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

Filing 188

MEMORANDUM OPINION AND ORDER denying 164 Motion for Summary Judgment; granting 173 Motion for Partial Summary Judgment. (Written Opinion) Signed by Chief Judge John R. Tunheim on 4/1/2021. (HMA)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 16-28 (JRT/TNL)

RSUI INDEMNITY CO.,
Plaintiff,
v.
NEW HORIZON KIDS QUEST, INC.,

MEMORANDUM OPINION AND ORDER
GRANTING PLAINTIFF’S PARTIAL
MOTION FOR SUMMARY JUDGMENT &
DENYING DEFENDANT’S MOTION FOR
SUMMARY JUDGMENT

Defendant.

Jo Allison Stasney and J. Richard Harmon, THOMPSON, COE, COUSINS, &
IRONS LLP, 700 North Pearl Street, Twenty-Fifth Floor, Dallas, TX 75201;
James S. Reece, REECE LAW LLC, 80 South Eighth Street, Suite 900,
Minneapolis, MN 55402; and David F. Herr and Jevon Bindman, MASLON
LLP, 3300 Wells Fargo Center, 90 South Seventh Street, Minneapolis, MN
55402, for plaintiff.
Katie C. Pfeifer, Andrew B. Brantingham, Brian B. Bell, and Vernle C.
Durocher, Jr., DORSEY & WHITNEY LLP, 50 South Sixth Street, Suite 1500,
Minneapolis, MN 55402, for defendant.
Plaintiff RSUI Indemnity Company (“RSUI”) seeks a declaratory judgment that the
Sexual Abuse and Molestation Exclusion (the “Exclusion”) of the insurance policy issued
to Defendant New Horizon Kids Quest, Inc. (“New Horizon”) excludes coverage for
damages owed by New Horizon in relation to an incident of assault at one of its day care
facilities. On appeal from a prior grant of summary judgment to New Horizon, the Eighth
Circuit held that RSUI must be afforded an opportunity to prove that the underlying
verdict includes excluded damages.

Now, on remand, the parties have refiled motions for summary judgment. New
Horizon seeks summary judgment on the basis that the Exclusion does not apply as a
matter of law, while RSUI seeks partial summary judgment on the basis that the Exclusion
applies to at least some portion of the damages awarded. Because the Court finds that
application of the Exclusion is not precluded and, based on the evidence presented during
the state court trial, no reasonable jury would not have awarded some portion of the
damages based on the sexual nature of the underlying assault, the Court will deny New
Horizon’s motion and grant RSUI’s motion. However, the Court concludes that RSUI bears
the burden of proving the appropriate allocation between covered and excluded damages
at trial by a preponderance of the evidence.
BACKGROUND
I.

FACTUAL BACKGROUND
A.

The Underlying Lawsuit

New Horizon operated an hourly drop-in childcare facility, Kids Quest Grand Casino
Mille Lacs. (Joint Stipulation of Facts (“Stip.”) ¶ 3, Nov. 2, 2020, Docket No. 171.) On
January 23, 2008, a three-year-old, J.K., was assaulted by a nine-year-old while in New
Horizon’s care at Kids Quest Grand Casino Mille Lacs. (Stip. ¶ 3.) The three-year-old,
through his mother, sued New Horizon in Minnesota state court, alleging a number of
negligence-based claims, including failure to supervise children in the facility and failure
to supervise and train employees. (Id. ¶¶ 2–3.) New Horizon stipulated to liability, but
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contested the nature and extent of damages. (See Decl. Katie C. Pfeifer (“Pfeifer Decl.”)
¶ 5, Ex. D (“NH Trial Tr. Excerpts”) at 3–4, Nov. 2, 2020, Docket No. 169-3.)
The underlying lawsuit was tried twice. After the first trial, New Horizon moved
for a new trial based on plaintiff’s attorney misconduct, and the motion was granted.
(Stip. ¶ 16.) At the second trial—from which the present matter arises—the sole issue
was damages, as New Horizon had conceded liability. (Id. ¶ 18.) Because the questions
presented here depend on the evidence presented at trial, it is summarized below.
Perhaps foremost, the jury viewed security footage of the assault. (See RSUI Ex. A
(“Trial Tr. Excerpts”) at 20, May, 2, 2017, Docket No. 82-2.) The video showed prolonged
and repeated physical assault of J.K., lasting around an hour and a half. (See Trial Tr. at
22.) No sexual conduct was visible in the security tapes, but the perpetrator and victim
were not always in view of the cameras, such as when in playground tunnels and the
bathroom. (See NH Trial Tr. Excerpts at 5–10; id. at 14.)
The jury heard testimony from witnesses who examined J.K., and to whom he
described the assault shortly after it occurred. For example, the jury heard about medical
examinations of J.K. the day after the incident, including that a rape kit was collected,
although not processed, and testimony from a doctor who examined J.K. and concluded
that his condition after the assault was consistent with anal rape. (Trial Tr. Excerpts at 8–
10, 51–56; NH Trial Tr. Excerpts at 12–13.)

