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Vol. 11 - Issue 1

January 3, 2022


Excess Policy Allocation Between Covered And Uncovered Claims

RSUI Indemnity Company v. New Horizon Kids Quest Inc., 2021 U.S. Dist. LEXIS 63424 (D. Minn. April 1, 2021)


This a first in my two-decades of identifying the Top 10 coverage cases of the year – an encore.            

The 2019 Top 10 cases article included the Eighth Circuit’s decision in RSUI Indemnity Co. v. New Horizon Kids Quest, Inc.  There, the federal appeals court remanded to the Minnesota District Court.  The Minnesota court issued its opinion in 2021.  And that decision is also worthy of inclusion at one of the ten most significant of the year.          

The issue – one that I have long discussed in Coverage Opinions and with clients – is the need for insurers to address, pre-trial, allocation between covered and uncovered damages.  There are many good reasons for doing so.  But, for various reasons, it doesn’t always happen.  Perhaps the insurer did not take any steps.  Or, maybe it did, and the court said no-go.  Either way, as a result, the verdict that comes down against the insured is unallocated.  In other words, it’s just one number and does not include an explanation of the nature of the damages that it represents, despite that it could represent more than one type – and some of which are covered and some not.   

When this happens, the insurer will likely be disinclined to pay damages that include some, or maybe a lot, that are uncovered.  The insured, however, will likely seek coverage for the entirety of this “general verdict,” despite the possibility (sometimes strong possibility) that it includes uncovered damages.  The insured will likely maintain that this is the consequence to be borne by the insurer since it did not take pre-trial steps to achieve an allocation.  Or, at least the insurer has the burden to prove which damages are uncovered.  Despite the importance of this issue, it wants for case law. 

This is the issue in RSUI Indemnity Co. v. New Horizon Kids Quest, Inc.  Since the 2021 decision is a follow-on to the 2019 decision, I’ll start with the Eight Circuit’s earlier decision.   

I am going to quote liberally from the Eighth Circuit’s New Horizon opinion.  New Horizon Kids Quest, Inc. operates a childcare facility at the Grand Casino Mille Lacs in Onamia, Minnesota.  New Horizon was sued for negligent supervision and training on account of J.K., then age three, suffering physical and sexual assaults at the hands of N.B., then age nine.

Travelers provided New Horizon with $3,000,000 of liability coverage and RSUI provided excess liability coverage of up to $8,000,000 per occurrence.  This is important – the RSUI policy included a Sexual Abuse or Molestation Exclusion. 

Travelers defended New Horizon in J.K.’s suit.  “Following a second trial [motion for new trial was granted after a $13 million award] at which New Horizon again conceded liability but contested J.K.’s claims of injuries and damages, the jury awarded total damages of $6,032,585, segregating its award into four damage categories but not finding whether J.K. suffered sexual as well as physical abuse and not allocating its award between those two claims.  Travelers paid its policy limits, plus interest.  New Horizon paid the remaining $3,224,888.59 and demanded indemnity from RSUI under its excess liability policy. RSUI then brought this action seeking a declaratory judgment that the policy’s ‘Sexual Abuse or Molestation’ exclusion barred coverage for that part of the award above Travelers’ policy limits.”

“The district court granted New Horizon summary judgment because, without an allocated award or jury interrogatory, RSUI is unable to prove ‘that the jury determined sexual abuse had occurred or that one cent of the award was based on such a determination.’”

RSUI appealed and the Eight Circuit reversed: “We conclude that RSUI, an excess liability insurer that did not control the defense of its insured in the underlying suit, must be afforded an opportunity to prove in a subsequent coverage action that the jury award included damages for uncovered as well as covered claims.  If the insurer sustains that burden, the district court must then allocate the award between covered and uncovered claims.”

While the court concluded that RSUI had the burden to prove that the jury award included an uncovered sexual assault claim, there is also the critical issue of which party would then have the burden to allocate the unallocated jury award.  The Eight Circuit (happy to do so, it seemed) handed that issue back to the District Court.

** This is where the 2021 case picks up.  First, and not the critical part for the decision for discussion here, the Minnesota District Court held that it was clear that some portion of the jury award was based on violative conduct of a sexual nature, i.e., the sexual abuse exclusion applied, as well as conduct of a physical assault.  Thus, RSUI won this portion of the case, namely, proving that some aspect of the damages involved an excluded claim. 

But the insurer lost on the next issue – who had the burden to prove, at a jury trial, which portion of the damages were for excluded sexual abuse and which were for the covered conduct, i.e., a physical assault.  The court concluded that this burden of proof, even with RSUI being an excess insurer, fell on the insurer.  The court’s reasoning, with much reliance on a 2012 Minnesota Supreme Court decision, was, in part, as follows:

“RSUI had a duty to notify New Horizon of its interest in a written explanation of the damages award. First, RSUI had a duty of good faith toward New Horizon, as RSUI uniquely knew the scope of the policy’s coverage and exclusion, and intended to exercise the Exclusion despite only issuing a tentative reservation of rights. Additionally, RSUI’s participation in New Horizon’s defense without disclosing its intent to exercise the Exclusion creates the possibility of prejudice to New Horizon, such as if RSUI had attempted to steer the litigation in a direction that would make it easier to later disclaim coverage. The duty to notify is intended to eliminate such opportunities for prejudice to the insured.

“Second, it would not have been onerous for RSUI to notify New Horizon of its interest in a written explanation. New Horizon informed RSUI of the underlying lawsuit more than three years before the verdict in the second trial, RSUI was present for and assisted with portions of the defense, and RSUI provided New Horizon with a reservation of rights letter several months before the second trial. RSUI had ample opportunity to notify New Horizon of its interest in a written explanation of the verdict, and it would not have been onerous to do so. Therefore, the first condition is established.

“Next, the insured must affirmatively show ‘that a written explanation of an award is available under the applicable rules.’  The Minnesota Rules of Civil Procedure allow for special verdicts and jury interrogatories which, if requested, would have allowed for a written explanation of the jury’s award to facilitate allocation. See Minn. R. Civ. P. 49. The second condition is met.”
Given that the court provided so many factors why the allocation burden should be placed on the insurer, the decision may be a go-to for other courts confronting the issue.  It remains to be seen whether this allocation burden can be satisfied by the insurer.  In addition, while the insurer has this burden, some courts do not even allow an insurer, that fails to take action to achieve an allocated verdict, to even try it.  In other words, some courts simply conclude that, if the insurer failed to take action to achieve an allocated verdict, the entirety of the verdict is covered.

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