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October 20, 2017

Legal Update
Susan A. Hartnett

Appeals Court underscores liability insurer’s right to control defense

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There is a well-established rule of liability-insurance law in Massachusetts and elsewhere that while an insurer typically has the contractual right to “control” a litigation defense that it provides to a policyholder, including the right to select the law firm to handle the matter, the insurer may lose this right of control when it provides the defense under a reservation of rights that creates a conflict of interest between insurer and policyholder. In a recent decision, the Massachusetts Appeals Court rejected a policyholder’s claim that even in the absence of a reservation of rights, there was a conflict of interest that transferred this right of control to the policyholder. The court held that no such conflict existed, and that the policyholder had wrongfully refused to cede control of the defense. And notwithstanding its claimed good faith in believing that a conflict existed, the policyholder, not the insurer, would have to bear the $2.4 million in legal fees and costs incurred in the defense during the time the parties were litigating the control issue.

The dispute in OneBeacon America Insurance Company v. Celanese Corporation involved a corporate policyholder, Celanese, who faced a series of lawsuits claiming personal injuries from the company’s asbestos and chemical products. Celanese sought to have its liability insurer, OneBeacon, fund the company’s defense in the suits, but wanted them handled by a law firm that had represented Celanese in such matters for many years. Though OneBeacon asserted no reservation of rights as to coverage for the claims, Celanese argued that, among other things, the potential prejudice from having new counsel appointed, and differences in OneBeacon’s and Celanese’s views about strategy for resolving the matters, including disagreement about the importance of litigating cases to preserve the company’s reputation, created a conflict of interest that should give Celanese the right to control the defense.

The Appeals Court granted that there might be unusual factual circumstances in which such a conflict might arise even without a reservation of rights. But none of the reasons offered by Celanese, the court held, sufficed to create such a conflict. In the absence of a conflict, the insurer’s contractual right to select counsel and otherwise control the defense remained intact. Moreover, having wrongfully refused to cede control of the defense, the court held (here reversing a ruling to the contrary by the lower court), Celanese would be required to bear the costs of its own defense during the time the parties were litigating the control issue.

As did the Supreme Judicial Court’s June 2017 decision in Mount Vernon Fire Ins. Co. v. VisionAid, Inc. (which we discussed here, holding that an insurer’s duty to defend does not include a duty to prosecute a policyholder’s counterclaims), the OneBeacon decision provides helpful guidance on the limits of a policyholder’s rights to a defense provided under a liability-insurance policy.