Understanding your insurance policies is vital to protecting your business. A recent Minnesota Supreme Court decision changes your rights and responsibilities in a typical commercial general liability ("CGL") policy.
If your business is sued, you should notify your insurer. It may provide an attorney to defend your company in the lawsuit. However, the insurer will often provide a defense "under a reservations of rights." When an insurer reserves its rights, it means that the insurer is providing a defense, but warning you that the award or settlement may not be or may only be partially covered by the CGL policy.
In Remodeling Dimensions, Inc v. Integrity Mutual Insurance Company, the Minnesota Supreme Court case added a new twist that may be used to the advantage of policyholders. Remodeling Dimensions, Inc. was hired to remodel a home. The homeowner sued Remodeling Dimensions, Inc., claiming that it was responsible for severe water damage to the home. The homeowner prevailed in an arbitration against Remodeling Dimensions, Inc., but the arbitrator did not provide a written explanation of the award. As a result, it was impossible to determine what part of the arbitration award, if any, was covered under the CGL policy.
In general, the insured -- not the insurer -- bears the burden of establishing that a claim is covered under the Policy. Therefore, the insurer, Integrity Mutual Company, refused to pay the arbitration award, arguing that it was the insured's responsibility to obtain an explanation of the arbitration award when the award includes covered and uncovered claims. As Remodeling Dimensions, Inc. failed to do so, it had no obligation to pay any of the award.
However, contrary to this general rule, the court concluded that, “When an insurer notifies its insured that it accepts the defense of an arbitration claim under a reservation of rights that includes covered and non-covered claims, the insurer not only has a duty to defend the claim but also to disclose to its insured the insured’s interest in obtaining a written explanation of the award that identifies the claims or theories of recovery actually proved and the portions of the award attributable to each.” If an insurer fails to notify its insured, the insurer must show, by a preponderance of the evidence, what portion of the award was not covered under its policy.
While this case arose within the context of a construction defect arbitration, it seems likely that policyholders will argue that their insurer's failure to give them notice in reservation of rights letter that they may be liable for unallocated awards or settlements negates the insurer's ability to later claim that the award or settlement is not covered under the policy. If your insurer is refusing to pay an award or settlement and failed to satisfy this new notice requirement, we may be able to help.