The Eighth Circuit Court of Appeals recently held that an insurer may pose interrogatories to juries—i.e., ask the jury questions—in an underlying third-party action. For example, an insurer’s insured is sued by a third-party claimant. The insured tenders defense of that third-party action to its insurer. The insurer accepts defense but does so under a reservation of rights. Then, in a post-award coverage action, the insurer may argue that there is no coverage under the at-issue insurance policy by relying on the jury’s findings of fact.
That right was affirmed by the Eighth Circuit Court of Appeals in RSUI Indemnity Co. v. New Horizon Kids Quest.1 In RSUI Indemnity, the Eighth Circuit Court of Appeals held that the insurer may ask the jury in the underlying third-party action to answer fact questions that the insurer may then use in the subsequent coverage action. Answers to which may directly impact the insurer’s indemnification obligations in the subsequent coverage action.
Background of RSUI Indemnity. The facts in RSUI Indemnity arise out of an incident that occurred at a child-care facility run by New Horizon Kids Quest, Inc. (“New Horizon”). On or around January 23, 2008 an incident involving physical and sexual abuse occurred between minor children at the facility. At the time of the incident, New Horizon held primary liability insurance through Travelers Property Casualty Company of America (“Travelers”); and an excess liability policy with Travelers, for a combined limit of $3 million. New Horizon also held an additional excess policy issued by RSUI Indemnity Company (“RSUI”). This additional excess policy had a liability limit of $8 million per occurrence, but also included a Sexual Abuse or Molestation Exclusion.
The parents of the injured child sued New Horizon and New Horizon tendered the claim to Travelers and RSUI. Travelers defended New Horizon in the lawsuit under a reservation of rights. No RSUI representative participated in the trial; but Travelers provided RSUI with updates. A jury awarded over $13 million, exceeding the limits of New Horizon’s coverage through Travelers. The jury did not, and was not asked, to specify what portion of the award, if any, resulted from sexual assault. Shortly thereafter, RSUI issued a reservation of rights letter, stating that coverage for underlying lawsuit’s judgment may be barred because of the Sexual Abuse or Molestation Exclusion.
Around the same time, New Horizon filed for and was granted a new trial at which Travelers again supplied the primary defense counsel. During this second trial, RSUI was more involved, hiring consultants and observing part of the trial. The second jury awarded $6 million and Travelers paid the limit of its policy. Again, the jury did not, and was not asked, to specify what portion of the award, if any, resulted from sexual assault. RSUI then denied coverage for the judgment based on the Sexual Abuse or Molestation Exclusion.
The Lower Court’s Decision. In the later coverage action, before the district court2, RSUI sought partial summary judgment declaring it need not indemnify New Horizon for damages resulting from the incident. The district court denied RSUI’s motion for partial summary judgment, holding that RSUI could not meet its burden to exclude coverage. The district court explained that the insured bears the initial burden of proving that a policy covers a certain claim. If it does, the burden shifts to the insurer to demonstrate exclusion and defeat coverage. For RSUI to succeed, it needed to show that the jury awarded damages, at least in part, for sexual abuse. The district court found that RSUI could not do so because it had no evidence. The district court also pointed to RSUI’s consent to the stipulation that an assault occurred, rendering factual findings of this nature unnecessary. The district court viewed the entire situation as avoidable and that RSUI or New Horizon should have attempted to put the question before the jury in the underlying third-party action. In response, RSUI pointed to trial record evidence that may have led a jury to conclude sexual abuse occurred, arguing that from this the district court could decide how the jury would have allocated the award. The district court, however, held that to specify allocation at that point would be nothing more than “pure and unfettered speculation.”
The Eighth Circuit Court of Appeals Reverses the District Court’s Decision. The Eighth Circuit Court of Appeals recognized that generally under Minnesota law, that “[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.” The Eighth Circuit Court of Appeals further recognized that “[i]f 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.”
The Eighth Circuit Court of Appeals built on Minnesota precedent, and held that if RSUI—as the excess carrier—can establish that the award included an uncovered claim, the next question is how to allocate the award. The Eighth Circuit Court of Appeals relied on Remodeling Dimensions, Inc. v. Integrity Mutual Insurance Co.3, a decision from the Minnesota Supreme Court. In Remodeling, the Minnesota Supreme Court determined that both parties may present evidence and “the district court must, as best it can, establish the allocation the arbitrator would have made.” The Eighth Circuit Court of Appeals agreed with the district court’s reasoning that no Minnesota case has subjected a general jury award to the same type of post hoc allocation; but it nonetheless concluded that Remodeling remains the best guidance. The Eighth Circuit Court of Appeals further illustrated that there are several cases applying the same analysis in similar ways to unallocated jury awards and unallocated settlements.
The Eighth Circuit Court of Appeals remanded the case for further proceedings, concluding that RSUI “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.” The Eighth Circuit Court of Appeals also held that if RSUI sustains that burden, “the district court must then allocate the award between covered and uncovered claims.” The goal of remanding was to give RSUI an opportunity to establish that the jury’s unallocated damages award included uncovered as well as covered claims, and if so, for an allocation of the award between those claims to determine whether RSUI’s excess policy covers all or any part of New Horizon’s liability not paid by Travelers.
Pointers for Best Practices. An insurer may rely on RSUI Indemnity to argue that it has the right to pose jury interrogatories in the underlying third-party action. To facilitate that right, the insurer may direct the defense counsel it retained for its insured to pose jury interrogatories on the special verdict form.
The key in drafting these sorts of jury interrogatories: Avoid asking the jury to determine coverage questions, as those are questions of law. Instead, review the exclusions that the insurer believes are the most applicable and could be raised in the subsequent coverage action, then draft jury interrogatories asking that the jury make factual findings that the insurer may then use in a subsequent coverage action.
For instance, the jury cannot answer, “Does Intentional Acts Exclusion in the insurance policy exclude coverage over the defendant’s conduct in this action”?
However, the jury can answer, “Did the defendant intentionally stab the plaintiff”? If the answer to that is “yes,” then the insurer in subsequent coverage action may use the jury’s finding to argue that, as a matter of undisputed fact, the insured intentionally stabbed the plaintiff. Consequently, it would be argued that the court should apply the Intentional Acts Exclusion and relieve the insurer of its coverage obligations.
As a final note, according to RSUI Indemnity, the insurer should take the affirmative step in advising the insured of its right to an allocated jury award. In other words, the insurer would advise its insured that it may request that the jury divide out what category the damages fall under. For instance, in a case where the insured is found liable for sexual assault and general negligence, the insured could have the jury allocate what damages fall under sexual assault and what damages fall under general negligence. Then, in the subsequent coverage action, the insurer and insured will debate the insurer’s indemnity obligations in light of the jury’s findings of fact.
If you have any questions regarding insurance-law related topics, please contact the authors or one of the other attorneys in HKM’s Insurance Law Group at (651) 227-9411.