The October 19, 2017 Appeals Court decision, OneBeacon America Insurance Company vs. Celanese Corporation resulted from an ongoing dispute over whether the insured or the insurance company could control the defense of a number of product exposure cases.
The Celanese decision gives an inside look at the high-stakes litigation over “duty to defend” liability policies held by large corporations. However, the case also provides an excellent primer for agents, insureds and company claim personnel dealing with questions on an insured’s rights after an insurer issues a reservation of rights in defending a third-party liability claim.
Toxic tort exposure cases generate defense cost agreements and litigation
OneBeacon has had over the years responsibility for the defense and indemnity of Celanese under certain exposure liability policies placed for policy periods between 1965-1971.
During a period of time, Celanese has been a defendant in a substantial number of legal suits involving bodily injury claims from asbestos and chemicals sold or used by Celanese. These longtail liability claims had been handled under a reservation of rights by OneBeacon with a defense cost-sharing agreement. Under the cost-sharing arrangement, OneBeacon paid, with other insurers, a pro-rata percentage of Celanese’s defense costs for certain specified claims.
Following litigation, that ended in 2009, between OneBeacon and Celanese over the cost-sharing agreement, Celanese notified OneBeacon it was terminating the parties’ agreement and demanding OneBeacon instead defend the ongoing asbestos and chemical product injury claims under its original general liability policies by paying Celanese’s private defense counsel.
OneBeacon replied to Celanese’s letter by offering to defend Celanese against the underlying asbestos and chemical product injury claims without any reservation of rights. OneBeacon also offered to waive any issues of coverage and to indemnify Celanese for any settlements or judgments up to its full liability limits. However, OneBeacon also sought to assume full control of Celanese’s defense of these claims.
Celanese, however, refused to cede control of its defense to OneBeacon or to replace the counsel it had employed for the prior fourteen years with the representation selected by OneBeacon.
Superior Court awards Celanese $2.4 million for defense costs
In March 2010, OneBeacon filed a Superior Court action for declaratory relief seeking the Court to declare that:
- under its policies, OneBeacon had the right to control the defense of Celanese and select counsel because of its offer to defend without a reservation of rights;
- Celanese breached its contractual obligations under the policies by refusing to cede control of its defense; and
- to the extent, OneBeacon’s duty to defend was not extinguished by Celanese refusing to relinquish control of its defense, OneBeacon’s liability was limited to its pro rata share of the cost to defend and indemnify Celanese regarding all underlying asbestos actions.
In response, Celanese counterclaimed seeking its own declaratory judgment that, “due to a conflict,” it had the right to control its own defense in the underlying actions and that OneBeacon had to pay the attorney’s fees to carry out that defense.
Celanese further asked the Court to rule OneBeacon:
- breached its contractual obligations by insisting on controlling Celanese’s defense and failing to pay the defense costs Celanese incurred.
- breached its duty of good faith and fair dealing; and committed unfair and deceptive business practices in violation of G. L. c. 93A.
A Superior Court judge entered an order in May 2011, ruling that OneBeacon had the right to control the defense of Celanese’s underlying claims because of its offer to defend without a reservation of rights. In making this ruling, the judge also found that Celanese did not breach its contractual duties to OneBeacon by refusing to cede control of its defense.
Because Celanese had not breached its contract by refusing to allow OneBeacon to control its defense, the judge found OneBeacon liable to Celanese for the defense costs Celanese had incurred during the two-year period when the right to control the defense was being litigated.
The award to Celanese for this two-year period totaled $2,435,921.49 in attorney’s fees, plus 12% prejudgment interest from May 27, 2011, to May 31, 2013.
OneBeacon appeals to the Appeals Court the Superior Court decision awarding defense costs.
Massachusetts has a fixed legal rule that holds where an insurance company reserves the right to deny coverage for a claim, then a conflict of interest between the insurance company and insured exists. Because of this conflict, an insurer cannot reserve its rights to disclaim liability in a liability case and still insist on retaining control of the insured’s legal defense.
If the insurer will not withdraw its reservation of rights, the insured may select its own counsel and the insurer has the obligation to pay the insureds attorney’s fees.
However, until this Celanese decision, Massachusetts courts had not explicitly commented on an insurer’s right to control the defense of an insured without a reservation of rights or when other conflicts of interest might require an insurer to relinquish the defense of an insured to the insured’s counsel.
Appeals Court finds Celanese had no right to refuse OneBeacon control of its defense
In Celanese, the Appeals Court had no difficulty finding that in offering to defend Celanese without a reservation of rights, OneBeacon had the right to control Celanese’s defense of the claims involved. This right to control Celanese’s defense included the right to choose the counsel who will defend the claims and to make other decisions related to control of the defense normally vested in the insured, as the named defendant.
The Appeals Court, however, stated that while OneBeacon had this right to control Celanese’s defense, such right was not absolute.
The Appeals Court noted circumstances where an insured could insist on the insurer paying for counsel selected by the insured because of conflicts of interest.
The Court stated such conflicts can arise:
- when the defense tendered is not a complete defense under circumstances in which it should have been;
- 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 insured’s interests;
- when the defense would not, under the governing law, satisfy the insurer’s duty to defend, and
- when, though the defense is otherwise proper, the insurer attempts to obtain some type of concession from the insured before it will defend.”
Appeals Court rejects Celanese’s arguments on a conflict of interest
Celanese unsuccessfully attempted to convince the Court that a real conflict of interest existed between it and OneBeacon notwithstanding OneBeacon’s unconditional offer to withdraw its reservation of rights.
First it argued that OneBeacon’s offer was conditional because it required to terminate Celanese’s counsel it had use for 14 years in defending specialized chemical cases.
Second it argued that the 2009 jury verdict in the litigation between OneBeacon, OneBeacon’s third-party administrator and Celanese had shown that OneBeacon would put its interest before it is insureds.
Third, Celanese argued that it and OneBeacon disagreed “as the appropriate way to conduct the defense of the underlying claims.”
The Appeals Court found none of the evidence supporting these arguments showed a legally actionable conflict of interest sufficient to deny OneBeacon the right to control Celanese’s defense. The Court then ruled Celanese had no right to obtain reimbursement for defense costs after it refused to accept OneBeacon’s defense, offered without a reservation of rights.
Based on The Appeals Court ended its decision with an order stating:
…the judgment that awarded Celanese defense costs [$2.4 million] for the period April 13, 2009, through May 27, 2011 …is vacated, and the judgment shall …declare that OneBeacon has no duty to reimburse Celanese for defense costs that Celanese incurred during that period of time….”
Celanese has 20 days to request further appellate review
The Massachusetts Appeals Court is an intermediate appellate court. The ultimate judicial authority in Massachusetts resides with the Supreme Judicial Court. Parties dissatisfied with an Appeal Court’s decision may apply for further appellate review within 20 days of the decision by the Appeals Court. The allowance of the appeal is discretionary with the Supreme Judicial Court.
Here, an application for further appellate review by Celanese seems likely. Agencychecklists will monitor this case for any further appeal.