ONEBEACON AMERICA INSURANCE COMPANY vs. CELANESE CORPORATION.

TRAINOR, J. This appeal arises from a series of cross motions for summary judgment. The plaintiff, OneBeacon America Insurance Company (OneBeacon), appeals from so much of the final judgment

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as awarded reasonable and necessary defense costs to its insured, Celanese Corporation (Celanese), that Celanese incurred from April 13, 2009, through May 27, 2011. [Note 1] On May 27, 2011, a judge of the Superior Court determined that OneBeacon was entitled to take control of Celanese's defense as of April 13, 2009 (see note 1, supra). The issue on appeal is whether that determination precludes Celanese from receiving any reimbursement for defense of the underlying claims during the period of time when the question of control over the defense was being litigated. OneBeacon argues that it is not liable for any defense costs incurred by Celanese during that period of time because OneBeacon offered to defend Celanese without a reservation of rights. Celanese, on cross appeal, contends that the judge committed an abuse of discretion by not awarding the full amount of defense costs that Celanese requested. We vacate so much of the judgment that held OneBeacon liable for Celanese's defense costs for the period of time at issue, and therefore do not reach the issues raised in Celanese's cross appeal.

Background. The following undisputed facts are taken from the summary judgment record. See Augat, Inc. v. Liberty Mut. Ins. Co., 410 Mass. 117 , 120 (1991) ("The standard of review of a grant of summary judgment is whether, viewing the evidence in the light most favorable to the nonmoving party, all material facts have been established and the moving party is entitled to a judgment as a matter of law").

Over the years, Celanese has been subject to numerous legal actions involving claims of bodily injury from asbestos and chemicals allegedly contained in Celanese's products or facilities. In an effort to seek coverage under its insurance policies in April, 2009, Celanese sent a letter to OneBeacon stating that it was terminating the parties' then-existing defense cost-sharing agreements [Note 2] and demanding that OneBeacon instead defend the ongoing

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asbestos and chemical product injury claims under its original general liability policies. [Note 3] OneBeacon's general policies provided:

"DEFENSE, SETTLEMENT, SUPPLEMENTARY PAYMENTS. As respects the insurance afforded by the terms of this policy [OneBeacon] shall:

"A. defend any suit against [Celanese] alleging bodily injury or property damage, even if such suit is groundless, false or fraudulent; but [OneBeacon] may make such investigation, negotiation and settlement of any claim or suit as it deems expedient;

"B. pay in addition to the applicable policy limits of liability:

"(1) all expenses incurred by [OneBeacon]." [Note 4]

In response to Celanese's letter, OneBeacon agreed to defend Celanese against the underlying asbestos and chemical product injury claims without a reservation of rights. To this effect, OneBeacon offered to waive any issues of coverage [Note 5] and to indemnify Celanese from 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.

In response, Celanese refused to cede its control of the defense or replace the counsel it had employed for the past fourteen years with the representation selected by OneBeacon. Celanese alleged that because a "demonstrated conflict of interest" existed, it was

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not required to yield control of its defense. [Note 6]

OneBeacon replied by advising Celanese that, as Celanese's insurer, it did not consent to Celanese's retention of independent counsel and was not contractually obligated to compensate Celanese for such defense costs.

In March, 2010, OneBeacon filed an action for declaratory relief. [Note 7] A judge entered an order in May, 2011, [Note 8] ruling on the parties' cross motions for summary judgment, and declaring that OneBeacon had the right to control the defense of Celanese's underlying claims as a result of its offer to defend without a reservation

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of rights. [Note 9] The parties then filed further cross motions for summary judgment on the issues underlying this appeal, particularly whether OneBeacon was liable to Celanese for the defense costs Celanese incurred during the period of April 13, 2009, (when Celanese elected to revert to defense under OneBeacon's general policies) through May 27, 2011 (when the judge ruled that OneBeacon had the right to control Celanese's defense. [Note 10] On the further cross motions, the judge ruled that OneBeacon was liable for reasonable and necessary defense costs incurred by Celanese during this period of time as part of OneBeacon's duty to defend. [Note 11] The judge further referred the issue of the amount of reasonable and necessary legal fees to a special master, and ultimately awarded Celanese $2,435,921.49 in attorney's fees, plus prejudgment interest from May 27, 2011, to May 31, 2013. [Note 12]

