Recent Minnesota Case Examines the Scope of Insureds’ Independent Counsel Rights
By David A. Gauntlett*
Introduction
When an insurer’s duty to defend is triggered by a lawsuit against the insured, the “normal” outcome is that the insurer will assume complete control of the defense by selecting counsel and paying any fees incurred. In ideal circumstances, this can work out as the insured, insurer, and appointed counsel are all theoretically aligned in their goals. In reality, complications often arise. Recognizing this, most states have articulated standards for determining when an insured is entitled to independent counsel and what an insurer must do to discharge its defense duty in those circumstances. The prototypical example of a conflict triggering a right to independent counsel is when a policy covers negligent acts but not intentional ones, and the attorney’s decisions will inevitably push toward one of those results.[1]
Nature of the Coverage Dispute
The Minnesota Court of Appeals’ decision in Fabyanske Westra Hart & Thomson PA v. Western National Mutual Insurance Co.[2] strengthens the argument that policyholders may be entitled to independent counsel when an insurer defends a claim under a Reservation of Rights (“ROR”) and the facts being litigated also determine whether coverage exists. The case arose from a motorcycle accident in a Minnesota construction zone involving a general contractor and subcontractor. Western National agreed to defend the general contractor as an additional insured but reserved the right to deny coverage if the contractor’s liability resulted from its own negligence rather than the subcontractor’s conduct. That reservation created a potential conflict because the underlying lawsuit required the parties to determine whose conduct caused the accident—the same factual question that would determine whether Western National had to indemnify the contractor. The Court of Appeals concluded that an actual conflict exists when “the facts to be determined in the underlying action are the same facts upon which coverage depends.”[3] In such circumstances, the insurer’s duty to defend becomes a duty to reimburse the insured for reasonable fees associated with independent counsel chosen by the insured. The court did not hold that every ROR automatically creates a right to independent counsel; instead, the critical issue is whether defense counsel’s handling of the underlying case could influence facts or findings that determine coverage.
The decision has practical implications for policyholders, particularly in construction and additional-insured disputes. Policyholders should compare an insurer’s ROR with the factual issues being litigated and consider whether defense counsel’s decisions about discovery, expert testimony, liability theories, allocation of fault, or settlement could affect the insurer’s ultimate coverage obligations.
In California, the issue of “independent counsel” has a statutory framework under Civil Code Section 2860, which addresses conflicts arising from an insurer’s ROR and regulates matters such as counsel qualifications and fees. Washington instead emphasizes an insurer’s heightened duties of fairness, disclosure, competent representation, communication, and good faith when defending under an ROR. Oregon generally relies on its tripartite insurance-defense framework and ethics rules, while providing a specific statutory independent-counsel requirement for certain environmental claims. After the decision in Fabyanske, the Minnesota Supreme Court granted further review, so the ultimate scope of the rule under Minnesota law remains unresolved. If the appellate ruling is affirmed, Minnesota policyholders could have a stronger basis for demanding insurer-funded independent counsel whenever coverage depends on facts that defense counsel is helping to develop in the underlying litigation.
Broad Reservation of Rights May Be a Sufficient Trigger
It is common practice for an insurer to include a statement at the end of an ROR letter stating that it reserves all rights to assert new grounds for potentially denying coverage in addition to any mentioned in the ROR. In Cunniff v. Westfield, Inc., 829 F. Supp. 55, 56 (E.D.N.Y. 1993), the insurer “‘reserve[d] the right to any policy defenses not heretofore raised.’” Applying New York law on the right to independent counsel, the court held:
[T]he Court agrees with Westfield that a clear conflict of interest is present between itself and Maryland. As noted … Maryland may continue to attempt to avoid coverage of any liability assessed against Westfield in the underlying action by invoking policy exclusions. Furthermore, Maryland can present Westfield’s case in such a way as to defeat liability based upon the ground of Westfield’s [uncovered conduct]. Indeed, as implicitly recognized by Maryland, a finding of Westfield’s affirmative negligence would trigger the policy’s exclusion and thereby relieve Maryland of any obligation to indemnify Westfield. That the loyalty of the insurer’s attorney would consequently be divided can hardly be questioned. See [Klein v. Salami, 545 F. Supp. 175, 179 (E.D.N.Y. 1982)]. Accordingly, the conflict presented herein requires independent counsel on behalf of Westfield.
