What happened

The facts of the case, in plain language.

Plaintiffs loaded and secured the backhoe on Rupp's truck, determined the route, accompanied the driver, and paid an hourly fee on a portal-to-portal basis; Rupp supplied the driver, paid his wages, and paid for the gasoline.

The nature and extent of Rupp's business, including whether it customarily supplied drivers or operators when other parties used its equipment, could not be determined from the trial record.

The facts could be interpreted two ways: either plaintiffs hired Rupp to transport the backhoe, or Rupp leased the equipment (including the driver) necessary to transport it.

The backhoe was damaged during transport by Rupp's tractor and trailer from Tracy to Round Lake, Minnesota, on June 5, 1975.

What the court decided

Rupp Construction transported a backhoe for Prahm Brothers that was damaged in transit. When Prahm sued Rupp, the insurer (Great American) denied coverage based on policy exclusions and refused to defend. The trial court granted summary judgment for Rupp, finding the insurer had a duty to defend. Great American appealed. The Minnesota Supreme Court affirmed, holding that where any part of a claim is arguably within coverage and issues are ambiguous, the insurer must defend. Here, it was unclear whether the backhoe was entrusted for "storage or safekeeping" (triggering an exclusion) or merely transported, and who had dominion and control during loss. These ambiguities prevented the insurer from clearly establishing that the claim fell outside coverage. However, the insurer's conflict of interest—defending its insured while denying coverage—transforms the duty to defend into an obligation to reimburse separately retained counsel.

1. An insurer is obligated to defend its insured whenever any part of the complaint is arguably within the scope of coverage; ambiguity in the policy or the facts is resolved in favor of the insured, and the burden rests on the insurer to prove that the claim clearly falls outside coverage.
2. A policy exclusion for property 'entrusted to the insured for storage or safekeeping' does not clearly encompass property delivered to the insured solely for the purpose of transportation. (*391)
3. Whether property falls within a 'care, custody or control' or 'operations being performed by the insured' exclusion is a question of fact—determined by examining (1) whether the property is realty or personalty, (2) its location, size, shape, and other characteristics, and (3) the insured's duties with respect to the property—that cannot be resolved on summary judgment where the record is insufficient to establish who had dominion and control.
4. When defending its insured would create an irreconcilable conflict of interest because the insurer simultaneously contests coverage, the duty to defend is transformed into a duty to reimburse the insured for reasonable attorneys' fees incurred in retaining independent counsel; prior Minnesota authority permitting defense under a reservation of rights in such circumstances is overruled.

How the court reached its decision

The court's reasoning, step by step.

Whether the damage to the backhoe fell clearly outside Great American's policy coverage under either the 'storage or safekeeping' or 'operations being performed' exclusion, so as to negate any duty to defend Rupp. The 'storage or safekeeping' exclusion did not clearly apply because the backhoe was delivered to Rupp for the purpose of transportation, not storage; even assuming an entrustment, it was for transport only. The 'operations being performed' exclusion required resolving who had dominion and control over the backhoe—a genuine factual dispute given that plaintiffs loaded the backhoe, determined the route, and accompanied the driver, while Rupp supplied the driver, paid his wages, and paid for fuel, and the full nature of Rupp's business could not be determined from the record. Because neither exclusion clearly applied and coverage was ambiguous, Great American was obligated to defend Rupp, and the trial court correctly granted summary judgment in Rupp's favor on the duty-to-defend issue.

What remedy is appropriate when the insurer's duty to defend its insured creates an irreconcilable conflict of interest because the insurer simultaneously contests coverage. Requiring Great American to defend Rupp on the merits would compel it to take opposing litigation positions—defending Rupp against plaintiffs' claim while simultaneously establishing facts to defeat coverage. Prior Minnesota decisions permitting defense under a reservation of rights were overruled as irreconcilable with this rule; the appropriate remedy is for Rupp to retain independent counsel at Great American's expense, with Great American permitted to have its own counsel present at trial to develop facts relevant to the coverage question. Great American's duty to defend was transformed into a duty to reimburse Rupp for reasonable attorneys' fees incurred with separately retained defense counsel; prior contrary Minnesota precedents were overruled.

Key quotes from the opinion

Notable passages from the opinion, in the court's own words.

Cases the court relied on

Earlier decisions the court cited as authority for its ruling.

• Bituminous Casualty Corp. v. Bartlett (307 Minn. 72, 240 N.W.2d 310 (1976)) — The foundational Minnesota precedent establishing that ambiguity is resolved in favor of the insured and the insurer must defend unless the claim clearly falls outside coverage; partially overruled insofar as it permitted defense under a reservation of rights when a conflict of interest exists.
• Ohio Cas. Ins. Co. v. Terrace Enterprises, Inc. (260 N.W.2d 450 (Minn. 1977)) — Supplied the three-factor test for determining whether property was in the insured's care, custody, or control, which the court applied by analogy to the 'operations being performed by the insured' exclusion and the dominion-and-control inquiry.
• F. D. Chapman Const. Co. v. Glens Falls Ins. Co. (297 Minn. 406, 211 N.W.2d 871 (1973)) — Prior Minnesota decision permitting an insurer to defend while reserving the right to contest coverage, expressly overruled to the extent inconsistent with the conflict-of-interest reimbursement rule announced in this opinion.
• Maryland Casualty Co. v. Peppers (64 Ill.2d 187, 355 N.E.2d 24 (1976)) — Illinois Supreme Court decision cited as persuasive authority for the rule that an insurer's conflict of interest transforms the duty to defend into a duty to reimburse the insured for separately retained counsel's reasonable fees.
• Burd v. Sussex Mutual Ins. Co. (56 N.J. 383, 267 A.2d 7 (1970)) — New Jersey authority cited for the proposition that where a conflict of interest exists between insurer and insured on the coverage question, the insurer must fund independent defense counsel rather than control the defense itself.