Discussion. Whether OneBeacon is liable for the defense costs incurred by Celanese is dependent on our answer to four questions: (1) Does OneBeacon have the right to control Celanese's defense if OneBeacon has offered to defend without a reservation of rights? (2) Does Celanese have the right to refuse OneBeacon's control of the defense if a sufficient conflict of interest exists? (3) Does a sufficient conflict of interest exist? and (4) Is OneBeacon liable for defense costs where Celanese has refused OneBeacon's control of the defense?

1. Insurer's defense without a reservation of rights. Massachusetts courts have not explicitly commented on an insurer's rights in seeking to defend an insured without a reservation of rights. However, such rights are logically inferred from Massachusetts case law that discusses the rights and limitations of an insurer's defense under a reservation of rights.

In Massachusetts, "[w]hen an insurer seeks to defend its insured under a reservation of rights, and the insured is unwilling that the insurer do so, the insured may require the insurer either to relinquish its reservation of rights or relinquish its defense of

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the insured and reimburse the insured for its defense costs" (emphasis added). Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387 , 406-407 (2003). In other words, "an insurer may [not] reserve its rights to disclaim liability in a case and at the same time insist on retaining control of its defen[s]e." Three Sons, Inc. v. Phoenix Ins. Co., 357 Mass. 271 , 276 (1970) (quotation omitted). Thus, when an insurer offers to defend the insured without a reservation of rights, it may retain control of that defense. See id. at 276-277; Sullivan, supra. See also Mount Vernon Fire Ins. Co. v. VisionAid, Inc., 91 F. Supp. 3d 66, 73 (D. Mass. 2015) (VisionAid) ("[The insured] admits, however, that [the insurer] has already withdrawn its reservation. Accordingly, [the insurer] has no obligation to relinquish its defense of [the insured] or to permit [the insured] to utilize independent counsel at its expense"); 1 Windt, Insurance Claims & Disputes § 4.25, at 225 (6th ed. 2013) (Windt) (A duty to defend provision "not only obligate[s] the insurance company to provide a defense, but also give[s] it the right to control the insured's defense").

Here, OneBeacon offered to defend Celanese against the remaining asbestos and chemical product injury claims without a reservation of rights. To this effect, OneBeacon offered to waive any issues of coverage and to indemnify Celanese from any settlements or judgments up to its full liability limits. In offering to defend Celanese without a reservation of rights, OneBeacon has the right to control Celanese's defense of those claims. See Three Sons, 357 Mass. at 276-277; Sullivan, 439 Mass. at 406-407. This right to control Celanese's defense includes the authority to choose the counsel who will defend the claims and to make other decisions related to control of the defense that would traditionally be vested in the insured, as a named party in the case. See Sullivan, supra at 407; Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004).

2. Insured's right to justifiably refuse insurer's control of defense when a sufficient conflict of interest exists. While OneBeacon has a right to control Celanese's defense as a result of its offer to defend without a reservation of rights, such right is not absolute. [Note 13] See Magoun v. Liberty Mut. Ins. Co., 346 Mass. 677 , 684 (1964) ("Nevertheless, the insurer's discretion under the

