                   United States Court of Appeals
                           FOR THE EIGHTH CIRCUIT
                                 ___________

                              Nos. 99-1157/1162
                                ___________

Agricultural Insurance Company and     *
American National Fire Insurance Co.,  *
                                       *
      Appellants/Cross-Appellees,      *
                                       *
      v.                               *
                                       *
Focus Homes, Inc. and Focus Homes      *
Corporation,                           * Appeals from the United States
                                       * District Court for the
      Appellees/Cross-Appellants,      * District of Minnesota.
      Third Party Plaintiffs,          *
                                       *
      v.                               *
                                       *
Minnesota Workers’ Compensation        *
Assigned Risk Plan,                    *
                                       *
      Third Party Defendant.           *
                                  ___________

                           Submitted: March 13, 2000
                               Filed: May 5, 2000
                                ___________

Before RICHARD S. ARNOLD, BEAM, and MURPHY, Circuit Judges.
                           ___________

MURPHY, Circuit Judge.
       This declaratory judgment action was brought by Agricultural Insurance
Company and American National Fire Insurance Co. who had issued insurance policies
to Focus Homes, Inc. (Homes) and Focus Homes Corporation (the Corporation). The
insurers now appeal from the district court’s denial of their summary judgment motion
and dismissal of their action. Homes and Corporation cross-appeal the district court’s
failure to grant them summary judgment. We reverse and remand.

                                            I.

        In the underlying action, three women employees sued Homes and the
Corporation under a number of theories, only one of which survived on appeal. See
Crist v. Focus Homes, Inc., 122 F.3d 1107 (8th Cir. 1997). Homes and the
Corporation operated a residential treatment facility, Yates House, at which the
incidents alleged in the employees’ complaint occurred. The surviving claim of sexual
harassment alleged that the employees had been physically and sexually assaulted by
a severely autistic and retarded sixteen year old male resident of the facility, J.L., that
they had reported their problems with J.L., that Homes and the Corporation had
belittled or disregarded their complaints and relieved them of their supervisory
authority, and that they had been constructively discharged by the absence of any
remedy to the situation. Homes and the Corporation tendered defense of this action to
the insurers, who denied coverage. After the sexual harassment claim was reinstated
on appeal in August 1997, the Crist parties agreed to submit it to binding arbitration
and eventually arrived at a settlement. The insurers brought this action in February
1998 to obtain a declaration that they had no duty to defend or indemnify the insured
parties.

        During the time of the incidents alleged in the Crist complaint, Homes and the
Corporation had been insured under three policies issued by the insurers. Both were
named insureds on a commercial general liability policy (CGL) and a professional
liability policy (PL) issued by the Agricultural Insurance Company, and Homes was the

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named insured on a commercial umbrella policy (CU) issued by the American National
Fire Insurance Company. The CGL policy provided coverage for "sums that the
insured becomes legally obligated to pay as damages because of 'bodily injury' or
'property damage' to which this insurance applies[,]" but did not cover injury "expected
or intended from the standpoint of the insured." Appellant's App., 77. The CU policy
covered "those sums in excess of 'underlying insurance' or the retained limit that the
'Insured' becomes legally obligated to pay as damages because of 'injury'[.]" Id. at 157.
The CGL and CU policies limited coverage to damage resulting from an “occurrence,”
defined under the policies as “an accident, including continuous or repeated exposure
to substantially the same general harmful conditions.” Id. at 88, 163. The PL policy
covered "those sums that the Insured becomes legally obligated to pay as damages
because of a professional error or mistake made . . . by you . . . arising out of the
performance or failure to perform any professional service for others in your capacity
as a residential care facility." Id. at 110. All the policies contained a number of
exclusion provisions.

       Both sides moved for summary judgment, and the district court ruled in favor of
Homes and the Corporation, finding coverage under each of the three policies. It found
that the Crist employees had alleged injuries within the scope of the CGL and CU
policies and that the injuries were neither expected nor intended by Homes and the
Corporation because they had been initiated by J.L. The court held that policy
exclusions for injuries which occurred in the scope of employment or as a result of
employment practices did not apply. The court also ruled that the PL policy covered
the allegations in the Crist complaint because the employee injuries arose from
treatment decisions for J.L. made by Homes and the Corporation.

