This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (2002).






M. W. Johnson Construction, Inc.,





Western National Mutual Insurance Company,



Assurance Company of America,



Filed October 12, 2004


Halbrooks, Judge


Hennepin County District Court

File No. CT 02-019670


Lewis A. Remele, Jr., Christopher R. Morris, Bassford Remele, P.A., 33 South 6th Street, Suite 3800, Minneapolis, MN 55402 (for respondent)


James T. Martin, Gislason, Martin & Varpness, P.A., 7600 Parklawn Avenue South, Suite 444, Edina, MN 55435 (for appellant)


            Considered and decided by Toussaint, Presiding Judge, Anderson, Judge, and Halbrooks, Judge.

U N P U B L I S H E D   O P I N I O N


            This matter arises out of a declaratory-judgment action in which respondent M. W. Johnson Construction, Inc. (Johnson) sought a declaration that appellant Western National Mutual Insurance Company (Western National) was contractually obligated to provide insurance coverage for damages awarded to Brian and Laurel Larsen (Larsens) by an arbitration panel and to reimburse Johnson for its defense costs.  Western National moved for judgment on the pleadings.  The district court ruled in Western National’s favor on the duty to indemnify but in Johnson’s favor on the duty to defend, awarding attorney fees to Johnson.  Western National argues that when the district court found no duty to indemnify, it erred in concluding that it had a duty to defend.  We affirm.


            Johnson, a general contractor, entered into a home-construction contract with Larsens in January 1992, completing the home in November 1992.  Johnson contracted with various subcontractors to perform the actual construction.  On April 3, 2000, seven years after taking possession of the home, the Larsens made a demand for arbitration against Johnson, asserting negligent construction. 

Five months into construction of the Larsens’ home, Johnson entered into an insurance contract with Western National on June 30, 1992, that expired one year later.  Western National’s policy with Johnson stated:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of


. . . .

B. property damage


to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such . . . property damage . . . .


The policy contained these pertinent definitions:

“[O]ccurrence” means an accident, including continuous or repeated exposure to conditions, which results in . . . property damage neither expected nor intended from the standpoint of the insured;


. . . .


“[P]roperty damage” means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period[.]


Several exclusions to the basic damage liability coverage were attached to the policy, including subsection (o) that stated that the insurance did not apply:

to property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith;


Exclusion (o) was modified by section VI.(A.)(3) of the broad form property damage liability coverage (or completed-operations exclusion exception) to read:

property damage to work performed by the named insured arising out of such work or any portion thereof, or out of such materials, parts or equipment furnished in connection therewith. 


On April 28, 2000, approximately three weeks after being served with Larsens’ arbitration demand, Johnson tendered the demand to both Western National and its then current insurer, Assurance Company of America (Assurance).  The demand for arbitration stated, in pertinent part, that “[Johnson] built a home for [the Larsens] in 1992.  Due to defective design and construction of the roof system . . . claimant’s home sustained major structural damage . . . .” 

Western National did not respond to the tender of the arbitration demand until December 15, 2000, three days before the arbitration was scheduled.  In its response, Western National acknowledged receipt of a December 12, 2000 letter from Johnson’s counsel.  Western National’s response, written by its vice president and general counsel, directed Johnson’s counsel to certain policy exclusions and stated that “some or all of the damages claimed by Brian and Laurel Larsen may not be covered by the insurance policy.”  The letter further stated:

At this time, we do not have any information regarding the claimed damages other than the Arbitration Petition.


We also do not have any information regarding when the damages occurred.  Since the house was constructed in 1992, the damages must have occurred sometime after that.  However, our coverage ended in June of 1993.  To the extent the [Larsens] had any claims against M.W. Johnson Construction, they would have had to assert claims that arose prior to June 30, 1993 by June 30, 1999.  It appears from the Petition that a demand for arbitration was made on April 3, 2000.  There is also a two year statute of limitations that may apply regarding construction which is contained in Minnesota Statute § 541.051.  In either event, any claims that the [Larsens] may have had that arose during our policy period would not be actionable since they have not commenced an action against M.W. Johnson Construction prior to the running of the statute of limitations.


There is no coverage available under the Western National policy.  If you have any questions or wish to discuss this matter, please feel free to contact me.