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The jury viewed an interview conducted by child protection several days after the
incident in which J.K. described repeated actual or attempted anal penetration by the
nine-year-old. (Trial Tr. Excerpts at 9.) The child protection worker testified that in her
opinion J.K. was sexually and physically assaulted. (Id. at 16.) The police officer who
conducted the investigation testified that nothing in his investigation was inconsistent
with J.K.’s description of a sexual assault. (Id. at 19–21.)
The jury also heard from J.K.’s therapist who treated him for around a year and a
half after the assault. (Id. at 65–72.) The therapist testified about the behaviors she
observed in J.K. and how those aligned with her expectations for behavior in children who
experienced physical and sexual trauma. (E.g., id. at 69–72.)
Each party also presented expert testimony regarding children and post-traumatic
stress disorder (“PTSD”). Witnesses discussed reports of J.K.’s behavior after the incident,
and analyzed how his behavior correlated to signs of PTSD, including how a child might
process a sexual assault. (See, e.g., id. at 29–30, 32–37.) The experts agreed that J.K. has
PTSD from the assault, but disagreed about the causes of the PTSD, specifically whether
or to what extent sexual assault contributed to the trauma, versus if severe physical
assault alone could cause PTSD in a young child. (See, e.g., NH Trial Tr. Excerpts at 17–
19.)

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Additionally, although not evidence, counsel for J.K. in the underlying lawsuit also
discussed the sexual aspects of the assault in both opening and closing statements. (See
Trial Tr. Excerpts at 7–13; RSUI Ex. B at 3–4, May 2, 2017, Docket No. 82-3.)
The jury awarded J.K. more than $6 million in damages. 1 (Stip. ¶ 21.) The verdict
was divided by type of expenses—such as past and future health care expenses, past and
future pain and emotional distress—but the jury did not indicate whether the award of
damages was for physical or sexual assault, or some combination thereof. (See id.)
B.

RSUI’s Policy and Participation in the Underlying Lawsuit

At the time of the incident, New Horizon had a general liability and excess liability
umbrella insurance policy through Travelers Property Casualty Company of America
(“Travelers”), which covered an aggregate limit of $3 million, 2 and a commercial excess
liability insurance policy through RSUI, with an $8 million limit. (Id. ¶ 1.) New Horizon
tendered the claim from the incident to Travelers, and Travelers retained representation
for New Horizon in the underlying lawsuit. (Id. ¶ 4.)
New Horizon informed RSUI of the lawsuit brought by J.K. in October 2012. (Id.
¶ 5.) RSUI did not provide a reservation of rights or coverage position letter, or otherwise

In the present action, RSUI disclosed an expert witness who opined that a verdict of this size in
a case about purely physical assault would be highly unusual. (See Ex. B at 14, Nov. 2, 2020,
Docket No. 175-1.)
1

Travelers paid $3 million, the limit of the combined general and umbrella policies, plus
applicable interest, toward the damages awarded by the jury. (Stip. ¶ 23.) New Horizon paid the
remainder of the judgment. (Id. ¶ 24.)

