                    United States Court of Appeals
                           FOR THE EIGHTH CIRCUIT
                                  _____________

                                  No. 98-1509MN
                                  _____________

American Employers Insurance Co.,       *
                                        *
             Appellee,                  *
                                        * On Appeal from the United
      v.                                * States District Court
                                        * for the District of
                                        * Minnesota.
John Doe 3B,                            *
                                        *
             Appellant.                 *
                                   ___________

                             Submitted: October 21, 1998
                                 Filed: February 1, 1999
                                  ___________

Before BOWMAN, Chief Judge, BRIGHT and RICHARD S. ARNOLD, Circuit
      Judges.
                            ___________

RICHARD S. ARNOLD, Circuit Judge.

       This case involves the interpretation of an insurance contract under Minnesota
law. The issue on appeal is whether American Employers Insurance Co. (AEIC) has
a duty to indemnify its insureds, the Diocese of New Ulm and the Church of St.
Joseph, in an action for the negligent employment and supervision of a priest who is
alleged to have sexually molested John Doe 3B over an extended period of time. AEIC
claims that the policies it issued do not provide coverage, because Doe's alleged
injuries were not caused by an "occurrence," as that term is defined in the policies.
The District
Court, relying upon this Court's opinion in Allstate Ins. Co. v. Steele, 74 F.3d 878 (8th
Cir. 1996), agreed, and granted AEIC's motion for summary judgment. After the
District Court's ruling, the Minnesota Court of Appeals filed a decision in Mork Clinic
v. Fireman's Fund Ins. Co., 575 N.W.2d 598 (Minn. App. 1998). Because we believe
Mork is a persuasive statement of Minnesota law, we reverse and remand.

                                           I.

       We summarize briefly the events that led to this lawsuit. AEIC issued four
identical comprehensive general liability insurance policies to the two named insureds,
which we shall call collectively the Diocese, covering consecutive time periods from
January 1, 1980, to July 1, 1984. The policies contained a "Bodily Injury Liability"
section that provided that AEIC would "pay on behalf of the insured all sums which
the insured shall become legally obligated to pay as damages because of bodily injury
or property damage to which this insurance applies, caused by an occurrence . . .." In
the definitions section of the policies, "occurrence" is defined as "an accident,
including continuous or repeated exposure to conditions, which results in bodily injury
or property damage neither expected nor intended from the standpoint of the insured."
In addition, the policies provided that "[t]he insurance afforded applies separately to
each insured against whom claim is made or suit is brought, except with respect to the
limits of the company's liability."

      In early 1994, Doe filed suit against the Diocese, alleging that he had been
"regularly and repeatedly sexually molested" by a priest who had been employed by
the Diocese. The abuse allegedly began in 1976, when Doe was six years old, and
ended in 1989, shortly before the priest's death. According to Doe's complaint, the
Diocese "knew or should reasonably have known of [the priest's] dangerous and
exploitive propensities as a child sexual abuser," and, despite such knowledge, the
Diocese negligently employed and failed to supervise the priest properly, and failed to
provide adequate warning to Doe and his family.


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       In 1997, Doe, the Diocese, and two other insurers which had provided liability
coverage for the Diocese entered into a settlement agreement. AEIC did not participate
in the settlement. The two insurers each paid Doe $50,000 for injuries he allegedly
sustained during the period of time during which their policies were in effect. The
parties agreed that, in addition to this payment of $100,000, a judgment of an
additional $50,000 would be entered against the Diocese for the period of time during
which the AEIC policies were in effect; that the Diocese would assign its rights against
AEIC to Doe; and that Doe would pursue collection of the remaining judgment only
against AEIC.

        Earlier, in 1996, AEIC had commenced a declaratory-judgment action seeking
a declaration of its rights and obligations under its policies. Following the settlement
agreement, AEIC filed a motion for summary judgment. AEIC alleged, first, that it
had no duty to indemnify the Diocese because Doe did not sustain a "bodily injury" as
defined by the policies, and, second, that any injuries sustained by Doe were not
caused by an "occurrence," as that term is defined by the policies. The District Court,
viewing the evidence and drawing all justifiable inferences in Doe's favor, held that the
physical pain suffered by Doe during certain instances of the alleged sexual abuse did,
in fact, constitute "bodily injury." The Court agreed with AEIC, however, that, under
Minnesota law, "the intentional acts of [the priest], not the negligence of the Diocese,
resulted in [Doe's] injury," and that it therefore cannot be said that "an accident" caused
Doe's injury, as required by the policies' definition of "occurrence." In addition, the
Court held that the policies' separability clause did not create coverage, because that
clause "merely requires that the acts of the Diocese be viewed independently of the acts
of [its employee]," and that, under Minnesota law, it is the intentional tort, not the
alleged negligent supervision, that causes an injury.




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                                           II.

