A Massachusetts trial court recently ruled on a number of issues concerning an insurer’s duties where it agrees to defend an insured under a reservation of rights, including: (1) an insurer’s duty to defend an affiliated company that owns all of the insured’s shares when only the affiliated company and not the insured is named as a defendant in the lawsuit; (2) an insurer’s duty to pay defense costs for legal work that benefits both the insured and non-insured entities working together as part of a joint defense agreement; (3) an insurer’s duty to pay defense costs for both national and local counsel retained by an insured; and (4) the reasonableness of legal fees incurred when the defense is provided under a reservation of rights. Watts Water Technologies, Inc., et al. v. Fireman’s Fund Ins. Co., et al., C.A. No. 05-2604-BLS2 (Mass. Super. Ct. July 10, 2007).

Watts Regulator Company has since 1936 been a manufacturer of valves that regulate the flow of gases and liquids. Watts Water Technologies, Inc. was incorporated in December 1985 and, through a Plan of Reorganization, Watts Regulator became a wholly-owned subsidiary of Watts Water. The insurance companies in question provided commercial liability policies to Watts Regulator only, prior to the Plan of Reorganization.

Since 2001, Watts Regulator, Watts Water and a number of other entities affiliated with Watts Water have been named as defendants in some 300 lawsuits involving approximately 21,000 plaintiffs alleging bodily injury allegedly resulting from asbestos exposure during the periods covered by the insurers in question. Watts Regulator is named as a defendant, directly and indirectly, in only certain of these cases, while Watts Water is named in them all.

Watts Regulator and Watts Water sought coverage under the commercial liability policies issued to Watts Regulator. The insurers acknowledged their duty to defend Watts Regulator under a reservation of rights. The insurers further asserted that (1) some or all of the claims in the underlying cases might not be covered by the commercial liability policies; (2) their duty to defend extended only to cases in which Watts Regulator had been named as a defendant; (3) they had no duty to pay legal fees billed by Watts Regulator’s national coordinating counsel, as opposed to its local defense counsel; and (4) they are not responsible for paying the full amount of legal fees incurred that benefited other non-insured defendants in the underlying lawsuits (instead being responsible only for payment of Watts Regulator’s pro rata share).

On summary judgment, the court ruled that where, as here, insurers acknowledge a duty to defend under a reservation of rights, their duties as to underlying lawsuits are as follows: (1) they owe a duty to defend only in those underlying lawsuits in which the insured (as opposed to non-insured, related defendants) is named, either directly or indirectly, as a defendant; (2) when, as here, the insured chooses to enter into a joint defense, the insurers remain responsible to pay all reasonable attorney’s fees incurred by the insured’s legal team, which requires an analysis of the reasonableness of the allocation of costs among the parties within the joint defense based on all the surrounding circumstances such as the relative exposure of the parties to liability, the size of the parties, and the parties benefiting most from the joint defense work; (3) when, as here, an insured chooses to retain both local and national counsel, the insurer must pay for legal work performed at a reasonable cost that is reasonably related to the defense of the insured, regardless of whether that work is performed by a single law firm or allocated among national counsel and various local counsel, but the insurer need not pay for work that is needlessly duplicated; and (4) the legal standard for determining the reasonableness of legal fees incurred by an insured when the insurance company recognizes its duty to defend under a reservation of rights 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, unless the policy so states.