Submitted: February 12, 2019
from United States District Court for the District of
Minnesota - Minneapolis
LOKEN, COLLOTON, and KELLY, Circuit Judges.
Horizon Kids Quest, Inc. ("New Horizon"), operates
a childcare facility at the Grand Casino Mille Lacs in
Onamia, Minnesota. In 2011, the guardian of J.K. sued New
Horizon, alleging that negligent employee training and
supervision resulted in J.K., then age three, suffering
physical and sexual assaults by N.B., then age nine, when the
two children were under New Horizon's care. At the time
of the incident, commercial general liability and excess
liability policies issued by Travelers Property Casualty
Company of America ("Travelers") provided New
Horizon $3, 000, 000 of liability coverage for insured
occurrences. A Commercial Excess Liability Policy issued by
RSUI Indemnity Company ("RSUI") provided additional
excess liability coverage of up to $8, 000, 000 per
occurrence. The RSUI policy included a Sexual Abuse or
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 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.
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. RSUI appeals. We
review de novo the district court's interpretation of an
insurance policy and its grant of summary judgment; Minnesota
substantive law controls this diversity action.
Jerry's Enters., Inc. v. U.S. Specialty Ins.
Co., 845 F.3d 883, 887 (8th Cir. 2017). 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. Accordingly, we reverse and
remand for further proceedings.
begin with basic principles under Minnesota insurance law.
"The insured bears the initial burden of proving prima
facie coverage of a third-party claim under a liability
insurance policy. If the insured meets its burden of
establishing coverage of the claim, the burden shifts to the
insurer to prove the applicability of an exclusion under the
policy as an affirmative defense." Remodeling
Dimensions, Inc. v. Integrity Mut. Ins. Co, 819 N.W.2d
602, 617 (Minn. 2012) (citation omitted). The insured's
primary insurer -- here, Travelers -- has both a duty to
indemnify covered claims and a broader duty to defend its
insured in the third party's action. A primary insurer
who accepts the duty to defend, but reserves the right to
contest its duty to indemnify, may bring a separate
declaratory judgment action to determine coverage while the
third party action is pending,  or it may seek to have the jury
make findings in the third party action to resolve coverage
issues. See, e.g., Prahm v. Rupp Const.
Co., 277 N.W.2d 389, 391 (Minn. 1979). If the primary
insurer refuses to defend the third party action, even
improperly, and the insured brings a coverage action seeking
indemnity for a judgment in the third party's favor,
whether the third party claim was covered by the policy is an
issue the insurer is "entitled to litigate."
Brown v. State Auto. & Cas. Underwriters, 293
N.W.2d 822, 825 (Minn. 1980).
award entered against the insured may include sums for which
it is entitled to be indemnified under the policy, and sums
for claims not covered by the policy. If the evidence in a
post-award coverage action establishes that the third party
action included both covered and uncovered claims, then the
total award must be allocated, by the court in the coverage
action if necessary. See Remodeling, 819 N.W.2d at
618-19 & n.4; Duke v. Hoch, 468 F.2d 973, 984
(5th Cir. 1972); United Health Group Inc. v. Columbia
Cas. Co., 941 F.Supp.2d 1029, 1033-34 (D. Minn. 2013).
If the insurer accepted defense of the third party action
under a reservation of rights but failed to disclose to the
insured its interest in obtaining an allocated award, then
the insured's burden to allocate the award between
covered and uncovered claims is shifted to the insurer in the
post-award coverage or declaratory judgment action.
Remodeling, 819 N.W.2d at 617-18.
case, Travelers, the primary insurer, accepted defense of New
Horizon in J.K.'s action, subject to a reservation of
rights based on an Abuse and Molestation exclusion in its
commercial general liability policy. Neither Travelers nor
New Horizon commenced a declaratory judgment action regarding
this coverage issue before the first trial. At that trial,
defense counsel stipulated that New Horizon conceded
liability but contested damages, a strategy communicated to
RSUI. At the second trial, New Horizon again admitted
liability. The jury was not asked to find whether
J.K. suffered sexual as well as physical assault, and its
total award of $6, 032, 585 was not allocated between those
two claims. After the second trial, Travelers paid its $3
million policy limits, without contesting coverage.
policy provided that it has the right to participate in the
defense of claims "to which this insurance may
apply" but has no duty to defend unless the applicable
limits of "underlying Insurance" have been
exhausted. RSUI did not communicate a coverage position
before the first trial and did not attend the first trial.
After the first trial, RSUI sent New Horizon a coverage
position letter noting that damages awarded may be barred by
its Sexual Abuse or Molestation Exclusion. During the second
trial, RSUI retained a jury consultant to work with defense
counsel, and its claims representative attended the first two
days of trial. Following the ...