        In Allstate Ins. Co. v. Steele, 74 F.3d 878 (8th Cir. 1996), this Court,
interpreting Minnesota law, held that a negligent-supervision claim arising from a
sexual assault did not trigger coverage because the injury to the victim would not have
occurred in the absence of the intentional misconduct, which was not covered by the
policy. In that case, a twelve-year-old was raped by her sixteen-year-old stepbrother
while she was visiting her father and stepmother. The victim's mother sued the
stepbrother, the father, and the stepmother, as well as the stepbrother's father. As
against the adult defendants, the victim's mother alleged negligent supervision,
negligent failure to protect, and negligent infliction of emotional harm. The insurance
company sought a declaratory judgment that none of its policies covered damages
resulting from the stepbrother's sexual misconduct, and the District Court held that the
policies covered accidents, not intentional sexual misconduct. The District Court also
held that the policies' "joint obligations" clause, which provided that the
"responsibilities, acts and failures to act of a person defined as an insured person will
be binding upon another [insured]," barred coverage on the negligence claim. Id. at
880-81 (citing Allstate Ins. Co. v. Steele, 885 F. Supp. 189, 192-93 (D. Minn. 1995)).
(This clause stands in contrast to the separability clause contained in the policies at
issue in the present case, stating that coverage "applies separately to each insured.")

       On appeal, this Court agreed, and affirmed the grant of summary judgment. We
noted that the policy in effect at the time of the rape specifically excluded coverage for
injuries "resulting from" acts that are "intended or expected to cause bodily injury,"
and, accordingly, held that the policy did not cover the negligent-supervision claims,
since the victim's injuries "resulted from" conduct that was excluded under the policy.
(The policies in this case have no such express exclusion for intentional acts.) The
Court relied upon two decisions of the Minnesota courts regarding negligent
supervision and entrustment, Fillmore v. Iowa Nat'l Mutual Ins., 344 N.W.2d 875
(Minn. App. 1984), and Faber v. Roelofs, 250 N.W.2d 817 (Minn. 1977). In those


                                           -4-
cases, claims for coverage were barred because the injuries were either "the result of"
or "arose out of" conduct that was expressly excluded from coverage. We held that,
even assuming the adult defendants were negligent in their supervision of the
stepbrother, the injury would not have occurred absent his misconduct, and that,
therefore, the harm "resulted from" the intentional act. According to the Court, the
plaintiff could not circumvent the policy's intentional-conduct exclusion by suing on
a theory of negligent supervision.

       Although the Supreme Court of Minnesota has not addressed the central issue
presented in this case, that state's Court of Appeals has done so, and it is that decision,
Mork Clinic v. Fireman's Fund Ins. Co., 575 N.W.2d 598 (Minn. App. 1998), that we
find persuasive as to state law. In Mork, a physician was accused of having sexually
abused several patients during medical examinations. The patients sued the physician,
the clinic, and the clinic's general liability carrier, Fireman's Fund Ins. Co. Fireman's
Fund participated in settlement agreements with two of the patients, and then refused
to defend further or to indemnify the clinic. The clinic, against which claims of
negligent hiring and supervision and of respondeat superior were made, settled with
the remaining plaintiffs. The clinic then brought a declaratory-judgment action against
Fireman's Fund to determine the insurance company's responsibility for indemnity,
defense costs, attorney fees, and interest.

       The trial court granted summary judgment in the clinic's favor, and the Court of
Appeals affirmed. The policy being construed provided coverage for claims of bodily
injuries "caused by" an "occurrence," which was defined as "an accident, including
continuous or harmful repeated exposure to substantially the same harmful condition."
On appeal, Fireman's Fund argued that the injuries sustained by the patients were
caused by the physician's intentional sexual abuse, which, it said, was not a covered
"accident" or "occurrence." That claim was rejected by the appellate court. The Court
wrote that "the immediate cause of the victims' injuries is not the only cause, and the
victims had a legitimate cause of action against the employer if they could establish,
as

                                           -5-
they claimed, that [the clinic] was negligent in the hiring, supervision, or retention of
their employee." Mork, 575 N.W.2d at 600. Although the merits of the underlying
negligence claim were not before the Court (only the question of whether the claim
was covered by the insurance policy), it noted that "[t]he injuries would not have
occurred if [the clinic] had not hired the employee and offered him as its agent to
provide professional medical services to the victims." Id.

       The Court distinguished our opinion in Steele, as well as the opinions in other
cases controlled by Minnesota law, including Fillmore and Faber, supra at 4. The
Court found that those cases focused primarily on the "breadth of exclusions for
injuries 'arising out of' or 'resulting from' certain conduct" and that the cases "have no
bearing on the coverage question of whether prior, independent acts of negligence are
causative of injuries." Mork, 575 N.W.2d at 601. In addition, the Court noted that it
had previously distinguished Steele, in Redeemer Covenant Church of Brooklyn Park
v. Church Mut. Ins. Co., 567 N.W.2d 71, 77-78 (Minn. App. 1997), as dependent on
the specific provisions of the policies involved in that case, including the "joint
obligations" clause, which provided that each insured was bound by the acts of others.
Mork, 575 N.W.2d at 601. Further, in Mork, as in this case, the policy contained a
separability clause, and the Court held that the clause supported the conclusion that the
employer's negligence was a "causative occurrence." Id. at 602.

                                           III.

      For the foregoing reasons, Mork is persuasive. Accordingly, we hold that, under
Minnesota law, the Diocese is entitled to indemnification under the AEIC policies. On
remand, AEIC may assert any other defenses to which it believes it is entitled,
including defenses related to the reasonableness of the settlement agreement.

      Reversed and remanded for proceedings consistent with this opinion.




                                           -6-
It is so ordered.

A true copy.

       Attest:

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




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