California courts have typically required an ROR to note specific rights reserved by the insurer that lead to a conflict, but none of those cases have addressed the arguments raised in Cunniff. Nor have they addressed the logic of cases like Long v. Century Indem. Co., 163 Cal. App. 4th 1460, 1471 (2008), where the court concluded independent counsel is triggered “whenever a conflict or potential conflict of interest between the insurer and the insured exists or may arise.” (emphasis added). As a result, those cases holding that a general ROR do not create a right to independent counsel under California law cannot be accepted as governing precedent. Rosen v. State Farm Gen. Ins. Co., 30 Cal. 4th 1070, 1076 (2003) (“‘It is a well-established rule that an opinion is only authority for those issues actually considered or decided.’”)
Insurers Must Pay for Competent Counsel
Unsurprisingly, insurers who begrudgingly accept their obligation to provide independent counsel are not enthusiastic about paying for the best possible defense team. Accordingly, they will often insist that the insured’s chosen counsel will only compensated according to panel rates, which are typically much lower than the rates charged by counsel experienced in complex litigation.[4]
The insurer’s duty to provide “competent” defense counsel includes hiring defense counsel specialized in particular fields of law where required to by the case. As the Supreme Court recognized, “[w]ith the increasing complexity of legal practice, perhaps the strongest trend in the profession today is toward specialization.” Bates v. State Bar of Ariz., 433 U.S. 350, 403 n.13 (1977). “[Representation] frequently involves highly practical considerations as well as specialized knowledge of the law.” People v. Brown, 177 Cal. 3d 537, 549 (1986) (citing Tollett v. Henderson, 411 U.S. 258, 268 (1973)). “Many small firms will limit their practice to intensely specialized areas; the larger, institutionalized firms are likely to have a variety of departments, each devoted to a special area of law.” Bates, 433 U.S. at 403 n.13.
For example, in Lesher, the Court interpreted the insurer’s duty to hire competent defense counsel as to mean competent antitrust counsel in an antitrust suit. Travelers Ins. Co. v. Lesher, 187 Cal. App. 3d 169, 181-82, 186-87, 190-91 (1986). The insurer in that case “accepted the defenses under a reservation of rights” and “appointed [a] personal injury defense firm … to represent [the insured] in the antitrust actions.” Id. at 182.
In Amato, which discusses the Lesher case, the Court explains that Travelers had been held liable for breach of its “duty to conduct the defense with due care” by, among other acts, “providing a new attorney who was not prepared for trial of one of the antitrust actions.” Amato v. Mercury Cas. Co., 53 Cal. App. 4th 825, 836 (1997).
Conclusion
Many policyholders mistakenly believe that there are no battles left to fight once an insurer accepts it has a duty to defend. In a perfect world, there would be no issue in being represented by counsel appointed by the insurer. In reality, it often leads to a poor defense or, worse, a delayed denial as new facts supporting non-coverage are developed in the underlying litigation. The inevitable conflicts faced by any insurer-appointed counsel mean it is always in your best interest to push for independent counsel. Coverage counsel can assist in enforcing those rights and securing the best possible defense team for the underlying action.
*David A. Gauntlett is a principal of Gauntlett Law and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.
[1] See, e.g., Aspen Am. Ins. Co. v. Ou, No. CV 18-2312 DSF (GJSx), 2019 LX 61373, at *13 (C.D. Cal. Mar. 14, 2019) (“It is in [the insured’s] interest in the [underlying action] that [appointed counsel] marshal facts that establish [the insured’s] actions did not amount to a breach of his professional duties. But it is in [the insurer’s] interest here to marshal facts that establish the contrary — or at the very least, undermine [the insured’s] defense with facts that establish [the insured] had at least a reasonable basis to believe that his medical treatment of Limon would result in a lawsuit.”)
[2] Fabyanske Westra Hart & Thomson PA v. W. Nat'l Mut. Ins. Co., 37 N.W.3d 625 (Minn. Ct. App. 2026).
[3] Id. at 631.
[4] See David A. Gauntlett, Battling for Equity – Securing Appropriate Fee Rates in C.C. § 2860 Disputes, https://www.gauntlettlaw.com/blogs/battling-for-equity-securing-appropriate-fee-rates-in-c-c-2860-disputes (Mar. 31, 2022); S. White, Challenging Insurer Rate Limits, LA Lawyer, Jan 2021, pp. 15-17.