2

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communicate a coverage position prior to the first trial in the underlying lawsuit. (Id. ¶ 6.)
Under the policy, RSUI had a right to participate in New Horizon’s defense. (Id. ¶ 29.)
RSUI agreed to the trial strategy of conceding liability, but contesting the nature, type,
and extent of damages. (Id. ¶¶ 8–9.)
In February 2015, after the first trial verdict, RSUI issued a reservation of rights
letter for the first time. (Stip. ¶ 12, Ex. B, Nov. 2, 2020, Docket No. 171-2.) Despite
agreeing to the strategy of stipulating to liability, RSUI noted that “while a dispute existed
concerning whether J.K. was sexually assaulted, New Horizon made the decision to admit
liability for J.K.’s alleged injuries[.]” (Ex. B at 1.) RSUI went on to state that the verdict
“raises serious coverage issues” and “[b]ased upon the facts of the case, the damages
awarded against New Horizon may be barred from coverage by the application of the
Sexual Abuse or Molestation Exclusion.” (Id. at 1–2.) The Exclusion states:
This insurance does not apply to any liability arising out of the:
1. Actual or threatened “sexual abuse of molestation” by anyone;
2. Negligent:
a. employment;
b. investigation;
c. supervision;
d. reporting to proper authorities, or failure to so report;
or
e. retention
of a person for whom any insured is or ever was legally
responsible and whose conduct would be excluded by 1. above;
or
3. Placement of a minor child in adoptive or foster home care.

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As used in this endorsement, “sexual abuse or molestation” shall mean
physical, mental, or moral harassment or assault of a sexual nature against
any person.
(Id. at 2.) Although the letter only tentatively suggested application of the Exclusion, RSUI
has since stated that there were no circumstances in which RSUI would have agreed to
coverage. (Pfiefer Decl. ¶ 11, Ex. J (“Graham Dep.”) at 143:13–144:13, Nov. 2, 2020,
Docket No. 168-7.)
After the first trial, it appears RSUI became more involved in New Horizon’s
defense. For example, RSUI attended a mediation, (Graham Dep. at 109:7–110:15);
intended to hire its own counsel for the second trial but was instead satisfied with
Travelers’ attorneys, (id. at 129:19–23); retained a jury consultant, (id. at 153:14–16,
155:10–18); and provided comments and recommendations regarding trial strategy
leading up to and during the second trial, (e.g., Pfeifer Decl. ¶ 3, Ex. B. at 105:18–108:20,
Nov. 2, 2020, Docket No. 169-1 (noting that trial preparation was a “collaborative
effort”).)
After the second verdict, RSUI again sent a reservation of rights letter citing the
Exclusion. (Stip. ¶ 22.) New Horizon disputed RSUI’s position and demanded that RSUI
indemnify New Horizon for the portion of the judgment exceeding Travelers’ limits. (Id.)
RSUI has not paid any portion of the judgment. (See id. ¶ 24.)

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II.

PROCEDURAL HISTORY
RSUI initiated this declaratory judgment action to determine whether the

Exclusion applies such that it need not indemnify New Horizon for any damages arising
from the underlying lawsuit or, in the alternative, that application of the Exclusion
requires the damages to be allocated and New Horizon bears the burden of proof as to
the allocated amounts. (Compl. ¶¶ 14–15, Jan. 6, 2016, Docket No. 1.) New Horizon filed
a counterclaim against RSUI, seeking damages for breach of contract and breach of the
duty of good faith and fair dealing, asserting that RSUI is obligated to indemnify New
Horizon. (Answer & Countercl. ¶¶ 25–37, Feb. 23, 2016, Docket No. 25.)
After discovery, the parties filed motions for summary judgment, and the Court
concluded that, as a matter of law, RSUI could not prove that the Exclusion applied
without an allocated award demonstrating that the jury determined sexual abuse had
occurred or a jury interrogatory. RSUI Indem. Co. v. New Horizon Kids Quest, Inc., 274 F.
Supp. 3d 910, 913 (D. Minn. 2017).
RSUI appealed and the Eighth Circuit reversed, finding that RSUI must be afforded
an opportunity to prove that the jury’s unallocated award included excluded claims
(sexual assault) as well as covered claims (physical assault). RSUI Indem. Co. v. New
Horizon Kids Quest, Inc., 933 F.3d 960, 966 (8th Cir. 2019). The Eighth Circuit remanded
the case so that the Court could give RSUI such an opportunity, and, if RSUI establishes
that the award included damages for excluded claims, for the Court to properly allocate
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the award. Id. The Eighth Circuit declined, however, to resolve the issue of which party
bears the burden to prove allocation, finding that it “should be decided by the district
court in the first instance.” Id.
On remand, the Court ordered the parties to submit motions for summary
judgment including briefing on (1) whether the jury’s unallocated award from the
underlying lawsuit included excluded as well as covered claims; (2) whether allocation
must be decided in a jury trial if the Court does not grant summary judgment on that
issue; and (3) which party bears the burden to prove allocation if the Court or a jury
concludes that the unallocated damages award from the underlying lawsuit includes
excluded claims. (Order at 3, Aug. 3, 2020, Docket No. 157.) These motions are now
before the Court. (Def.’s Mot. Summ. J., Nov. 2, 2020, Docket No. 164; Pl.’s Mot. Partial
Summ. J., Nov. 2, 2020, Docket No. 173.)
DISCUSSION
III.

