RSUI Indemnity Company v. New Horizon Kids Quest, Inc.

Background

New Horizon operated an hourly drop-in childcare facility. On January 23, 2008, a three-year-old, J.K., was assaulted by a nine-year-old while in New Horizon’s care. J.K., through his mother, sued New Horizon in Minnesota state court on negligence-based claims, including failure to supervise children and failure to supervise and train employees. New Horizon admitted liability but contested the nature and extent of the damages.

The second state-court trial focused only on damages. The jury saw security footage of a prolonged physical assault and heard evidence about alleged actual or attempted anal penetration, medical examinations, J.K.’s statements, therapy, and testimony about post-traumatic stress disorder. The jury awarded more than $6 million, but its verdict did not identify which damages resulted from physical assault, sexual assault, or both.

RSUI insured New Horizon under a commercial excess liability policy containing a Sexual Abuse and Molestation Exclusion. The exclusion applies to liability arising from actual or threatened sexual abuse or molestation and defines that phrase as physical, mental, or moral harassment or assault of a sexual nature. Travelers paid $3 million toward the judgment, and New Horizon paid the remainder. RSUI did not pay any portion of the judgment.

Issues

The parties filed renewed summary-judgment motions after the Eighth Circuit reversed an earlier ruling for New Horizon. The issues included whether the exclusion could apply to some part of the unallocated verdict, whether allocation should be decided by a jury, and which party had the burden of proving the allocation.

Court’s analysis

The court rejected New Horizon’s arguments that the exclusion could not apply because New Horizon would have been liable for physical-assault damages even without sexual conduct, because the physical and sexual conduct were concurrent causes, or because the perpetrator was nine years old. The court explained that the policy’s “arising out of” language uses a broad but-for causation standard. It also held that the exclusion was not a criminal-acts or intentional-acts exclusion and did not contain a minimum-age or intent requirement.

The court concluded that the described conduct—repeated actual or attempted anal penetration—was plainly an assault of a sexual nature. It then reviewed the evidence from the underlying trial. Although evidence about the sexual aspects occupied only part of the trial record and the security footage strongly showed a physical assault, J.K.’s description of the sexual conduct was undisputed. The court held that no reasonable jury would have disregarded that evidence and that there was a non-speculative basis to conclude that some portion of the verdict reflected the sexual conduct and its psychological effects.

Because the verdict was not allocated, the court ruled that the damages must be divided between covered and excluded claims at trial. The parties were entitled to a jury trial because New Horizon had demanded one in its counterclaim and had not withdrawn that demand.

Burden of proof

Under the Minnesota allocation framework discussed by the court, the insured ordinarily must prove the allocation of damages between covered and uncovered claims. That burden can shift to the insurer when four conditions are met: the insurer had a duty to notify the insured about obtaining a written explanation of the damages award; such an explanation could have been obtained; the insurer failed to provide timely notice; and the failure prejudiced the insured.

The court found all four conditions satisfied. RSUI had a duty to notify New Horizon because RSUI knew the policy’s coverage and exclusion, participated in the defense, and had issued a reservation-of-rights letter. A special verdict or jury interrogatories could have produced a written explanation of the award. RSUI had the opportunity to provide notice but did not do so. New Horizon was prejudiced because it could not make an informed decision about requesting an allocated verdict.

Order

The court denied New Horizon’s Motion for Summary Judgment and granted RSUI’s Motion for Partial Summary Judgment. Unless the parties agreed otherwise, the case would proceed to a jury trial on allocation of the underlying damages. RSUI would bear the burden of proof for that allocation.