimbursement for defense costs when it refused to accept [the insurer’s] defense, offered without a reservation of rights.”