STANDARD OF REVIEW
Summary judgment is appropriate when there are no genuine issues of material

fact, and the moving party can demonstrate that it is entitled to judgment as a matter of
law. Fed. R. Civ. P. 56(a). A fact is material if it might affect the outcome of the suit, and
a dispute is genuine if the evidence is such that it could lead a reasonable jury to return a
verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
A court considering a motion for summary judgment must view the facts in the light most
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favorable to the nonmoving party and give that party the benefit of all reasonable
inferences to be drawn from those facts. Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 587 (1986). The nonmoving party may not rest on mere allegations or
denials but must show, through the presentation of admissible evidence, that specific
facts exist creating a genuine issue for trial. Anderson, 477 U.S. at 256 (discussing Fed. R.
Civ. P. 56(e)). “The mere existence of a scintilla of evidence in support of the [nonmoving
party’s] position will be insufficient; there must be evidence on which the jury could
reasonably find for the [nonmoving party].” Id. at 252. At the summary judgment stage,
the Court may not make credibility determinations or weigh the evidence before it.
Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000).
II.

WHETHER THE JURY AWARDED DAMAGES FOR EXCLUDED CLAIMS
The Court first addresses the dispositive motions filed by each party on whether
the verdict in the underlying lawsuit included damages for excluded claims under New
Horizon’s policy with RSUI. As noted above, it is undisputed that there was some evidence
presented at trial about an alleged sexual assault, yet the special verdict form did not ask
the jury to differentiate between damages attributed to the general physical versus sexual
nature of the assault. When there is no factfinding in the liability suit to facilitate
allocation between covered and excluded claims, “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
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admissible evidence.” UnitedHealth Grp. Inc. v. Exec. Risk Specialty Ins. Co., 870 F.3d 856,
863 (8th Cir. 2017).
Relevant here, after the insured has established a prima facie case of coverage, the
burden is on the insurer to establish that an exclusion applies to preclude coverage.
Domtar, Inc. v. Niagara Tire Ins. Co., 563 N.W.2d 724, 736 (Minn. 1997). Exclusions are
read narrowly against the insurer. State Farm Ins. Cos. v. Seefeld, 481 N.W.2d 62, 64
(Minn. 1992). To survive summary judgment, the insurer must present a non-speculative
basis that the award should be allocated between covered and excluded claims.
UnitedHealth, 870 F.3d at 863. Here, RSUI must demonstrate that it is beyond speculation
that some portion of the verdict must have been based on excluded conduct.
A.

Applicability of the Exclusion

At the outset, New Horizon offers several unavailing legal arguments as to why, as
a matter of law, the Exclusion cannot apply to any portion of the damages awarded. First,
New Horizon maintains that the Court cannot conclude that the verdict encompassed
excluded damages because New Horizon’s liability did not “aris[e] out of” “harassment or
assault of a sexual nature,” (Stip. ¶ 28), since New Horizon would have been liable to J.K.
for physical assault damages, even absent sexual conduct. Minnesota courts have
interpreted the “arising out of” language in insurance exclusions to indicate a “but-for”
causation standard. See Faber v. Roelofs, 250 N.W.2d 817, 822 (Minn. 1977). The
standard is “comprehensive and broad” and requires only “a cause and result
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relationship,” not proximate cause, id., and “has also been held to mean originating from,
or having its origin in, growing out of, or flowing from,” Murray v. Greenwich Ins. Co., 533
F.3d 644, 550 (8th Cir. 2008) (citing Associated Indep. Dealers, Inc. v. Mut. Serv. Ins. Cos.,
229 N.W.2d 516, 518 (Minn. 1975)).
Here, New Horizon obscures the substantive issue of whether the jury awarded
damages based on sexual assault with its but-for causation argument. In this case, even
if the jury may have awarded some damages based on physical assault alone, if the Court
finds that the jury awarded any additional damages because of the evidence of sexual
conduct, then sexual assault is the but-for cause of those additional damages, and New
Horizon’s liability would therefore arise out of sexual conduct. Thus, the Court cannot
resolve the matter on but-for causation grounds without first examining the record of the
underlying lawsuit, and the analysis must continue.
Along similar lines, New Horizon argues that the concurrent cause doctrine
precludes application of the Exclusion. Under Minnesota law, if a covered and an
uncovered cause could have operated independently to cause the actual injury that
occurred, the claim is covered despite the existence of an uncovered component.
Midwest Family Mut. Ins. Co. v. Schmitt, 651 N.W.2d 843, 848 (Minn. Ct. App. 2002) (citing
Seefeld, 481 N.W.2d at 65). The doctrine only applies, however, when the same injury or
loss could have been caused by a covered cause independent of the noncovered cause.
Seefeld, 481 N.W.2d at 65.