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covenant to defend is not unlimited"); Davalos, 140 S.W.3d at 688 ("Under certain circumstances, however, an insurer may not insist upon its contractual right to control the defense"). See also Windt, supra at §§ 4:20, 4:25 (recognizing circumstances where insured may justifiably refuse insurer's control of defense). Massachusetts courts have recognized that an insured may rightfully refuse the insurer's control of the defense when a conflict of interest arises. See J. D'Amico, Inc. v. Boston, 345 Mass. 218 , 227 (1962); Magoun, 346 Mass. at 685 (recognizing a "possible divergence of interests" between the insurer and the insured). See also VisionAid, 91 F. Supp. 3d at 73, citing Sullivan, 439 Mass. at 406-407 ("Absent a conflict of interest, in order to entitle an insured to independent counsel at the insurer's expense, an insured must demonstrate that the insurer is defending it under a reservation of rights"). However, Massachusetts courts have not yet addressed the question of what circumstances would create a conflict of interest sufficient to justify an insured's refusal of an insurer's control of the defense when the insurer has offered to defend without a reservation of rights. [Note 14]

Other authorities have shed light on this issue. Circumstances in which a conflict of interest may arise between an insured and an insurer, other than a dispute over the scope of coverage, [Note 15]

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include: "(1) when the defense tendered is not a complete defense under circumstances in which it should have been, (2) 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, (3) when the defense would not, under the governing law, satisfy the insurer's duty to defend, and (4) when, though the defense is otherwise proper, the insurer attempts to obtain some type of concession from the insured before it will defend." Davalos, 140 S.W.3d at 689 (quotation omitted). See Windt, supra at § 4:25, at 226-228 (recognizing these circumstances as types of conflicts of interest). Another type of conflict of interest arises "if the defense provided by the counsel selected by the insurer was materially inadequate." Id. at § 4:25, at 228. An insured may justifiably refuse an insurer's control of the defense if one of these conflicts of interest exists. In such a circumstance, the insured is entitled to coverage of the costs it incurs by hiring its own counsel to defend the claims against it. See Davalos, supra. See also Windt, supra at § 4:25, at 225-228.

3. Has Celanese demonstrated that a sufficient conflict of interest exists? Celanese suggests that the third type of conflict of interest listed above exists in this case -- that OneBeacon's defense would not satisfy its duty to defend under governing law. Celanese offers several reasons to support its argument.

Celanese first argues that OneBeacon's defense did not satisfy its duty to defend because it made a "conditional offer [that] required Celanese to terminate . . . counsel [that had been representing Celanese] in these types of chemical cases for the past fourteen years." Despite Celanese's contentions, OneBeacon's offer did not demand the type of extra-contractual conditions that courts have recognized as resulting in a conflict of interest. See Motorists Mut. Ins. Co. v. Trainor, 33 Ohio St. 2d 41, 47-48 (1973); Davalos, 140 S.W.3d at 689. Instead, OneBeacon offered to defend Celanese without a reservation of rights and notified Celanese that it would choose the attorney that would conduct that defense. This is the type of authority that is inherent in the insurer's control of the defense as a part of its duty to defend. See Sullivan, 439 Mass. at 407 ("The policy language not only obligated [the insurer] to defend [the insured], but also, by extension, gave it the right to choose defense counsel"). See also

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Davalos, supra at 688 ("The right to conduct the defense includes the authority to select the attorney who will defend the claim and to make other decisions that would normally be vested in the insured as the named party in the case").

Celanese also argues that a conflict of interest existed because OneBeacon had demonstrated, through a 2009 jury verdict and trial testimony, that it would put its own interests before Celanese's interests in controlling the defense. Celanese urges that the 2009 jury verdict supports its contentions because the jury found OneBeacon and OneBeacon's third-party administrator liable for unfair and deceptive practices under G. L. c. 93A, in relation to the parties' prior cost-sharing agreement. However, as the judge noted, the violations under G. L. c. 93A found by the jury in the 2009 verdict involved "a very finite issue [concerning] only . . . delayed payments on certain claims." Despite Celanese's contentions, these findings by the jury do not concern the manner in which OneBeacon would conduct its defense and certainly do not "'create[] the inescapable conclusion' that OneBeacon cannot fairly evaluate and defend the underlying claims on their merits." Moreover, any such nexus to a potential conflict of interest is further attenuated where Celanese had terminated the cost-sharing agreement that OneBeacon was found in breach of by the 2009 verdict, and instead, requested that OneBeacon provide a defense against the underlying asbestos and chemical product injury claims under its general policies.