The arbitration claim resulted in a January 25, 2001 award to the Larsens in the amount of $160,000; a finding that Johnson’s subcontractors were negligent in constructing the roof and installing the windows of the Larsens’ home; and an entry of judgment in district court in favor of the Larsens.  Johnson again contacted Western National about coverage.  On June 20, 2001, Western National sent Johnson a letter denying coverage, citing the statute of limitations and the fact that the damage occurred outside the dates of the policy.  Johnson then filed for a declaratory judgment against both Western National and Assurance to recover defense and indemnity costs in connection with the arbitration judgment. 

Assurance settled with Johnson.  But Western National moved for judgment on the pleadings, arguing that the “business risk” doctrine precluded any coverage under its policy.  The district court granted Western National’s motion with regard to its duty to indemnify.  But the court, sua sponte, ruled in favor of Johnson on the duty to defend, stating that Western National “could not determine that it did not have a duty to defend Johnson Construction without knowing when the water infiltration began damaging the home’s structure.”  The district court ordered attorney fees and costs to Johnson in the total amount of $84,560.18 and entered judgment.  This appeal follows. 


            The sole issue on appeal is whether, on this record, the district court erred in its determination that Western National owed Johnson a duty of defense.  Johnson has not appealed the district court’s ruling that Western National had no duty to indemnify it for the Larsens’ claims. “[T]he interpretation of insurance contract language is a question of law as applied to the facts presented.”  Meister v. W. Nat’l Mut. Ins. Co., 479 N.W.2d 372, 376 (Minn. 1992).  Likewise, determining whether an insurer has a duty to defend an insured is a question of law, which we review de novo.  Thommes v. Milwaukee Ins. Co., 641 N.W.2d 877, 879 (Minn. 2001). 

An insurer assumes both a duty to defend and a duty to indemnify.  See St. Paul Fire & Marine Ins. Co. v. Nat’l Chiropractic Mut. Ins. Co., 496 N.W.2d 411, 415 (Minn. App. 1993), review denied (Minn. Apr. 29, 1993).  The duty to defend is broader than the duty to indemnify.  Even if there is no duty to indemnify, a duty to defend may nevertheless exist.  See Redeemer Covenant Church of Brooklyn Park v. Church Mut. Ins. Co., 567 N.W.2d 71, 81-83 (Minn. App. 1997), review denied (Minn. Oct. 1, 1997).  A duty to defend generally extends to those claims that arguably fall within the scope of the policy.  Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 415 (Minn. 1997). 

If any part of a cause of action is arguably within the scope of coverage, the insurer must defend.  Any ambiguity is resolved in favor of the insured, and the burden is on the insurer to prove that the claim clearly falls outside the coverage afforded by the policy.  If the claim is not clearly outside coverage, the insurer has a duty to defend.


Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 390 (Minn. 1979) (emphasis added).

In determining the existence of a duty to defend, this court will compare the allegations in the complaint in the underlying action with the relevant language in the insurance policy.  Meadowbrook, 559 N.W.2d at 415.  If an action for declaratory relief results in a determination that the insurer breached its duty to defend, the insurer will be held responsible for the attorney fees and costs from the underlying action.  Redeemer Covenant Church, 567 N.W.2d at 82. 

There is no dispute in this case that Johnson properly tendered the claim to Western National by giving the insurer notice of the claim and an opportunity to defend.  Home Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 658 N.W.2d 522, 532-33 (Minn. 2003).  “Once an insurer’s duty to defend is triggered, it must begin defending the suit or bring a declaratory judgment action if it believes the policy does not cover the claim.”  Id. at 533.  Western National did neither.

Western National contends first that there was nothing in the arbitration demand that indicated that the damage to the Larsens’ home occurred within the policy period and, therefore, no clear duty to defend.  Citing Garvis v. Employers Mut. Cas. Co., 497 N.W.2d 254, 258-59 (Minn. 1993), Western National asserts that the initial burden is for the insured to make a prima facie case for coverage and that it was not responsible for looking beyond the allegations in the arbitration demand when making a decision about coverage.  Western National asserts, therefore, that the district court’s ruling that it had a duty to defend is erroneous because at the time that it denied coverage, Western National could not discern an actual “occurrence” of “property damage” before the policy’s expiration.  As a result, there was no way for it to conclude that a duty to defend existed. 