      The insurers contend on appeal that the Crist allegations did not invoke coverage
under any of the policies. They argue that the complaint did not allege “occurrences”
causing “bodily injury” as defined in the CGL and CU policies and that exclusions for
employer’s liability, employment practices, and workers compensation would bar

                                           -3-
coverage in any event. They further assert that there is no coverage under the PL
policy because the complaint did not state a malpractice claim and the policy's
exclusions for employer’s liability and workers compensation would also apply.
Homes and the Corporation respond that the employees did allege occurrences causing
bodily injury within the coverage of the CGL and CU policies and that no exclusion
applies because the injuries were caused by J.L. They also argue for coverage under
the PL policy because they say that the women’s injuries occurred as a result of
treatment decisions regarding J.L. While they do not dispute that the employer’s
liability exclusion in the CGL policy eliminates the duty to defend or indemnify Homes,
which they identify as the employer,1 they claim that this exclusion does not apply to
the Corporation. They also do not dispute that the employer’s liability exclusion in the
PL policy eliminates the duty to defend Homes, but they claim that the exclusion does
not apply to the Corporation and does not eliminate the duty to indemnify Homes.

      On their cross-appeal, Homes and the Corporation argue that the district court
erred by dismissing the case without granting summary judgment in their favor and
without addressing the motions for summary judgment on their third party complaint
against the Minnesota Worker's Compensation Board. After the case was dismissed,
Homes and the Corporation entered into a stipulation to dismiss the third party action
without prejudice and they wish to have the district court give effect to that stipulation
on remand.

                                           II.

      An insurer’s duty to defend an insured is contractual. See Meadowbrook, Inc.
v. Tower Ins. Co., Inc., 559 N.W.2d 411, 415 (Minn. 1997) (citing Inland Constr.
Corp. v. Continental Cas. Co., 258 N.W.2d 881, 883 (Minn. 1977)). The duty to


      1
      The allegations in the complaint name both Homes and the Corporation as the
employer.
                                           -4-
defend is broader than the duty to indemnify and extends to every claim that arguably
falls within the scope of the policy coverage. Id. (citations omitted). Coverage
depends upon the allegations in the complaint, which must be compared with the
relevant language in the policy, see Ross v. Briggs & Morgan, 540 N.W.2d 843, 847
(Minn. 1995), as the duty to defend exists regardless of the merit of the underlying
claims. See Meadowbrook, Inc., 559 N.W.2d at 419 (citing Republic Vanguard Ins.
Co. v. Buehl, 204 N.W.2d 426, 429 (Minn. 1973)) (“An insurer’s obligation to defend
its named insured does not depend on the merits of the claim asserted, but on whether
the allegations of the complaint state a cause of action within the coverage afforded by
the policy.”) (emphasis in original). An insurer contesting its duty to defend bears the
burden of showing that each claim asserted in the lawsuit “clearly falls outside”
coverage under the policy. Meadowbrook, Inc., 559 N.W.2d at 418 (internal quotation
marks and citation omitted). “Exclusions are to be strictly interpreted against the
insurer and an insurer denying coverage because of an exclusion bears the burden of
proof.” Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 327 (Minn. 1993).
Our review is de novo. See St. Paul Fire & Marine Ins. Co. v. Schrum, 149 F.3d 878,
880 (8th Cir. 1998).

                                          A.

       The employee complaint alleges ‘bodily injury’ as defined under the CGL policy.
That policy defines “bodily injury” as “bodily injury, sickness, or disease sustained by
a person, including death resulting from any of these at any time.” Appellants’ App.,
86. The complaint alleges attacks by J.L. resulting in loss of consciousness and a
broken wrist, id. at 4, a back injury, id. at 5, and an attempted rape. Id. at 4. These
allegations do not clearly fall outside the coverage for bodily injury under the policy,
and the insurers’ argument on this point must therefore be rejected. See
Meadowbrook, Inc., 559 N.W.2d at 419.




