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(Article from Insurance Law Alert, November 2017)

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A Massachusetts appellate court ruled that when an insurer offers to defend without a reservation of rights and the insured refuses to cede control of the defense to the insurer’s selected counsel, the insured is not entitled to reimbursement of defense costs incurred during the period in which control over the defense was in dispute.  OneBeacon Am. Ins. Co. v. Celanese Corp., 92 Mass. App. Ct. 382 (2017).

OneBeacon agreed to defend Celanese without a reservation of rights and sought to assume control of Celanese’s defense.  Celanese refused to cede control of the defense or replace its existing counsel with OneBeacon’s selected counsel, alleging that a conflict of interest existed.  OneBeacon filed suit, seeking a declaration that it had the right to control Celanese’s defense, which the court granted.  Thereafter, a dispute arose as to whether OneBeacon was responsible for the defense costs incurred during the time frame in which the parties disputed control over the defense.  A Massachusetts trial court ruled that OneBeacon was liable for the reasonable fees incurred by Celanese during that period.  The appellate court reversed.

The appellate court ruled that when OneBeacon offered to defend Celanese without a reservation of rights, it obtained the right to control the defense, including the right to select counsel.  The court further held that although a conflict of interest may justify an insured’s refusal to cede control of the defense, none existed here.  In particular, the court rejected Celanese’s assertion that a conflict existed by virtue of a prior “unfair practices” ruling against OneBeacon, explaining that that ruling related to a discrete issue about the cost sharing agreement and did not concern the manner in which OneBeacon would defend Celanese.  The court also noted that a conflict does not exist simply because the insured and insurer have differing views as to the insured’s liability or defense strategy.