This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (1996).




Western National Bank of Duluth,



Transcontinental Insurance Company, et al.,


Filed June 16, 1998

Affirmed in part and reversed in part

Crippen, Judge

St. Louis County District Court

File No. C196600338

Mark L. Knutson, Bye Boyd Agnew, Ltd., Suite 200 Sellwood Building, Duluth, MN 55802 (for respondent)

Lauris A. Heyerdahl, Abrams & Smith, 700 Northstar West, 625 Marquette Avenue, Minneapolis, MN 55402 (for appellants)

Considered and decided by Peterson, Presiding Judge, Crippen, Judge, and Mansur, Judge.[*]



Respondent Western National Bank of Duluth defended and settled a lawsuit that alleged intentional discrimination, wrongful discharge, and tortious interference with the employment contract of its former employee, Marlene Beckman. The bank then brought the present action, seeking a declaration of coverage under a commercial general liability policy issued by Valley Forge Insurance Company and an umbrella policy issued by Transcontinental Insurance Company. On cross-motions for summary judgment, the trial court concluded that neither insurer had a duty to defend the bank, that Valley Forge had no duty to indemnify the bank, but that Transcontinental had a duty to indemnify the bank because its policy provided "illusory coverage" for discrimination claims, violating public policy.

We affirm the district court's decision that Valley Forge had no duty to defend or indemnify the bank, but we reverse the court's decision that Transcontinental had a duty to indemnify the bank.


Coverage issues and the construction and interpretation of insurance policies are questions of law, subject to de novo review. Haarstad v. Graff, 517 N.W.2d 582, 584 (Minn. 1994). When examining an insurance policy, our function is to "determine what the agreement was and enforce it." Fillmore v. Iowa Nat'l Mut. Ins. Co., 344 N.W.2d 875, 877 (Minn. App. 1984).

The Transcontinental policy covered the bank's legal obligations for either bodily injury or personal injury caused by an "incident." For "bodily injury," the policy stated that an incident would be triggered by an "occurrence," which was defined as requiring an "accident." Beckman's claims of intentional discrimination did not allege an accident. Cf. Sage Co. v. Insurance Co. of N. Am., 480 N.W.2d 695, 698 (Minn. App. 1992) (concluding that intentional discharge of employee was not an "accident"). We find nothing in the Beckman complaint, which variously states the occurrence of intentional discriminatory practices, that suggests disparate impact unintentionally resulting from the bank's adoption of a facially neutral policy. See Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 419 n. 20 (Minn. 1997) (pointing out that claim requiring intentional behavior is "clearly" not covered by policy requiring accidental or unintentional behavior).

The Transcontinental policy stated that it provided "personal injury" coverage for an incident triggered by an "offense," including the offense of discrimination. But another section of the policy specifically excluded coverage for discrimination against a bank employee and other intentional discrimination. The trial court concluded that the policy as a whole provided "illusory coverage" for discrimination actions and violated public policy.

The doctrine of illusory coverage is a means of avoiding an unreasonable result when an otherwise literal reading of an insurance policy would unfairly deny coverage. Jostens, Inc. v. Northfield Ins. Co., 527 N.W.2d 116, 118 (Minn. App. 1995), review denied (Minn. Apr. 27, 1995). "Under the doctrine of illusory coverage, `liability insurance contracts should, if possible, be construed so as not to be a delusion to' the insured." Id. (quoting Motor Vehicle Cas. Co. v. Smith, 247 Minn. 151, 157, 76 N.W.2d 486, 490-91 (1956)).

The Transcontinental policy, while broadly including discrimination as a type of "offense" covered by the policy, also excluded certain specific types of discrimination from coverage, including discrimination against employees and intentional discrimination against non-employees. Contrary to the bank's arguments, this exclusion was not all- encompassing; the exclusion did not apply to unintentional discriminatory acts against non-employees.

The discrimination exclusion was located near the beginning of the policy, in a readily-accessible list of policy exclusions. Even a cursory reading of the exclusions would have revealed that the type of discrimination alleged by Beckman, an employee, was excluded from coverage. We conclude that the policy did not provide illusory coverage for Beckman's claims[1].

The bank filed a notice of review, claiming that Valley Forge was required to defend and/or indemnify the bank for expenses related to Beckman's discrimination action. The bank argues that the Valley Forge policy provided coverage because Marlene Beckman's complaint alleged bodily injury, caused by an occurrence. But again, even if Beckman's complaint arguably alleged a bodily injury, her complaint of discrimination did not allege an occurrence, which the Valley Forge policy defined as an "accident," because Beckman's complaint alleged only intentional, not disparate impact, discrimination.

With regard to Beckman's allegations of personal injury, the Valley Forge policy excluded coverage if such injury occurred during an employee's scope of employment. This type of scope-of-employment exclusion is applicable if the alleged injury was "directly related to" the plaintiff's employment. Meadowbrook, 559 N.W.2d at 420. Any personal injuries alleged by Marlene Beckman were directly related to her employment with the bank and were thus excluded from coverage.

Because neither insurer breached a duty to defend, the bank is not entitled to an award of attorney fees in this action. Id. In light of our decision, the remaining issues raised by the parties need not be decided.

Affirmed in part and reversed in part.

[*] Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. Art. VI, § 10.

[1] We note that the general coverage section, which included discrimination as a "personal injury," was located much later in the policy and was perhaps less readily visible than the policy exclusions.