An excess insurer that did not control its insured’s defense must be given the opportunity to prove that jury-awarded damages included uncovered as well as covered claims, says a federal appeals court, in overturning a lower court ruling in a child abuse case.

In 2011, the guardian of J.K. sued New Horizon Kids Quest Inc., which operates a child care facility at the Grand Casino Mille Lacs in Onamia, Minnesota, alleging that J.K., then age 3, suffered physical and sexual assaults by 9-year-old N.B. while the two children were under New Horizon’s care, according to Monday’s ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in RSUI Indemnity Co. v. New Horizon Kids Quest Inc.

At the time of the incident, commercial general liability and excess liability policies issued by Travelers Cos. Inc. unit Travelers Property Casualty Coverage of America provided New Horizon with $3 million of liability coverage for insured occurrences, and a commercial excess liability policy issued by Atlanta-based RSUI Indemnity Co. provided additional coverage of up to $8 million per occurrence. The RSUI policy included a sexual abuse or molestation exclusion.

A jury awarded J.K. more than $13 million, but the trial court granted New Horizon’s motion for a new trial. At the second trial, the jury awarded J.K. $6 million in total damages, and segregated its award into four damage categories, but did not find whether the boy suffered sexual as well as physical abuse, and did not allocate its award between those two claims.

Travelers paid its policy limits, plus interest, according to the ruling. New Horizon paid the remaining $3.2 million and demanded indemnity from RSUI under its excess policy. RSUI then filed a motion in U.S. District Court in Minneapolis seeking a declaration that its policy’s “sexual abuse or molestation” exclusion barred coverage for that part of the award above Travelers policy limits.

The District Court granted New Horizon summary judgment, concluding RSUI could not prove that any part of the jury’s unallocated award was based on sexual assault that was subject to the policy’s exclusion.

The ruling was overturned by a unanimous three-judge appeals court panel.

“As it is undisputed that New Horizon proved a claim of physical assault covered by the RSUI policy, RSUI has the burden to prove that the award also included an uncovered claim, here, sexual assault excluded by its policy,” said the ruling.

“If RSUI establishes that J.K. proved an uncovered sexual assault claims well as a covered physical assault claim, then the court must address the final coverage issue — how to allocate the total award,” the ruling said.

“Accordingly, we remand this case for further proceedings 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,” said the ruling, in reversing the lower court’s judgment.

RSUI attorney J. Richard Harmon, co-chair of the insurance litigation and coverage section for Thompson, Coe, Cousins & Irons LLP in Dallas, said in a statement he was pleased with the decision. “Currently, we are analyzing the other issues addressed in the opinion relating to remand,” he said.

New Horizon’s attorney did not immediately respond to a request for comment.   

Last week, in a divided ruling, a federal appeals court upheld a lower court’s decision and ruled RSUI appropriately denied a technology company coverage under its directors and officers liability policies because the firm had failed to give timely notice of its claim during the coverage’s initial policy period.