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Vol. 9 - Issue 1
January 8, 2020


RSUI Indemnity Company v. New Horizon Kids Quest Inc. (8th Circuit)

Despite Primary’s Decision, Excess Insurer Has Right To Seek Allocation Between Covered And Uncovered Claims


To me, any case that involves guidance on the treatment of allocation, between covered and uncovered damages, has the potential to be significant.  There can be reasons for an insurer to arrange for such allocation before a case goes to trial.  But, for various reasons, it doesn’t always happen.  Perhaps the insurer did not take the steps. Or, maybe it did, and the court said no-go.  As a result, the verdict that comes down against the insured is unallocated.  It’s just one number and does not include an explanation of which damages it represents, despite that it could represent more than one type.   

The insured will likely seek coverage for the entirety of this “general verdict,” despite the possibility (strong possibility) that it includes uncovered damages.  The insurer will likely be disinclined to pay damages that include some, or maybe a lot, that are uncovered.  However, the insured will likely maintain that the entirety of the verdict should be covered, since the insurer did not take steps to achieve a pre-trial 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. 

For this reason, and that the issue arises in a unique setting, I included RSUI Indemnity Co. v. New Horizon Kids Quest, Inc., No. 17-3567 (8th Cir. Aug. 12, 2019) here.  The court addressed the allocation issue in the context of excess polices.  The cases in this area – all that I’ve seen at least -- involve primary policies.  And, as the decision shows, that makes a difference.

I am going to quote liberally from the New Horizon opinion.  That’s easier for me.  And you don’t pay for this fine publication.  So you can’t complain if I take an easier way out.     

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.

The New Horizon court’s decision was tied to, or at least influenced by, the fact that RSUI was an excess insurer.  And that’s what I believe makes it significant.  When a primary insurer fails to take steps to achieve a pre-trial allocation, between covered and uncovered claims, and then seeks to do it post-trial, the insured is able to respond that the insurer had its chance and did not take it.  Thus, the argument will likely be that the insurer is now obligated for the entirety of the general verdict, despite that it may include uncovered damages.  Or, at a minimum, the burden is on the insurer to prove which damages are not covered. 

But it can be a different story for an excess insurer.  The excess insurer is likely not involved in the day-to-day aspects of the underlying action, and, in fact, as noted by the New Horizon court, has no defense obligation.   New Horizon provides excess insurers with an opportunity to argue that, because they are in a different position than primary insurers, any adverse consequences for primary insurers, for the primaries’ failure to address allocation between covered and uncovered claims pre-trial, do not apply to them. 

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