Between the Lines

A Discussion of Case Law and Statutory Law Affecting Commercial Lines of Insurance


Massachusetts Appeals Court Confirms the Right of a Liability Insurer Defending Without a Reservation of Rights to Control Defense and Settlement Even Where the Policyholder Disagrees with the Insurer’s Defense Strategy

The Court Also Confirms That Massachusetts Applies A Per Se Rule That A Reservation of Rights Creates A Conflict Entitling A Policyholder To Independent Counsel.

 A dispute concerning liability insurance coverage for toxic tort suits has given the Massachusetts Appeals Court an opportunity to clarify some basic principles concerning the duty to defend:

  • An insurer that defends a policyholder without reserving rights under a traditional general liability policy has the right to control the defense and settlement of the suit against the policyholder.
  • When an insurer defends without reservation, the fact that the insurer may have a financial interest in settling the suit, contrary to the policyholder’s interest in protecting its reputation by defending the suit, does not constitute a conflict that entitles the policyholder to control the defense and settlement.
  • Massachusetts follows a per se rule that, when an insurer does reserve its rights, the policyholder is entitled to its choice of counsel and to control the defense.

 The policyholder in OneBeacon America Ins. Co. v. Celanese Corp, unhappy with a cost-sharing agreement with its insurer for the toxic tort suits, informed the insurer that it was terminating that agreement, and demanded a defense in accordance with the terms of its general liability policies.  The insurer agreed to defend without reservation, waiving any issues of coverage.  The policyholder, claiming a conflict of interest, refused to yield control of the defense to the insurer.  The insurer refused to pay for independent counsel selected by the insured and filed for a declaratory judgment that it was not obligated to do so.

The trial court ruled that the insurer had the right to control the defense, but awarded the policyholder its reasonable defense costs through the date of its ruling.  Both sides appealed.  The insurer asserted that it had no obligation to pay any of the independent counsel’s fees.  The policyholder argued that the trial court erred by failing to find a conflict that required the insurer to pay all of the fees charged by the policyholder’s chosen counsel.

The Appeals Court held that an insurer who defends without reserving its rights is entitled to control the defense of its policyholder.  The court noted that this question had not explicitly been addressed in Massachusetts cases, but that the result was implicit in cases discussing the limitations of a defense subject to a reservation of rights.

The court then turned to the question whether there were any circumstances where an insurer defending without reservation might have a conflict of interest sufficient for the policyholder to refuse to yield control of the defense.  The court held that such a conflict may arise in the following circumstances (other than a dispute over the scope of coverage, which would ordinarily be the subject of a reservation of rights): (1) when the insurer does not tender a complete defense; (2) when the attorney hired by the insurer acts unethically by favoring the insurer’s interests at the expense of the policyholder’s; (3) when the defense does not satisfy the duty to defend under governing law; and (4) when the insurer attempts to obtain some type of concession from the policyholder before it will defend.

In the course of discussing the issue of conflicting interests, the court stated in a footnote that, when an insurer does reserve its right to deny coverage, Massachusetts follows a per se rule that such a reservation creates a conflict of interest which entitles the policyholder to independent counsel.  While this could be inferred from prior Massachusetts law, it had not previously been stated categorically by a Massachusetts appellate court.  Indeed, the Appeals Court cited, in support of the existence of this per se rule in Massachusetts, a case from the United States Court of Appeals for the Fourth Circuit.

The court went on to hold that, when an insurer defends without reservation, a dispute concerning defense tactics is not a conflict sufficient to entitle the policyholder to independent defense counsel.  Specifically, the fact that the insurer may wish to settle suits that the policyholder, in order to protect its reputation, may wish to defend, does not entitle the policyholder to have the insurer pay for its attorney of choice.  As the court pointed out, the contract between the policyholder and the insurer requires the insurer to protect the policyholder against specific risks: claims of bodily injury or property damage.  The policy does not require the insurer to defend the policyholder’s reputation.

Finally, the court held that the lower court erred by awarding any defense costs to the policyholder.  The policyholder had the right to choose to have its own counsel defend, instead of counsel selected by the insurer.  However, where the insurer did not reserve the right to deny coverage and had no other conflict of interest, the policyholder did not have the right to require the insurer to pay for that defense by counsel of the policyholder’s choice.  A contrary ruling, the court observed, would nullify the insurer’s contractual right to control the defense.

The Appeals Court’s decision does not reach the question whether, by insisting on controlling the defense, the policyholder gives up its right to indemnification.  At least one of the cases from other jurisdictions cited by the court states that the policyholder may still be entitled to indemnification: “If the insured chooses to conduct its own defense, the insured is responsible for all attorneys’ fees related thereto.  The insurer is still potentially liable for indemnification for a judgment within the scope of insurance coverage.  However, having refused the contractual terms of the policy, the insured foregoes its right to compensation for defense fees.” Finley v. Home Ins. Co., 90 Haw. 25, 35 (1998).  Whether a Massachusetts court would agree remains to be seen.

The case is OneBeacon America Ins. Co. v. Celanese Corp., __ Mass. App. Ct. __ (2017).

About the Author

Harvey Nosowitz – Counsel

Harvey helps clients with commercial litigation, in particular insurance coverage, personal injury and products liability cases.

Please contact him with any questions:
(617) 621-6555.

Posted In: Duty to Defend

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