                                          -5-
       The CGL policy limits coverage to “‘bodily injury’ . . . caused by an
‘occurrence[.]’” Appellants’ App., 77. “Occurrence” is defined by the policy as “an
accident, including continuous or repeated exposure to substantially the same general
harmful conditions.” Id. at 88. The Minnesota courts have so far declined to decide
whether allegations of sexual harassment can satisfy the ‘occurrence’ requirement. See
Meadowbrook, Inc., 559 N.W.2d at 419; see also St. Paul Fire & Marine Ins. Co. v.
Seagate Technology, Inc., 570 N.W.2d 503, 507 (Minn. Ct. App. 1997). We need not
address this undecided question of state law if a policy exclusion applies, so we move
on to consider the exclusions.

       The CGL policy's employer’s liability exclusion bars coverage for “‘bodily
injury’ to . . . an ‘employee’ of the Insured arising out of and in the course of . . .
employment by the Insured . . . [or] performing duties related to the conduct of the
Insured’s business . . . whether the Insured may be liable as an employer or in any other
capacity[.]” Appellants’ App., 78. Homes and the Corporation do not dispute that this
exclusion applies to Homes, but assert that it does not bar coverage for the
Corporation because it was not the employer . This argument overlooks the fact that
the complaint alleged that both Homes and the Corporation were liable as employers.

      The duty to defend arises from the allegations within the complaint. See
Meadowbrook, Inc., 559 N.W.2d at 420 (citing Ross v. Briggs & Morgan, 540 N.W.2d
843 (Minn. 1995)) (“In assessing whether an insurer has a duty to defend, the court
must focus on the claim and whether its elements fit within the exclusion.”) (emphasis
in original). The employees’ complaint identifies both Homes and the Corporation as
their employer. See Appellant’s App., 2-3. While the Corporation was insured under
the CGL policy, the allegations in the complaint only addressed it as an employer.
Within that role there was no coverage under the CGL policy because of the
employer’s liability exclusion. The insurers thus had no duty under the policy to defend
or indemnify the Corporation in the underlying litigation. Because the employer’s


                                           -6-
liability exclusion eliminated coverage under this policy, the employment practices and
workers compensation exclusions need not be addressed.

                                            B.

       The CU policy covers “those sums in excess of ‘underlying insurance’ . . . that
the ‘Insured’ becomes legally obligated to pay as damages because of an ‘injury’
caused by an ‘occurrence’ to which this policy applies.” Appellants’ App., 157.
Under this policy, ‘injury’ includes ‘bodily injury,’ as well as ‘advertising injury,’
‘personal injury,’ and ‘property damage.’ Id. at 163. Because the language defining
‘bodily injury’ in the CU policy is identical to that in the CGL policy, the allegations
in the Crist complaint do not clearly fall outside the scope of the policy, for the reasons
already discussed. An “occurrence” under the CU policy is defined as “an accident
including continuous or repeated exposure to substantially the same general harmful
conditions.” Id. at 163. This language substantially mirrors that of the CGL policy and
has not been construed in a Minnesota sexual harassment case.

       The employment practices provision in the CU policy precludes coverage for the
Crist allegations. The provision bars coverage for any injury “arising out of          ...
refusal to employ . . . termination of employment . . . coercion, demotion, evaluation,
reassignment, discipline, humiliation, discrimination or other employment-related
practices, policies, acts or omissions[.]” Appellants’ App., 158. The Crist complaint
states seven claims that could have invoked the duty to defend:2 sexual harassment,
assault and battery, intentional infliction of emotional distress, negligent infliction of
emotional distress, negligent hiring and supervision, whistle blower, and aiding and


