Minnesota Court of Appeals Holds that an Insurer's Reservation of Rights Can Entitle an Insured to Select Independent Counsel
On June 1, 2026, the Minnesota Court of Appeals issued a decision in Fabyanske, Westra, Hart & Thomson, P.A. v. Western National Mutual Insurance Company, in which the court held that a conflict of interest on the part of counsel hired by an insurance carrier can entitle an insured to independent counsel that is paid for by the carrier. When an insurer defends an insured under a reservation of rights, and the facts to be determined in the underlying action are the same facts upon which coverage depends, the court concluded the insurer's duty to defend transforms into a duty to reimburse the insured for reasonable attorney fees incurred in defending the lawsuit.
Case Background
The underlying facts involve a motorcycle crash in a construction zone that resulted in the death of one rider and serious injury to the other. The injured party sued the general contractor and the subcontractor responsible for the road construction project, alleging negligence in maintaining the road.
The subcontractor had a commercial general liability insurance policy issued by Western National Mutual Insurance Company (Western). The general contractor was an additional insured on the subcontractor's insurance policy. The general contractor tendered its defense to Western, and Western agreed to defend the general contractor. Western issued a reservation of rights letter that limited their indemnification of the general contractor to those claims which were attributable to the subcontractor's negligence and not the general contractor's negligence. That is, Western reserved the right to deny coverage if the general contractor was found to be negligent. Western hired separate counsel for the general contractor and the subcontractor.
After roughly a year of litigation, the general contractor hired the law firm Fabyanske, Westra, Hart & Thomson, P.A. (Fabyanske) to review its coverage under the subcontractor's policy. Fabyanske subsequently informed Western that the general contractor objected to the reservation of rights and asserted that such a reservation created a conflict of interest which provided the general contractor with a right to independent counsel.
The conflict of interest arose because Western agreed to defend the general contractor unless and until the general contractor was found to be negligent. Therefore, Fabyanske argued Western would benefit from the general contractor being found negligent because Western could then deny coverage. Western refused to withdraw its reservation of rights and denied the existence of any conflict. The general contractor continued to work with both Fabyanske and its carrier-hired counsel to defend the case.
After the underlying action settled, Fabyanske sent Western an invoice for its fees, Western refused to pay, and Fabayanske sued Western for failure to pay. The district court granted Western's summary judgment motion, finding that there was no genuine issue of material fact as to whether a conflict of interest existed. Fabyanske appealed.
The Court of Appeals' Analysis
The court of appeals explained that general liability insurers have a duty to defend insureds when any part of the claim is arguably within the scope of coverage. And when coverage is questioned, insurers must inform the insured of that question and issue a reservation of rights. Yet that reservation itself can create a conflict of interest between the insurer and the insured. In such a circumstance, "the insurer's duty to defend transforms into a duty to reimburse" and the insured has the right to select independent counsel.
The court of appeals noted that (1) the general contractor tendered its defense to Western, (2) Western agreed to defend the general contractor subject to the reservation of rights that stated Western would not cover the general contractor for their own negligence, and (3) therefore, the same facts upon which Western was able to deny coverage—the general contractor's negligence—would be decided in the underlying action. Thus, the court of appeals determined that a conflict existed between Western and the general contractor that transformed Western's duty to defend into a duty to reimburse.
The court of appeals analyzed three similar cases to frame its analysis. In Prahm v. Rupp Construction Co., 277 N.W.2d 389 (Minn. 1979), the supreme court held that a conflict existed where an insurer would have to take opposing positions at trial on the coverage question and the defense. In Grain Dealers Mutual Insurance Co. v. Cady, 318 N.W.2d 247 (Minn. 1982), the supreme court held that when coverage and liability questions create a conflict, the insurer's duty to defend transforms into a duty to reimburse. And in Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161 (Minn. 1986), the supreme court noted that a reservation of rights created a conflict where it would be to the insured's advantage to show conduct was unintentional while it would be to the insurer's advantage to show it was intentional.
Drawing from these precedents, the court of appeals held that a conflict of interest entitling an insured to independent counsel exists when (1) the insurer defends under a reservation of rights and (2) the facts to be determined in the underlying action are the same facts upon which coverage depends.
Key Takeaways
This decision provides clarity for insureds and insurers and has important implications regarding the right to independent counsel.
First, this decision establishes that when an insurer defends under a reservation of rights and the coverage determination turns on the same facts that will be litigated in the underlying case, the insured has a right to independent counsel at the insurer's expense. This provides a clear analytical framework for determining when the duty to defend transforms into a duty to reimburse.
Second, insureds and their counsel should carefully analyze any reservation of rights letter upon receipt and evaluate whether the facts upon which coverage depends overlap with the facts to be litigated. If such overlap exists, the insured should promptly assert its right to independent counsel and document the factual basis for the conflict.
Third, insurers should be aware that issuing a reservation of rights which hinges on the same factual determinations at issue in the underlying action may trigger an obligation to reimburse the insured for independent counsel fees.
For more information on the right to independent counsel when an insurer defends under a reservation of rights, please contact Steve Lindemann, John Knapp or the Stinson LLP contact with whom you regularly work.
Brandon Batchelor is a 2026 summer associate with Stinson and is attending the University of Minnesota.