Within the context of this matter, the actual injury
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requirement means that the concurrent cause doctrine does not apply if RSUI can
establish that the jury awarded any portion of the damages based on evidence of sexual
conduct. If so, the separate, physical assault alone would not have led to the same injury
or loss, and accordingly, the concurrent cause doctrine would not preclude application of
the Exclusion. As such, the Court cannot resolve the matter without examining the record
of the underlying lawsuit.
Lastly, New Horizon asserts that the Exclusion cannot apply because of the
perpetrator’s young age. New Horizon contends that the Exclusion incorporates criminal
law definitions of “assault of a sexual nature,” and, under Minnesota criminal law, a nineyear-old is neither capable of committing crimes nor subject to delinquency.
Furthermore, New Horizon asserts that the Exclusion only applies to intentional conduct
and, although sexual intent may be inferred in some cases, New Horizon posits that the
Court should not infer intent where the perpetrator is so young.
Minnesota courts interpret different types of insurance exclusions differently, and
the arguments New Horizon offers have no bearing on a sexual abuse and molestation
exclusion.

First, the Exclusion is also not a criminal acts exclusion, and although

Minnesota courts have relied on criminal law to define terms in criminal exclusions, see,
e.g., Wheetley v. Allianz Life Ins. Co., No. A04-402, 2004 WL 2221735, at *2 (Minn. Ct. App.
Oct. 5, 2004), it is unlikely that Minnesota courts would use criminal law to define terms

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in a sexual abuse or molestation exclusion. 3 Cf. SECURA Supreme Ins. Co. v. M.S.M., 755
N.W.2d 320, 325 (Minn. Ct. App. 2008) (distinguishing between criminal acts and
intentional acts exclusions). So although a nine year old perpetrator would not be subject
to criminal prosecution, see Minn. Stat. § 609.055, or be considered delinquent, In re
Welfare of S.A.C., 529 N.W.2d 517, 519 (Minn. Ct. App. 1995), the perpetrator’s age does
not have the same effect on application of the Exclusion. 4
The Exclusion is also not an intentional acts exclusion and its plain language does
not include an intent element.

The Court declines to graft an additional intent

requirement onto the clause. See SECURA, 755 N.W.2d at 325; see also Edgley v. Lappe,
342 F.3d 884, 888–89 (8th Cir. 2003) (explaining that insurance policies are interpreted
using contract principles and finding that the district court erred by looking beyond the
plain language of a policy). In other words, to trigger the Exclusion, the insurer must only
prove that the conduct itself falls within the Exclusion’s terms, irrespective of the actor’s

Accord National Cas. Co. v. Young, No. 07-4836, 2009 WL 2170105, at *6–7 (E.D. Pa. July 17,
2009) (interpreting the term “sexual act” in a sexual abuse or molestation exclusion by reference
to Black’s Law Dictionary rather than criminal law and noting that such exclusions are often
broadly applicable).
3

Minnesota courts have considered how other types of legal capacity, such as incapacitation or
mental disability, affect application of intentional act insurance exclusions, and have declined to
directly applying criminal capacity analysis to insurance exclusions when the insured is mentally
ill. See State Farm Fire & Cas. Co. v. Wicka, 474 N.W.2d 324, 330 (Minn. 1991) (noting that
statutory codification of cognitive incapacity defenses in criminal cases “provides but a partial
answer when dealing within the realm of insurance law.”). Thus, the Court finds that Minnesota
courts would likely also decline to directly apply criminal law minimum age limits to insurance
exclusions.
4