As to the trial testimony complained of by Celanese, the judge reasoned that the record contained no evidence suggesting that "OneBeacon has a policy of exhausting liability limits rapidly to avoid paying defense costs." [Note 16] While the statements made by OneBeacon at the 2009 trial did acknowledge the possibility that the amount of indemnity resulting from the defense of the case may exceed the insured's policy limit, this concern does not

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create a conflict of interest to justify Celanese's refusal of OneBeacon's control of Celanese's defense.

"A conflict of interest does not exist with regard to the conduct of the [insurer's] defense simply because the insured and the insurer have a different view as to the insured's potential liability. The parties still have a common interest in defense counsel providing a vigorous defense." Windt, supra at § 4:20, at 205. See Davalos, 140 S.W.3d at 690 ("[An insurer's] lawyer owes unqualified loyalty to the insured . . . [and] must at all times protect the interests of the insured if those interests would be compromised by the insurer's instructions" [quotation omitted]). Indeed, "[t]o mitigate the danger . . . that the insurer will favor its own interest to the exclusion of the insured's, good faith requires that it make the decision (whether to settle a claim within the limits of the policy or to try the case) as it would if no policy limit were applicable to the claim." Murach v. Massachusetts Bonding & Ins. Co., 339 Mass. 184 , 187 (1959). Finally, Celanese argues that a sufficient conflict of interest exists to justify its refusal of OneBeacon's control of the defense without a reservation of rights, because the parties have disparate viewpoints as to how the defense should be conducted. Particularly, Celanese emphasizes its right to protect its reputation in the ongoing asbestos and chemical product litigation.

Celanese argues that a conflict of interest exists because of the parties' dispute "as to the appropriate way to conduct [the] defense of the underlying claims." The judge summarized the parties' approach to Celanese's defense as follows:

"Celanese understandably places a high priority on its reputation, and seeks publicly to defend and to rebut any and all claims that its products or premises contain carcinogenic or other poisonous material. OneBeacon's business view is, equally unsurprisingly, a more pragmatic one. OneBeacon's focus is on reducing the volume and cost of pending cases wherever possible, by seeking out reasonable settlements and thus incurring and applying indemnity payments towards the policy limits, not solely defense payments." [Note 17]

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These opposing tactics of defense, however, do not give rise to a sufficient conflict of interest under our law to justify Celanese's refusal of OneBeacon's control of the defense.

"As with any contract, in interpreting an insurance policy, we begin with the plain language of the policy." Mount Vernon Fire Ins. Co. v. VisionAid, Inc., 477 Mass. 343 , 348 (2017). OneBeacon's general policies explicitly provide that OneBeacon will "defend any suit against [Celanese] alleging bodily injury or property damage, even if such suit is groundless, false or fraudulent; but [OneBeacon] may make such investigation, negotiation and settlement of any claim or suit as it deems expedient." Accordingly, "[Celanese] and [OneBeacon] entered into a contractual agreement that [required Celanese to] pay a certain amount of money to insure against a particular risk." Id. at 349. Here, that risk solely concerned claims of "bodily injury or property damage" against Celanese, and nothing more. See ibid. Protecting Celanese's reputation was not something that OneBeacon was required to insure or defend. See Golchin v. Liberty Mut. Ins. Co., 466 Mass. 156 , 159-160 (2013) ("We interpret the words of the standard policy in light of their plain meaning, . . . giving full effect to the document as a whole[,] . . . consider[ing] what an objectively reasonable insured, reading the relevant policy language, would expect to be covered . . . [and] interpret[ing] the provision of the standard policy in a manner consistent with the statutory and regulatory scheme that governs such policies" [quotation omitted]).

