In Massachusetts, Defendants Often Have the Right to Select Insurance Defense Counsel – and Have the Insurance Company Pay All of the Associated Legal Fees

On the one hand, business insurance provides in-house counsel with the peace of mind to know that if their company is involved in a covered event, the insurer will be responsible for some or all of the damages and also may be responsible for footing the bill for legal fees and defense costs. On the other hand, insurance carriers usually are incentivized to engage inexpensive attorneys who may not have the industry, business or other expertise which in-house counsel typically desire. Further, even when insurance carriers allow the insured to select defense counsel, the carriers often only agree to reimburse the insured at insurance defense rates – not the actual legal fees paid.

What many in-house counsel are not aware of, however, is that the 2007 decision by Judge Ralph Gants in Watts Water Techs., Inc. v. Fireman’s Fund Ins. Co. gives insureds significant leverage in selecting insurance defense counsel and having the insurance carrier pay all the associated legal fees.

In 2001 Watts Water and its affiliates were named as defendants in hundreds of asbestos lawsuits, and Watts tendered the claims to various insurance carriers. Those carriers responded by disputing coverage, saying that they only had a duty to defend some of the claims, and, even with respect to those claims, the carriers reserved their rights to contest coverage in the future. As a result, Watts directly engaged counsel to defend it and sought reimbursement from the insurance carriers for the legal fees paid. When those carriers refused to reimburse Watts, it filed suit.

Watts eventually moved for summary judgment and prevailed on a number of key issues that have broad implications. First, Judge Gants ruled that if an insurance company tenders a “reservation of rights” letter, i.e., a letter in which the insurer reserves its right to assert that some or all of the claims may not be covered, the insurer gives up all control of the defense – including the selection of defense counsel. In such circumstances, an insurance carrier cannot:

[R]easonably expect that it will pay the same amount of legal fees that it would have paid had it accepted coverage and retained control of the defense. Through its reservation of rights, the insurer’s duty to defend is transformed into a duty to reimburse its insured for reasonable attorney’s fees incurred by the insured’s chosen counsel.

Judge Gants then explained that “[w]hat is reasonable is not what an insurance company would pay to the attorneys it would retain, but what a reasonable person in the insured’s position would pay for capable attorneys it chose to retain.” As such, and while he reminded the parties that determining reasonability requires evaluating the multiple factors set forth in Linthicum v. Archambault, Judge Gants went out of his way to note that “[o]ne of the Linthicum factors is ‘the usual price charged for similar services by other attorneys in the same area,’ not the usual price paid by insurance companies to other attorneys for similar services in the same area.”

Finally, Judge Gants implicitly warned insurance carriers that if they unreasonably refused to reimburse the legal fees incurred by an insured who directly hired counsel at standard rates, and the insured sued, the carrier could be liable for unfair acts and practices under the Massachusetts insurance practices statute, M.G.L. c. 176D, §3(9)(g), and for unfair and deceptive acts and practices under the Massachusetts consumer protection statute, M.G.L. c. 93A.

So the next time you have a claim that arguably is covered by insurance, and your insurer sends a reservation of rights letter, do not be shy about demanding to select your own defense counsel and asking your carrier to reimburse your company for the actual legal fees it incurs. If the carrier balks at such demands, consider handing them an appropriately highlighted copy of Watts Water ….

Comments are closed, but trackbacks and pingbacks are open.