Minnesota Supreme Court Holds That Insurer Must Notify Policyholder of Right to Receive Explanation of Damages Award from Arbitrator
The Minnesota Supreme Court held that when an insurer agrees to defend an arbitration under a reservation of rights, the insurer has a duty to disclose to the policyholder its right to obtain an explanation of damages from the arbitration panel, if available. If an insurer fails to provide such notice, and the policyholder suffers prejudice because of its failure to obtain an explanation of damages, the burden of proving allocation of the damages award as to covered versus non-covered claims shifts from the policyholder to the insurer. Remodeling Dimensions, Inc. v. Integrity Mutual Ins. Co., No. 2012 WL 3587825 (Minn. Aug. 22, 2012).
Integrity Mutual Insurance Company agreed to defend its policyholder, a contractor, under a reservation of rights in a construction defect arbitration. After the arbitrator entered an award against the insured contractor, the contractor’s attorney requested but was denied an explanation of the award. This lack of an explanation of damages was critical because only some of the claims against the contractor were covered by Integrity’s policy. In evaluating coverage, the Minnesota Supreme Court relied on general principles relating to an insurer’s reservation of rights and the doctrine of estoppel to find that an insurer that fails to inform a policyholder of its right to an explanation of damages bears the burden of establishing the portion of the award that is not covered and is estopped from claiming that the insured has that burden.
Importantly, the court limited the scope of the insurer’s duty of disclosure in several respects. First, the duty applies only where a written explanation of an award is available and where the insurer had the opportunity to provide notice of the availability of such an explanation. Second, untimely notice in this context must result in prejudice to the policyholder in order for the burden of allocation to shift to the insurer. Because the case presented factual uncertainty as to these issues, the court remanded the case to the district court.
Integrity Mutual serves as a caution to insurers to include in a reservation of rights the availability of an explanation of damages (where applicable). Although Integrity Mutual was decided in the context of arbitration, policyholders may argue for its application to court cases where special jury verdict forms, jury interrogatories, findings of fact and conclusions of law, or any other procedural device through which the fact finder may apportion a damage award among multiple claims would be available to the insured.