Eighth Circuit Remands for Allocation Between Covered and Uncovered Claims in Excess Insurance Coverage Case

In RSUI Indem. Co. v. New Horizon Kids Quest, Inc., 2019 WL 3773463, the Eighth Circuit recently held that an excess liability insurer that does not control the defense of its insured in an underlying suit must be afforded an opportunity to allocate a jury award between covered and uncovered claims in a subsequent coverage action.
In 2011, the guardian of a minor sued the insured, which operates a daycare facility, alleging the insured’s negligence resulted in the minor suffering physical and sexual assaults by another minor while the children were under the insured’s care.  At the time, the insured had $3,000,000 in primary and excess coverage under policies issued by Travelers and an additional $8,000,000 in coverage under an excess policy issued by RSUI that included a Sexual Abuse or Molestation Exclusion.  Travelers defended the insured in the lawsuit subject to a reservation of rights.  

The insured conceded liability and went to trial on damages.  The jury awarded the plaintiff more than $13 million, but the district court granted the insured’s motion for a new trial.  The issue of damages was then tried a second time, after which the jury awarded just over $6 million.  The jury segregated its award into four damage categories but did not make a finding as to whether the plaintiff suffered sexual as well as physical abuse and did not allocate its award between those two claims.  

Travelers paid its policy limits, and the insured demanded that RSUI cover the remainder of the second jury verdict. RSUI declined and commenced suit, seeking a declaratory judgment that the Sexual Abuse or Molestation Exclusion barred coverage for that part of the award above Travelers’ policy limits.  The district court granted summary judgment for New Horizon, concluding that RSUI could not prove that any part of the jury's unallocated award was based on sexual assault subject to the policy's exclusion, and RSUI appealed.  

The Eighth Circuit first determined that the district court erred in denying “RSUI an opportunity to establish that the jury’s unallocated damages award included uncovered as well as covered damages.”  The court reasoned that whether the plaintiff in the underlying action proved an uncovered claim—sexual assault—was a coverage issue that was not decided in the underlying action and could thus be litigated in a subsequent action.  On remand, RSUI will have the burden to prove that the underlying jury award included damages for an uncovered claim—sexual assault. 

Second, the Eighth Circuit determined that should RSUI establish that the jury’s unallocated damages award included uncovered damages, the district court must allocate the unallocated jury award between covered and uncovered claims.  In so holding, the court looked to the Minnesota Supreme Court’s decision in Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d 602 (Minn. 2012), and particularly the cases cited therein.  While Remodeling Dimensions involved the allocation of an unreasoned arbitration award, the cases relied upon by the supreme court involved the allocation of a jury award and a settlement.  The court thus predicted that the supreme court would apply its allocation analysis in Remodeling Dimensions to an unallocated jury award.  

In remanding the case to the district court for further proceedings, the Eighth Circuit declined to resolve the issue of the burden to prove allocation, reasoning that the burden issue should be decided by the district court in the first instance.  While the case involves the application of an exclusion, the applicability of which is RSUI’s burden to prove, we expect based on Remodeling Dimensions and the Eighth Circuit’s decision in UnitedHealth Grp. Inc. v. Exec. Risk Specialty Ins. Co., 870 F.3d 856, 863 (8th Cir. 2017), that the district court will impose the burden of allocating the jury verdict on the insured.  

In Remodeling Dimensions, the supreme court held that as long as an insurer discloses to its insured the insured’s interest in obtaining a reasoned arbitration award that allocates between covered and uncovered claims, “the insured bears the burden of proving allocation of the award in subsequent litigation with its insurer over coverage.”  Similarly, in UnitedHealth Group, which involved a settlement, the court held that the insured bears the burden to allocate a settlement between covered and uncovered claims with enough specificity to permit a reasoned judgment about liability.  In so holding, the Eighth Circuit relied upon the Minnesota Supreme Court’s decisions in Remodeling Dimensions and Bor-Son Bldg. Corp. v. Emp’rs Commercial Union Ins. Co. of Am., 323 N.W.2d 58 (Minn. 1982).  The court further observed that “[t]o prove allocation, parties can present testimony from attorneys involved in the underlying lawsuits, evidence from those lawsuits, expert testimony evaluating the lawsuits, a review of the underlying transcripts, or other admissible evidence.”

RSUI is a welcome decision for insurance companies, and particularly excess insurers, as it reaffirms that insurers are entitled to litigate coverage issues that are not resolved in an underlying liability action and to have an unallocated arbitration award, jury award, or settlement allocated between covered and uncovered claims in in a separate coverage action.  

If you have any questions regarding the RSUI decision, an insurer’s rights in allocations situations under RSUI and Minnesota Supreme Court precedent, or any other insurance-related issues, please contact Dale Thornsjo, Lance Meyer, or one of the other members of our Firm’s Insurance Coverage Practice Group at 952.831.6544.