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

United States District Court, D. Minnesota

August 4, 2017

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

          JAMES RICHARD HARMON, JO ALLISON STASNEY, THOMPSON, COE, COUSINS & IRONS LLP, DALLAS, TEXAS, JAMES S. REECE, REECE LAW LLC, MINNEAPOLIS, MINNESOTA, FOR PLAINTIFF.

          VERNLE C. DUROCHER, JR., KATIE C. PFEIFER, BRIAN B. BELL, DORSEY & WHITNEY, LLP, MINNEAPOLIS, MINNESOTA, FOR DEFENDANT.

          MEMORANDUM OPINION AND ORDER

          PAUL A. MAGNUSON UNITED STATES DISTRICT JUDGE

         INTRODUCTION

         In this insurance-coverage action, Plaintiff RSUI Indemnity Company (“RSUI”) seeks a judgment declaring it need not indemnify its insured, Defendant New Horizon Kids Quest, Inc. (“New Horizon”), for damages resulting from an incident at a child-care facility New Horizon operated. Presently before the Court are the parties' cross-Motions for Summary Judgment. For the reasons that follow, the Court will grant New Horizon's Motion and deny RSUI's Motion.

         BACKGROUND

         The relevant facts are undisputed. New Horizon operates a child-care facility, Kids Quest, located in the Grand Casino Mille Lacs in Onamia, Minnesota. (Doc. No. 46 (hereafter “Stip.”) ¶ 3.)[1] At the relevant time, it held primary liability insurance through Travelers Property Casualty Company of America (“Travelers”) and a Commercial Excess Liability Policy (the “Policy”) issued by RSUI. (Id. ¶ 1.) Under the Policy, RSUI agreed to pay “those sums[] in excess of” the limits of New Horizon's primary coverage through Travelers that New Horizon became “legally obligated to pay as damages because of injury to which [the Policy] applies.” (Id. Ex. E at 10.) The Policy excluded from coverage any liability arising out of (i) “the actual or threatened ‘sexual abuse or molestation' by anyone” as well as (ii) the negligent supervision “of a person for whom any insured is or ever was legally responsible and whose conduct would be excluded by” the sexual-abuse exclusion (the “Exclusion”). (Id. at 11.) The Policy further defined “sexual abuse or molestation” as the “physical, mental or moral harassment or assault of a sexual nature against any person.” (Id.) RSUI enjoyed the right to “participate in the defense of claims or suits against [New Horizon] seeking damages because of injury to which [the Policy] may apply.” (Id. at 19.)

         On January 23, 2008, an incident occurred between two minor children, J.K. and N.B., while under New Horizon's supervision at Kids Quest. (Id. ¶¶ 2-3.) J.K. (age 3) claimed that N.B. (age 9) had assaulted him physically and sexually. (Id.) After the incident, J.K.'s parent sued New Horizon in the Hennepin County District Court (the “Underlying Lawsuit”), alleging that New Horizon negligently supervised J.K. and N.B, resulting in a physical and sexual assault. New Horizon tendered the claim to Travelers and RSUI, and “RSUI does not dispute that it received timely notice of the claim.” (Id. ¶¶ 4-5.) Travelers, as New Horizon's primary insurer, defended it in the Underlying Lawsuit under a reservation of rights, while RSUI did not communicate its position regarding coverage under the Policy. (Id. ¶¶ 4, 6.)

         The Underlying Lawsuit proceeded to trial in January 2015, where New Horizon stipulated as follows:

On January 23, 2008, [J.K.], then age 3, was left in the care, custody, and control of the [New Horizon] drop-in daycare facility . . . located on the premises of the Grand Casino Mille Lacs. While he was there, [J.K.] was assaulted by another male child at the daycare center who was 9 years old.
[New Horizon] admits that it owed a duty to [J.K.] and that it was solely responsible for his supervision, safety and security while he was in [its] daycare facility. And that it was negligent and failed to fulfill those obligations to [J.K.] on January 23, 2008.
[New Horizon] has accepted responsibility to pay for all the damages that the jury in this case finds to be sustained by [J.K.] as a result of the incident or incidents that occurred while he was at the [New Horizon] facility.
However, [New Horizon] disputes the nature, type, and extent of [J.K.]'s injuries and the damages arising from the incidents.

(Id. ¶ 8.) Prior to entering this stipulation, a Travelers representative discussed it with RSUI's claims representative, John Graham, who “wrote that the strategy made sense to him.” (Id. ¶ 9.) No RSUI representative participated in the trial, but Travelers provided RSUI updates. (Id. ¶ 10.) After hearing evidence on J.K.'s damages, on January 30, 2015, a jury awarded over $13 million, an amount that exceeded the limits of New Horizon's coverage through Travelers. (Id. ...


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