      2
        As noted above, only the sexual harassment claim survived on appeal. The duty
to defend arises regardless of the merits of the claims, however, so long as the
allegations do not clearly fall outside the coverage of the policy. See Meadowbrook,
Inc., 559 N.W. 2d at 418.
                                            -7-
abetting. Id. at 9-14. Each of these claims turns on employment practices. The
complaint alleges that “[d]efendants created a hostile work environment . . . by
allowing a working environment to exist [that] included unlawful sexual harassment
[and] discrimination,” id. at 9, that defendants made unwanted sexual conduct from J.L.
“a condition of their employment,” id. at 11, that the insureds’ failure to “react[] and
protect[] [employees] [was] extreme and outrageous[,]” id., that after the employees
reported the assaults “[d]efendants failed to take timely and appropriate action . . . to
protect [employees,]” id. at 12, that the insureds negligently hired supervisors who
failed to take appropriate action in response to the employees’ complaints, id. at 13,
and that as a result of their complaints about their work environment the employees
were “stripped of all authority . . . and . . . constructively discharged.” Id. at 14. The
first paragraph of the complaint states that “[t]his is an action . . . based on unlawful
employment practices on the basis of sex[.]” Id. at 2. As we noted in Crist v. Focus
Homes, Inc., 122 F.3d 1107, 1110 (8th Cir. 1997), “the thrust of [the employees’]
lawsuit is Focus Homes’ conduct in response to [the employees’] complaints about
J.L.’s physically aggressive behavior, not J.L.’s underlying conduct.”

       The relatively few cases that have addressed employment practices exclusions
in similar contexts have held in favor of the insurers. In Miller v. McClure, 742 A.2d
564 (N.J. App. Div. 1998) (per curiam), aff’d, 745 A.2d 1162 (N.J. 1999) (per curiam),
an employment practices exclusion was held to bar coverage of a sexual harassment
claim because it, like the one in this case, provided that coverage did not extend to
“harassment, humiliation, discrimination or other employment-related practices,
policies, acts or omissions[.]” Id. at 569; see also Frank and Freedus v. Allstate Ins.
Co., 52 Cal. Rptr. 2d 678, 684 (Cal. Ct. App. 1996) (defamatory statement made in
context of employment and directed to performance fell within employment practices
exclusion). Compare HS Serv. v. Nationwide Mut. Ins. Co., 109 F.3d 642, 646 (9th
Cir. 1997) (employment practices exclusion did not apply where defamatory statement
occurred outside employment context). See generally Joseph P. Monteleone & Emy
Grotell, Coverage for Employment Practices Liability under Various Policies:

                                           -8-
Commercial General Liability, Homeowners’, Umbrella, Worker’s Compensation and
Directors’ and Officers’ Liability Policies, 21 W. New. Eng. L. Rev. 249 (1999).

        The assertion by Homes and the Corporation that the employees sought relief
primarily because of the failure to provide proper treatment for J.L. is not borne out
by their complaint. The employees could have sued Homes and the Corporation under
a number of theories. For example, they could have alleged that the employers had a
duty to control J.L., that they had failed to do so, and that the employees had been
injured as a result. See, e.g., Johnson v. Minnesota, 553 N.W.2d 40, 50 (Minn. 1996);
Lundgren v. Fultz, 354 N.W.2d 25, 27 (Minn. 1984). They could also have alleged that
Homes and the Corporation improperly medicated J.L. or negligently provided or failed
to provide professional services to him. Nowhere in their complaint, however, did the
employees make such claims. The complaint instead deals with the insureds’ treatment
of the plaintiffs as employees. The employment practices exclusion therefore precludes
coverage for the claims, and the insurers had no duty to defend or indemnify the Homes
or the Corporation under the CU policy.

                                           C.

        The PL policy covers “those sums that the Insured becomes legally obligated to
pay as damages because of a professional error or mistake made . . . by you . . . arising
out of the performance or failure to perform any professional services for others in your
capacity as a residential care facility.” Appellants’ App., 110. The policy does not
cover “‘bodily injury’ . . . resulting from other than a professional error or mistake
acting in your capacity as a residential care facility” or bodily injury to “an employee
of the Insured arising out of and in the course of employment by the Insured[.]” Id. at
110-111.

      The Crist complaint did not allege injuries arising from professional malpractice,
and the PL policy therefore does not cover the claims in the complaint. Moreover, the

                                           -9-
employer’s liability exclusion would bar coverage under the PL policy, as it did under
the CGL policy, because the complaint alleged injuries that occurred in the course of
employment.

                                         III.

       After a thorough review of the record, we conclude that the insurers had no duty
to defend or indemnify Homes or the Corporation under any of the three policies. The
insurers are therefore entitled to judgment in their favor, and the stipulation for
dismissal of the third party action may be presented to the district court on remand.
The judgment of the district court is reversed, and the case is remanded for further
proceedings consistent with this opinion.

A true copy.

      Attest:

               CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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