In the original posts, below, we covered the horrific case of child-care center negligence that resulted in serious injuries to a 3 year-old child, who had been attacked by a 9 year-old child (“J.K. v. New Horizon”).
Specifically, the lawsuit of RSUI Indemnity Company (“RSUI”) v. New Horizon, is a lawsuit brought by the excess insurance company seeking a ruling by the U.S. District Court (Kyle, J.) that a policy exclusion applies (the “Sexual Abuse or Molestation Exclusion”).
There was no dispute that a physical attack occurred, which harmed “J.K.” But whether there was also “sexual abuse” was “hotly disputed.” If it did occur, (1) what proportion of the jury award was for damages due to the physical attack (for which there would be coverage under the policy) vs. due to the sexual abuse (for which there wouldn’t be), and, (2) if that matters, as between the insurer and the insured, whose problem is it that the jury did not allocate its award between “physical assault” damages and “sexual abuse damages”?
But what readers might find interesting, or even strange, is the strategic decision-making of an excess insurer under these circumstances.
Here is what we mean: the applicable RSUI policy provided second layer excess coverage with limits of $8 million over a primary policy with $1 million limits and a first layer excess policy of $2 million limits issued by Travelers. In other words, RSUI would only be “on the hook” (if it had a coverage obligation) for a max of $8 million after the first $3 million in liability was paid out by the underlying insurers.
Under such circumstances, the insurer has some delicate strategic decisions to make.
For example, it could “turtle,” or “go radio silent,” or “play wait and see” how the underlying liability shakes out, then take a two-pronged approach of attacking the underlying lawyering and denying coverage.
Alternatively, it could hurtle itself into the defense of the case, pitching in resources to try to limit liability so it is under the coverage amounts of its policy.
Or, maybe, it could do some of both?
According to New Horizon’s lawyers:
For several years after learning about J.K.’s claim against Defendant New Horizon Kids Quest, Inc. (“NHKQ”), Plaintiff RSUI Indemnity Company (“RSUI”), NHKQ’s insurer, did nothing. RSUI did not provide a coverage position to NHKQ, even though J.K.was seeking damages in the litigation entitled J.K., a minor, by and through K. Kimball, parent and natural guardian v. New Horizon Kids Quest, Inc. (“the Underlying Lawsuit”) far above the limits of both underlying policies and above the limits of RSUI’s Excess Policy (“Policy”). RSUI was silent even in the face of its own apparent conclusion that an exclusion—the Sexual Abuse or Molestation Exclusion (“Exclusion”)—was triggered by NHKQ’s admission of liability to J.K. (an admission that RSUI agreed to without registering any caveats or concerns to its insured, NHKQ). Instead, RSUI sat back, kept its coverage position to itself, and left NHKQ and Travelers Property Casualty Company of America (“Travelers”) to protect RSUI’s interests.
Once it became apparent that RSUI would have to provide coverage to NHKQ, because of the verdict against NHKQ after the first trial far exceeding Travelers’ underlying policy limits (indeed, even exceeding the RSUI Policy limits), the insurer finally chose to participate in the defense. But even then, RSUI was cagey about its coverage position; RSUI merely advised NHKQ that the Sexual Abuse or Molestation Exclusion “may” bar coverage for the damages incurred in the Underlying Lawsuit. RSUI did not tell NHKQ that it was denying coverage, even though it had already decided internally that it would never pay on the claim.
After the verdict in the first trial in the Underlying Lawsuit, and with RSUI’s full participation, NHKQ moved successfully for a new trial. The second time around, RSUI played an extensive role in pretrial and trial activities.
Can an insurer have it both ways? Can it actively participate in the defense, sit passively by as the insured allows for a jury verdict form that does not allocate between covered and uncovered claims, and then exploit that omission to deny coverage?
Seems like a tricky high wire act to us.
Original post (April 19, 2017) (under headline “The Justice Kluge”): Last week, we covered J.K. v. New Horizon, a Minnesota Court of Appeals decision that made passing reference to the trial court’s grant of a new trial based on trial misconduct by the plaintiff’s lawyers in the previous trial in which the plaintiff had won a $13.5 million jury verdict. (The lawsuit was retried and plaintiff won a jury verdict of about $6 million the second time around.)
The large jury verdict tossed out by the trial judge piqued our interest. We dug up Hennepin County District Court Judge Ivy Bernhardson’s order for a new trial to investigate. What had the plaintiff’s lawyers done to deserve this severe set-back? Read the linked decision and see for yourself.
The plaintiff, a small child, was badly beaten by another older child while in the care of a daycare facility.
The plaintiff’s lawyer sought to impose punitive damages on the facility but Judge Bernardson refused to allow plaintiff to seek to recover punitive damages. With one avenue of recovery blocked, the plaintiff’s lawyer simply attempted to pursue an alternate route to try to reach the same destination (Easy Street (a cynic would say)).
Almost all complex systems — of any kind — are kluges (also spelled, “kludges”), defined as workarounds, clumsy, inelegant, inefficient, difficult to extend and hard to maintain.
All social institutions are kluges by necessity. Society and social systems are composed of competing, inconsistent, disparate, and incessantly mutating interests. Our school systems, our court systems, our governance systems are forever “works in progress,” which we tweak here, resulting in dislocations there, resulting in accommodations somewhere else, causing another problem in a fourth area, etc.
This ceaseless imperfection and imbalance of social institutions comes to mind in connection with our justice system. In J.K. v. New Horizon Kids Quest, Inc., the Minnesota Court of Appeals affirmed the denial of the plaintiff’s motion to add a claim for punitive damages (post, here, decision, here).
Horrific life-altering harms suffered by the likes of J.K. will always and undoubtedly stoke people’s bottomless grief and righteous outrage. Such emotions underlie all claims for punitive damages. Minnesota courts, as we have commented many times before, are extremely reluctant to allow Minnesotans to seek punitive damages. But this hostility to punitive damages (expressed by our legislature and by our court system, as well) will not make the desire for punishment go away; it will inevitably force the expression of these profound and intense emotions to come out in other ways.