Plaintiffs usually don’t bring claims based on the defendant’s insurance coverage. So it is not unusual for an insurer and policyholder to have a dispute about what claims are covered and what claims are not covered under the insurance policy and, if there are covered and uncovered claims, how to allocate the covered claims to the insurance policy. When the allocation question arises between a policyholder and an excess insurer, where the excess insurer did not control the underlying defense, the situation becomes more complicated. The Eighth Circuit Court of Appeals recently addressed this issue.
In RUSI Indemnity Co. v. New Horizon Kids Quest, Inc., No. 17-3567 (8th Cir. Aug. 12, 2019), the policyholder had commercial general liability and excess liability policies issued by one carrier and a second excess liability policy issued by a second carrier (the “excess carrier”). The underlying claim alleged negligent employee training and supervision resulting in a physical and sexual assault at a childcare facility operated by the policyholder (the alleged perpetrator was an older child also at the facility). The excess policy had a Sexual Abuse or Molestation Exclusion (so did the primary policy, but the primary insurer defended under a reservation of rights and ultimately never adjudicated that issue).
After two trials, the jury rendered a verdict and did not make any findings concerning whether there was sexual abuse as well as physical assault (the policyholder admitted liability for negligent supervision). The jury’s award reached the excess carrier’s limits and the excess carrier refused to pay that part of the award (the primary carrier paid its full primary and excess policy limits and the policyholder paid the remaining amount of the judgment, which it sought back from the excess carrier).
The excess carrier commenced a declaratory judgment action claiming that the exclusion barred coverage for the part of the award that reached the excess carrier’s policy. The district court granted summary judgment to the policyholder, but the circuit court reversed and remanded.
The basis for the reversal and remand was the court’s holding, under Minnesota law, that an excess insurer that did not control the underlying defense must be afforded the opportunity to prove in a subsequent coverage action that the jury award included damages for uncovered as well as covered claims. The court went on to say that if the excess carrier sustains that burden, the district court must then allocate the award between covered and uncovered claims.
Here, said the court, the jury was not asked to find whether the victim suffered sexual as well as physical assault and the award was not allocated between those two claims. While the excess carrier had the right to participate in the defense of the underlying claim to which the insurance may apply, it had no duty to defend unless the underlying limits were exhausted. Although the court found that it was undisputed that physical assault claims were covered under the excess policy, the excess carrier asserted that it had no duty to pay the policyholder because a substantial portion of the jury award–“perhaps all of it in excess of the amounts paid by” the primary carrier– was based on claims of sexual assault that were barred by the exclusion.
The court concluded that two issues had to be resolved on remand. First, whether the jury award included damages for sexual assault that fell within the exclusion, and, if so, what portion of the total award must be allocated to that uncovered claim. Under Minnesota law, held the court, the excess carrier had the right to try to prove in a post-award coverage action 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. Because whether the underlying claimant proved an uncovered claim was a coverage issue that was not necessary or essential for the jury to determine, it, said the court, was an issue the excess carrier was entitled to litigate in a post-award coverage action.
The circuit court held that if the excess carrier establishes that the claimant proved an uncovered sexual assault claim as well as a covered physical assault claim, then the district court must address the final coverage issue of how to allocate the total award. The circuit court left it to the district court to determine in the first instance who has the burden to prove allocation should the excess carrier carry its burden on the uncovered claim issue.