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purpose. See SECURA, 755 N.W.2d at 325 (holding that the perpetrator’s intent to cause
harm was irrelevant because conduct fell with the meaning of the exclusion). Accordingly,
the Court imposes neither an intent requirement nor a minimum age requirement for the
Exclusion to apply. Rather, RSUI need only demonstrate that the jury found that assault
of a sexual nature occurred for the Exclusion to apply. See Evanston Ins. Co. v. Johns, 530
F.3d 710, 714 (8th Cir. 2008) (applying an exclusion for claims arising out of “physical
conduct . . . of a sexual nature” without regard for the perpetrator’s understanding
because the contact itself was sexual in nature).
Although there may be other instances in which there is some doubt about
whether an assault was “of a sexual nature” when the phrase is given its ordinary
meaning, this is not such a case. J.K. described an assault which included repeated
attempted or actual anal penetration, and no one disputed J.K.’s description at trial. The
assault was undoubtedly “assault of a sexual nature,” even if the perpetrator did not
commit the acts with sexual intent or motive. The Court thus finds that the Exclusion may
apply in this case.
B.

Evidence Presented at Trial

Having found that none of New Horizon’s legal theories preclude application of the
Exclusion, the Court now turns to the evidence presented at trial to determine whether
there is a non-speculative basis to conclude that the jury awarded damages based on the
sexual assault.
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As described above, multiple trial witnesses discussed sexual aspects of the assault
and J.K.’s description of his experience, and opined as to whether J.K.’s PTSD was
attributable to severe physical assault and/or sexual trauma. Overall, RSUI submitted at
least 140 pages of trial transcript that include statements by attorneys, descriptions of
evidence, and testimony about the alleged sexual violation experienced by J.K. and its
effects on him going forward.
On the other hand, New Horizon points out that the 140 pages submitted is out of
a total 1600 pages of trial transcript. New Horizon also maintains that the evidence, such
as the security footage, was so compelling and explicit as to a physical assault having
occurred, that the Court should not speculate about whether the jury may have also relied
on less explicit evidence of sexual conduct.
When determining if the verdict in the underlying lawsuit includes any damages
based on the sexual aspects of the assault, there is no minimum amount of the award
that must be attributed to such conduct in order for the case to move to the allocation
phase. Here, even if the evidence about the sexual aspects of the assault was a relatively
small portion of the trial, as New Horizon suggests, the Court finds that no reasonable jury
would have disregarded that evidence in deliberation, particularly because J.K.’s
description of the alleged sexual conduct was undisputed. Accordingly, there is a nonspeculative basis to conclude that the jury awarded some portion of the verdict based on

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the fact that there was violative contact of a sexual nature suffered upon J.K. by the
perpetrator, and that this contact caused some of J.K.’s ongoing psychological effects.
As such, RSUI has satisfied its burden to establish that the jury awarded some
portion of the damages—even if ultimately a small portion—based on evidence of an
excluded claim, and the Court will therefore grant RSUI’s Motion for Partial Summary
Judgment and deny New Horizon’s Motion for Summary Judgment.
III.

BURDEN OF PROOF FOR ALLOCATION OF DAMAGES
Because the Court grants partial summary judgment for RSUI and the damages
awarded in the underlying lawsuit will need to be allocated, the Court must determine
which party shall bear the burden of proof at trial. As an initial matter, the Court also
requested that the parties brief whether a trial on allocation should be a bench or jury
trial because there had been some dispute about the proper format. However, the
parties now agree to proceed to a jury trial on allocation. (See Def.’s Mem. Opp. at 7 n.1,
Nov. 23, 2020, Docket No. 177.) Because New Horizon included a demand for jury trial
with its counterclaim, and the parties have not agreed to withdraw the demand, the

parties are entitled to a jury trial. 5 Fed. R. Civ. P. 38(b); see also Northgate Homes, Inc. v.