We disagree.  While the claim description asserted in the arbitration demand was concededly brief, it arguably raised a cause of action within the scope of coverage.  We addressed a similar issue in Westling Mfg. Co. v. W. Nat’l Mut. Ins. Co., 581 N.W.2d 39 (Minn. App. 1998), review denied (Minn. Sept. 22, 1998).  There the insurer denied coverage, informing the insured that it believed such coverage was barred by a policy exclusion.  Id. at 47.  Although the insured produced no evidence to the contrary prior to a summary judgment hearing, we held that the insurer had a duty to defend because the coverage was “arguable” until further factual investigation demonstrated that an exception to the exclusion did not apply.  Id.  “[T]here is no authority for the proposition that tender of the claim must await completion of an ongoing investigation of facts such that all conditions of coverage are made evident.”  Id.

When a court evaluates a duty to defend, the language of the complaint or, in this case, the demand for arbitration, should be construed most broadly, as a party adverse to the insured drafted it.  See Crum v. Anchor Cas. Co., 264 Minn. 378, 392, 119 N.W.2d 703, 712 (1963) (noting that an insured has no control over the allegations in a complaint).  “An insurer seeking to escape the duty to defend bears the burden of establishing that all parts of a cause of action clearly fall outside the scope of coverage.”  Franklin v. W. Nat’l Mut. Ins. Co., 574 N.W.2d 405, 407 (Minn. 1998).  Contrary to Western National’s contention that it need not look beyond the four corners of the complaint, “if the insurer is aware of facts indicating that there may be a claim, either from what is said directly or inferentially in the complaint, . . . then the insurer must either accept tender of the defense or further investigate the potential claim.”  Garvis, 497 N.W.2d at 258.  Because Johnson’s claim was arguably covered, Western National had a duty to defend until a factual investigation conclusively demonstrated that the claim fell outside the scope of coverage.

Western National asserts that the exclusions may be read to deny both indemnity and defense and, as a result, it could reasonably conclude that the claims made in the arbitration demand were outside the scope of coverage.  Western National supports this proposition by citing Bobich v. Oja, which holds that “[w]here there is no coverage by reason of an exclusionary clause, there is no obligation to defend.”  258 Minn. 287, 293, 104 N.W.2d 19, 24 (1960). 

            In an action to determine insurance coverage, once the insured has established a prima facie case of coverage, it “is entitled to go to the jury.”  Boedigheimer v. Taylor, 287 Minn. 323, 329, 178 N.W.2d 610, 614 (1970).  If the policy contains an exclusionary clause, the burden then shifts to the insurer to prove the applicability of the exclusion as an affirmative defense.  Id.; Hubred v. Control Data Corp., 442 N.W.2d 308, 310 (Minn. 1989).  It is not the insured’s obligation to show that the exclusion has become operative.  Bolduc v. New York Fire Ins. Co., 244 Minn. 192, 197-98, 69 N.W.2d 660, 665 (1955).  Exclusions are narrowly interpreted against the insurer.  Bob Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 327 (Minn. 1993); Atwater Creamery Co. v. W. Nat'l Mut. Ins. Co., 366 N.W.2d 271, 276 (Minn. 1985).

Here, the arbitration demand included a reference to the period of construction of the Larsens’ home in 1992; Western National insured Johnson from June 1992 to June 1993.  There was, at the very least, an overlap in time of the coverage and the home’s construction.  Western National had ample time to make a decision to deny Johnson a defense or to proceed to defend the claim, with or without a reservation of rights, having received notice of the Larsens’ claim more than seven months before the arbitration.  It did not pursue any of those alternatives.  Instead, Western National first responded to Johnson just three days before the arbitration.  Even then, it did not deny that it had a duty to defend.  Western National’s letter states that “some or all” of the damages claimed by the Larsens “may not be covered” and that the company did not have any information concerning when the damages occurred.

Because the district court reasonably determined that the damage potentially occurred during the policy period and potentially fell outside the scope of the exclusions, it did not err in its conclusion that Western National had a duty to defend Johnson.