In Remodeling Dimensions, Inc. v. Integrity Mutual Insurance Company, ___ N.W.2d ___, 2012 WL 3587825 (Minn. 2012), the Minnesota Supreme Court, applying Minnesota law, held, among other issues, that the insurer, which provided a defense of an arbitration pursuant to a reservation of rights, had a duty to advise the policyholder to request a written award that apportions the award between covered and uncovered claims. Because it was not clear whether the insurer timely advised the policyholder of the need to request such an award, the court reversed the intermediate appellate court’s summary judgment ruling in favor of the insurer and remanded to the trial court for further factual development.
The policyholder, a home remodeling contractor, received an arbitration demand from homeowners who alleged that the policyholder’s negligent construction work on a part of their home caused damage to other parts of the house. The insurer provided a defense under a reservation of rights, appointed a lawyer to represent the policyholder in the arbitration, and, according to the court, “controlled” the defense. The applicable arbitration rules stated that the arbitrator would provide a written breakdown of the award, “‘[i]f requested in writing by all parties prior to the appointment of the arbitrator, or if the arbitrator believes it is appropriate to do so, the arbitrator shall provide a written explanation of the award.’” Id. at *2. The attorney representing the policyholder did not request a written report before the arbitrator was appointed. The arbitrator awarded the homeowners damages that included certain amounts that the policyholder conceded were not covered by the insurance policy. Id. The insurer denied coverage for the entire award, and the policyholder brought a declaratory judgment action.
The Minnesota Supreme Court determined that the homeowner presented one claim in the arbitration – a negligent construction claim relating to the original house – that if proven, would be covered by the insurance policy. Id. at *6. Thus, the arbitration award might have included damages for a “covered claim.” Based on principles of equitable estoppel, the court held that where an insurer accepts a defense of a claim that includes covered and noncovered claims under a reservation of rights, the insurer has a duty “to disclose to the [policyholder] the [policyholder]’s interest in obtaining a written explanation of the award that identifies the claims or theories of recovery actually proved and the portion of the award attributable to each.” Id. at *10-11. However, this duty “is conditioned upon” an affirmative showing by the policyholder that “a written explanation of an award is available under applicable rules, the insurer had the opportunity to provide timely notice to the [policyholder] of the [policyholder]’s interest in a written explanation of the award, and prejudice was caused by the failure of the insurer to provide such notice.” Id. The court held that prejudice means “the inability of the [policyholder] to obtain a written explanation of an arbitration award caused by conduct of the insurer.” Id.
If the insurer fails to give timely notice, and the policyholder satisfies the conditions, the insurer is estopped from arguing that the policyholder has the burden of proof. Id. The burden then shifts to the insurer to “prove by a preponderance of the evidence that some part of the award is attributable to a noncovered claim.” Id. If the insurer satisfies its burden, both parties are entitled to submit evidence so the court can establish the allocation that would have been made by the arbitrator. Id. If the policyholder received timely written notice from the insurer, the policyholder then bears the burden of proving the allocation of the arbitration award in the insurance coverage action. Id. The court noted that the disclosure regarding the written explanation of the arbitration award should occur at or near the time when the insurer accepts the claim under a reservation of rights. Id. at *11. Recognizing that the policyholder has more information regarding the underlying claim than the insurer, the court limited the scope of the insurer’s duty to notify to the claim presented to it by the policyholder. Id.
The court in Remodeling Decisions approved of a procedure that requires an insurer to notify a policyholder in a timely manner of the need to request an arbitration award that allocates any award between covered and uncovered claims. The failure to provide such notice may require the insurer to show that some part of the arbitration award is not covered under the policy.