The Court notes that within the context of this case, a bench trial would likely be more efficient
than a jury trial, as no additional fact-finding is needed. A bench trial would also comport with
state law, which provides that application of an insurance policy is the role of the court. See
Comm. Bank v. West Bend Mut. Ins. Co., 870 N.W.2d 770, 773 (Minn. 2015) (“The interpretation
of an insurance policy and the application of the policy to the undisputed facts of a case are
5

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City of Dayton, 126 F.3d 1095, 1098–99 (8th Cir. 1997) (“Federal procedural law governs
the question of whether [a party] has a right to a jury trial on its claim for declaratory
judgment.”).
The next question is which party will bear the burden of allocation between
covered and excluded claims. Under Minnesota law, although the insured generally has
the burden of proving allocation of damages between covered and uncovered claims by
a preponderance of the evidence, that burden may shift to the insurer if certain
conditions are met. See Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819
N.W.2d 602, 618 (Minn. 2012). The Minnesota Supreme Court has not addressed the
burden of allocation in the precise situation presented here: a coverage dispute with
covered and excluded claims involving an excess insurer that did not control the defense
of the insured in the underlying litigation. Yet the Eighth Circuit, on appeal of the instant
case, concluded that Minnesota courts would apply the allocation analysis established by
Remodeling to determine the burden. See RSUI Indem. Co., 933 F.3d at 966.
The Remodeling court outlined four estoppel-based conditions which, if
established, result in the burden shifting from the insured to the insurer to allocate an

questions of law[.]”); see also See Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819
N.W.2d 602, 618 (Minn. 2012) (instructing the district court to establish allocation of an award).
Nonetheless, whether to conduct a jury trial or a bench trial is not within the Court’s discretion
since the parties have exercised a jury trial demand, and therefore the interests of efficiency and
judicial economy cannot prevail without the parties’ agreement.

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award post-judgment: (1) the insurer had a duty to notify the insured of its interest in
obtaining a written explanation of the damages award; (2) it was possible to obtain a
written explanation of the award; (3) the insurer had the opportunity but failed to
properly notify the insured; and (4) the insurer’s failure caused prejudice to the insured. 6
See Remodeling, 819 N.W.2d at 617–19. The insured has the burden to demonstrate that
the conditions have been met. See id. at 618. The Court will apply the four conditions to
predict how the burden should be assigned in this case.
A.

Duty to Notify

An insurer has the duty “to disclose to its insured the insured’s interest in obtaining
a written explanation of the award that identifies . . . the portions of the award
attributable to each” claim or theory of recovery when the insurer “accepts the defense
of [a] claim under a reservation of rights that includes covered and noncovered claims.”
Id. at 618. Although Remodeling only specifically addressed the duty to notify when an

RSUI argues that the burden cannot shift because it is an excess insurer without a duty to
defend, and in Remodeling, the court stated that the burden “does not shift to the insurer unless
the insurer had an affirmative duty to defend the underlying claims.” Remodeling, 819 N.W.2d
at 618. While this quotation is from Remodeling, it is not the holding of the case, but comes from
a parenthetical explaining a West Virginia Supreme Court case. See id. at 617–18. Rather, the
Remodeling court clarified that the duty to notify an insured of its interest in a written
explanation of damages for allocation “arises not from [the insurer’s] contractual duty to defend,
if any, but from the equitable principal of estoppel.” Remodeling, 819 N.W.2d at 617 (citation
omitted). Indeed, the Eighth Circuit instructed the Court to apply the fact-intensive analysis
described in Remodeling despite the differences between that case and the present matter,
confirming that not having a duty to defend is not dispositive for the burden of proof inquiry.
RSUI Indem. Co., 933 F.3d at 966.
6

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insurer had the duty to defend, it did not hold that the duty to notify only exists for
primary insurers with a duty to defend. See RSUI Indem. Co., 933 F.3d at 966 (recognizing
that Remodeling’s allocation analysis applies to excess insurers who do not control the
defense). Rather, the Remodeling Court imposed a duty to notify on the insurer for two
reasons: (1) because an insurer has a duty of good faith to its insured and the insurer
uniquely knows the scope of coverage and exclusions, the notification duty prevents
prejudice to the insured; and (2) the duty to notify is not onerous. Remodeling, 819
N.W.2d at 618–19.
Applying the two-part rationale, RSUI had a duty to notify New Horizon of its
interest in a written explanation of the damages award. First, RSUI had a duty of good
faith toward New Horizon, as RSUI uniquely knew the scope of the policy’s coverage and
exclusion, and intended to exercise the Exclusion despite only issuing a tentative
reservation of rights. Additionally, RSUI’s participation in New Horizon’s defense without
disclosing its intent to exercise the Exclusion creates the possibility of prejudice to New
Horizon, such as if RSUI had attempted to steer the litigation in a direction that would
make it easier to later disclaim coverage. The duty to notify is intended to eliminate such
opportunities for prejudice to the insured.
Second, it would not have been onerous for RSUI to notify New Horizon of its
interest in a written explanation. New Horizon informed RSUI of the underlying lawsuit
more than three years before the verdict in the second trial, RSUI was present for and
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assisted with portions of the defense, and RSUI provided New Horizon with a reservation
of rights letter several months before the second trial. RSUI had ample opportunity to
notify New Horizon of its interest in a written explanation of the verdict, and it would not
have been onerous to do so. Therefore, the first condition is established.
B.

