Travelers, as New Horizon’s primary insurer, accepted defense of J.K.’s suit.

Prior to trial, New Horizon conceded liability but disputed “the nature, type and extent” of J.K.’s injuries and damages.

Following trial, the jury awarded J.K. more than $13 million, but the trial court granted New Horizon’s motion for a new trial.

Following a second trial 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 an action seeking a declaratory judgment that its policy’s sexual abuse or molestation exclusion barred coverage for that part of the award above Travelers’ policy limits.

The U.S. District Court for the District of Minnesota granted summary judgment for New Horizon, and RSUI appealed to the Eighth Circuit.

The Eighth Circuit’s Decision

The circuit court reversed, holding that RSUI, an excess liability insurer that did not control the defense of its insured in the underlying suit, had to 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 RSUI were to sustain that burden, the Eighth Circuit added, the district court would have to allocate the award between covered and uncovered claims.

The circuit court explained that J.K. asserted physical assault claims that were covered by RSUI’s excess liability policy, and that the unpaid balance of the $6,032,585 judgment in J.K.’s favor was within the $8 million limit of RSUI’s excess policy. The circuit court then stated that whether RSUI had a duty to indemnify New Horizon because a substantial portion of that award – perhaps all of it in excess of the amount paid by Travelers – was based on claims of sexual assault that were barred by RSUI’s exclusion and therefore uncovered turned on two issues: whether J.K. was awarded damages for sexual assault that fell within the RSUI excess policy exclusion, and if so, what portion of the total award had to be allocated to that uncovered claim.

The Eighth Circuit ruled that the district court had erred in granting New Horizon summary judgment. According to the circuit court, under Minnesota law, RSUI had the right to defend a post-award coverage action by proving that the award was based at least in part on an uncovered claim, and the failure to allocate the award between covered and uncovered claims. Whether J.K. proved an uncovered claim – sexual assault – was a coverage issue that was not “necessary or essential” for the jury to determine in the third party action after New Horizon conceded liability, the circuit court added.

Thus, it ruled, it was an issue RSUI was “entitled to litigate” in its declaratory judgment action. Moreover, because New Horizon proved a claim of physical assault covered by the RSUI policy, RSUI had the burden to prove that the award also included an uncovered claim, here, sexual assault, excluded by its policy.

The Eighth Circuit next ruled that if RSUI established that J.K. proved an uncovered sexual assault claim as well as a covered physical assault claim, then the district court had to address the final coverage issue: how to allocate the total award. It concluded that the district court had to determine the burden to prove allocation and that the district court had to divide the unallocated jury award “as best it can” between covered and uncovered claims.

The case is RSUI Indemnity Co. v. New Horizon Kids Quest, Inc., No. 17-3567 (8th Cir. Aug. 12, 2019). Attorneys involved include: For RSUI Indemnity Company, Plaintiff – Appellant: James Richard Harmon, Jo Allison Stasney, Thompson & Coe, Dallas, TX; David Fulton Herr, Attorney, Maslon, Llp, Minneapolis, MN; James S. Reece, Reece Law, Llc, Minneapolis, MN. For New Horizon Kids Quest, Inc., Defendant – Appellee: Brian B. Bell, Andrew B. Brantingham, Vernle Charles Durocher Jr., Katie C. Pfeifer, Dorsey & Whitney, Minneapolis, MN.