Why it matters: In OneBeacon American Insurance Co. v. Colgate-Palmolive Co., a policyholder believed that its insurer’s objectives in defending tort litigation against the policyholder were inconsistent with the policyholder’s objectives. In addition, the policyholder believed that certain reinsurance and claims services agreements entered into by its insurer compromised the policyholder’s rights under the policy at issue. Making matters worse, the insurer was negotiating a deal to transfer its liabilities, including those related to the policyholder’s claims, to a third party, raising questions regarding whether there would be sufficient resources available to cover the policyholder’s claims. Recognizing the potential conflicts, the court held that the policyholder should be able to pursue breach of contract, breach of implied covenant of good faith and fair dealing, and statutory unfair trade practice claims against its insurer and its insurer’s reinsurer. Moreover, the court held, the policyholder was entitled to conduct discovery to learn more about the implications of the pending liability transfer.

Detailed Discussion

Colgate-Palmolive faced multiple lawsuits by tort claimants alleging exposure to asbestos contained in talc products manufactured by Colgate. Colgate’s insurer, OneBeacon, accepted tender of the claims and selected a defense firm. But when Colgate began to fear that a conflict existed, it hired its own counsel, which took over the defense.

OneBeacon filed a declaratory judgment action, asserting that Colgate violated the terms of its policy by preventing OneBeacon from being involved in the defense of the litigation. Thus, OneBeacon asserted, it had no obligation to pay defense or indemnity costs.

Colgate asserted multiple counterclaims alleging conflicts of interest, including OneBeacon’s reserved rights as to all present and future talc litigation involving Colgate. Colgate argued that these reservations created a conflict of interest between Colgate and any counsel appointed by OneBeacon. Moreover, Colgate argued, there was an inherent conflict in defense strategy between Colgate and OneBeacon. Colgate sought to defeat the talc cases in their entirety to prevent copycat suits, while OneBeacon was interested in defeating only those claims that implicated OneBeacon’s coverage and in controlling defense costs generally.

Colgate’s counterclaims also alleged conflicts of interest based on certain corporate relationships involving OneBeacon, including its relationships with National Indemnity Company (NICO) and Resolute Management. Pursuant to an agreement between NICO and OneBeacon, NICO retroactively reinsured $2.5 billion of OneBeacon’s existing liabilities. This arrangement also provided for NICO to adjust, handle, settle, pay, or repudiate any claims regarding the relevant OneBeacon policies. NICO then contracted with Resolute to administer claims handling duties on NICO’s behalf for OneBeacon’s policies.

Colgate argued that both of these arrangements resulted in Colgate’s being treated unfairly, including lack of incentive to provide Colgate with an adequate defense. As a result, Colgate asserted counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of both New York and Massachusetts business laws. OneBeacon, NICO, and Resolute moved to dismiss all of the counterclaims.

Ruling largely in favor of Colgate, the court held that Colgate’s breach of implied covenant of good faith allegations regarding the impact of OneBeacon’s arrangements with NICO and Resolute were distinct from OneBeacon’s breach of contract claims and therefore would not be dismissed. Moreover, Colgate’s allegations regarding OneBeacon’s failure to inform Colgate of its right to independent counsel and subsequent failure to accept Colgate’s selected counsel stated a cause of action under the Massachusetts unfair and deceptive trade practices statute, the court held, and therefore survived the motion to dismiss. Importantly, this statute allowed for awards of triple damages if violated. However, the court held that Colgate did not state a cause of action under the New York unfair and deceptive trade practices statute because the transactions at issue were not sufficiently “consumer-oriented.”

Turning to Resolute and NICO, the court refused to dismiss Colgate’s tortious interference claim, but found that the language of the agreement between NICO and Resolute precluded a claim by Colgate based on third-party beneficiary status. In addition, NICO sought dismissal of breach of contract and breach of covenant of good faith and fair dealing claims, relying upon its status as a reinsurer. Based on the contract between OneBeacon and NICO, however, the court held that NICO could be liable. Case law has established that where the “original insured consistently deals directly with the reinsurer, bypassing the original insurer,” a direct cause of action against a reinsurer may stand. “The relevant Agreements submitted by NICO/Resolute fail to establish that the relationship between the insured (Colgate), insurer (OneBeacon), and the reinsurer (NICO) was that of a typical insured/insurer/reinsured relationship so as to preclude Colgate from asserting a direct breach of contract claim against NICO,” the court opined. The agreement required NICO “to perform all administrative services with respect to” the OneBeacon policies on behalf of OneBeacon, and NICO had failed to demonstrate that OneBeacon retained all contact with the insured.

Finally, Colgate’s counterclaims also raised issues regarding OneBeacon’s prospective transfer of its asbestos liability portfolio to a third party, which Colgate asserted would leave OneBeacon inadequately funded to pay its claims. Colgate sought discovery on the proposed transaction, and OneBeacon sought a protective order to preclude the discovery. The court sided with Colgate, holding that its concerns about the proposed transfer could be explored in discovery. “Colgate cites to the Proposed Acquisition as one of the bases of Colgate’s tort claims against OneBeacon, and discovery as to [the] impact the Proposed Acquisition has to the fulfillment of OneBeacon’s payment obligations under the OneBeacon Policies is relevant to the existing claims,” the court opined. That the agreement had yet to be approved was irrelevant, the court held, as the mere circumstances of the proposal could provide evidence tending to establish that OneBeacon breached its covenant of good faith and fair dealing.

To read the decision in OneBeacon American Insurance Co. v. Colgate-Palmolive Co., click here.