Ability to Obtain a Written Explanation of the Award

Next, the insured must affirmatively show “that a written explanation of an award
is available under the applicable rules.” Id. at 618. The Minnesota Rules of Civil Procedure
allow for special verdicts and jury interrogatories which, if requested, would have allowed
for a written explanation of the jury’s award to facilitate allocation. See Minn. R. Civ. P.
49. The second condition is met.
C.

Failure to Notify

Third, the insurer must have “had the opportunity to provide timely notice to the
insured” but failed “to make a timely disclosure of the insured’s interest in obtaining a
written explanation of the award.” Remodeling, 819 N.W.2d at 618–19. It is undisputed
that RSUI did not directly notify New Horizon of its interest in obtaining a written
explanation before the jury’s verdict in the underlying lawsuit and, as explained above,
RSUI had the opportunity to provide such notice. Therefore, the third condition is met
unless RSUI’s failure to notify is otherwise excused, which the Court finds no reason to
do. The Court disagrees with RSUI’s position that New Horizon should have known that
RSUI had an interest in a written explanation. Remodeling does not establish an exception
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to the duty to notify if the insured should have known to request a written explanation,
and it is unlikely that the Minnesota Supreme Court would permit such an exception, as
the court stressed that “the duty to notify is not onerous.” Id. at 619. Thus, the third
condition is also satisfied.
D.

Prejudice to the Insured

Finally, to shift the burden of allocation, the insured must show that “prejudice
was caused by the failure of the insurer to provide [] notice” of the insured’s interest in
obtaining a written explanation of the damages award. Id. at 618. Here, New Horizon
was prejudiced by RSUI’s failure to notify because New Horizon was unable to make an
informed decision about whether to request an appropriate special verdict. It is possible
that New Horizon would not have requested a written explanation, but “the insured is
entitled to make the decision whether to seek an allocated [award],” Remodeling, 819
N.W.2d at 617, and the inability to do so because of the insurer’s failure to notify is
prejudicial.
Finding that the fourth condition is met, the Court concludes that the burden of
allocation will shift from New Horizon to RSUI at trial as all four Remodeling conditions
are satisfied.
CONCLUSION
In sum, the Court grants RSUI’s Motion for Partial Summary Judgment and denies
New Horizon’s Motion for Summary Judgment. Application of the Exclusion is not barred
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by state law and, upon review of the record, the Court finds that no reasonable jury would
have disregarded the evidence of assault of a sexual nature and ongoing psychological
effects presented in the underlying lawsuit. Therefore, the case will proceed to trial on
allocation of the damages between covered and excluded claims. Because RSUI had a
duty to notify New Horizon of its interest in a written explanation of the verdict, and such
an explanation could have been obtained, yet RSUI failed to notify New Horizon of its
interest, which resulted in prejudice to New Horizon in defending the underlying lawsuit,
RSUI will bear the burden of proof for allocation in the damages trial.
ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED:
1. New Horizon’s Motion for Summary Judgment [Docket No. 164] is DENIED;
2. RSUI’s Motion for Partial Summary Judgment [Docket No. 173] is GRANTED;
3. Unless the parties agree otherwise, the matter will proceed to a jury trial on
the issue of allocation of the damages award in the underlying lawsuit; and
4. RSUI will bear the burden of proof for allocation of damages at such trial.

DATED: April 1, 2021
at Minneapolis, Minnesota.

_____

______

JOHN R. TUNHEIM
Chief Judge
United States District Court

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