Moreover, our courts have addressed several safeguards available to an insured for protection against unreasonable settlements by an insurer that exceed the insured's policy limits. For example, an insured can sue an insurer for breach of its duty to defend if an insurer fails to settle the underlying suit for the policy limit and a reasonable insurer would have done so in such circumstances. See Boyle v. Zurich Am. Ins. Co., 472 Mass. 649 , 659 (2015) ("[The insurer] committed a breach of th[e] duty [to defend] by failing to settle the suit for the policy limit, an endeavor that, the judge found, any reasonable insurer would have undertaken"). Further, an insurer's decision whether to settle or try the case is

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measured by good faith. See Murach, 339 Mass. at 187; Home Indem. Ins. Co. v. Merchants Distribs., Inc., 396 Mass. 103 , 105 (1985) ("We have upheld a settlement by an insurance company where the amount paid was fully recoverable from the insured . . . . We said in that context that the insurer's judgment was final unless the insured showed fraud, negligence, or an absence of good faith in the making of the settlement" [quotation omitted]). See also Aetna Cas. & Surety Co. v. Sullivan, 33 Mass. App. Ct. 154 , 157-158 (1992) ("For example, [under the policy language,] in the case of multiple claims against an insured, good faith settlement with one claimant, or payment of all or part of a judgment favoring one claimant . . . would have the effect of discharging the insurer from defending additional claims beyond the policy limits. . . . The insurer, having exhausted the policy limits and provided a defense, the insured could not reasonably expect more" [emphasis omitted]). These protections mitigate, if not alleviate, any conflict of interest that Celanese argues is present in this case. The insurance policies allow OneBeacon to seek out settlements instead of defending Celanese's reputation by trying each case and denying Celanese's liability. Here, significantly, Celanese did not obtain insurance for the defense of its reputation.

Since Celanese has not demonstrated that a sufficient conflict of interest exists, it unjustifiably refused OneBeacon's offer to defend without a reservation of rights.

4. Insured's refusal of insurer's control of defense. Despite finding that Celanese had failed to demonstrate that a sufficient conflict of interest existed, the judge concluded that OneBeacon was liable to pay for the defense costs that Celanese incurred from April 13, 2009, when it refused OneBeacon's control of the defense and hired its own counsel, through May 27, 2011, when the judge ruled against Celanese on this point. This conclusion is contrary to authority commenting on an insured's unjustified refusal of an insurer's right to control the defense when defending without a reservation of rights.

Here, Celanese rejected OneBeacon's offer to defend without a reservation of rights and conducted its own defense because it believed that its own attorney would provide a better defense. That was Celanese's right. However, absent a sufficient conflict of interest on the part of OneBeacon, Celanese lost its right to obtain reimbursement for defense costs when it refused to accept OneBeacon's defense, offered without a reservation of rights. See

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VisionAid, 91 F. Supp. 3d at 73; Davalos, 140 S.W.3d at 690 ("But having rejected the insurer's defense without a sufficient conflict, [the insured] lost his right to recover the costs of that defense"). [Note 18] See also Finley v. Home Ins. Co., 90 Haw. 25, 35 (1998) ("If the insured chooses to conduct its own defense, the insured is responsible for all attorneys' fees related thereto. . . . A contrary holding would effectively nullify our determination that the insurer, even in a reservation of rights situation, retains the contractual right to select the counsel whom it will pay to defend the insured"); Windt, supra at § 4:1A, at 54 ("An insurer should not have to pay for the attorney fees incurred by the insured after the insured has wrongfully rejected the defense tendered by the insurer").

Therefore, OneBeacon satisfied its duty to defend by offering to defend Celanese without a reservation of rights. As a result of Celanese's unjustified refusal of OneBeacon's control of that defense, OneBeacon is not liable for the attorney's fees that Celanese incurred in conducting its own defense.

Conclusion. So much of the judgment that awarded Celanese defense costs for the period April 13, 2009, through May 27, 2011, and prejudgment interest is vacated, and the judgment shall be modified to declare that OneBeacon has no duty to reimburse Celanese for defense costs that Celanese incurred during that period of time. As so modified, the judgment is affirmed. So ordered.