When an insurer defends a lawsuit under a reservation of rights, the lawyer handling the defense may influence facts that affect both liability and insurance coverage. A recent Minnesota Court of Appeals decision gives policyholders greater ability to address that potential conflict.
In Fabyanske Westra Hart & Thomson PA v. W. Nat’l Mut. Ins. Co., the court held that an actual conflict exists when the facts being decided in the underlying lawsuit are the same facts that determine whether coverage applies. In those circumstances, the insurer’s duty to defend can become a duty to reimburse the insured for reasonable fees incurred in hiring independent counsel.
The decision does not mean that every reservation of rights entitles an insured to choose its own lawyer. The critical question is whether defense counsel can shape facts or findings that also determine coverage. In Fabyanske, that overlap arose because the allocation of fault between a general contractor and subcontractor could affect both liability and whether the general contractor qualified for coverage as an additional insured.
Key takeaways for policyholders:
- Review any reservation of rights alongside the issues being litigated in the underlying lawsuit.
- Determine whether defense strategy—including discovery, expert testimony, allocation arguments, or settlement decisions—could influence facts that determine coverage.
- An insured does not need to show that insurer-appointed counsel has already acted improperly; divided incentives created by the structure of the case may establish an actual conflict.
- When liability and coverage turn on the same facts, the insured may have a strong basis to demand that the insurer withdraw its reservation or reimburse the cost of independent counsel.
- The decision may be particularly significant in construction and additional-insured disputes, where allocation of fault can determine both liability and coverage.
Fabyanske strengthens the position of Minnesota policyholders facing a defense under a reservation of rights and provides an important framework for evaluating who should control the defense.
Read the full article for a closer look at the court’s reasoning, practical considerations for policyholders, and how Minnesota’s approach compares with California, Washington, and Oregon.