Sletten & Brettin Orthodontics, LLC v. Continental Casualty Co., 782 F.3d 931

Background

Daniel Sletten bought liability insurance from Continental; later formed Sletten & Brettin Orthodontics, LLC (S&B) and asked insurer to add a Hudson, WI office as an insured location; S&B was never added as a named insured.
St. Croix (Dr. Wolff and St. Croix Valley Dental) sued S&B and employee Brettin in Minnesota state court alleging defamatory internet posts made by Brettin, and each claim pleaded that the defendants acted with intent to injure.
S&B and Sletten tendered defense to Continental; Continental refused because S&B was not a named insured and invoked policy exclusions.
S&B and Sletten sued Continental and Wells Fargo seeking a declaratory judgment that Continental must defend, defense costs, and reformation to add S&B as a named insured; defendants removed to federal court and moved to dismiss for failure to state a claim.
The district court dismissed with prejudice, holding the policy unambiguously excluded coverage for injury intentionally caused; the Eighth Circuit affirmed.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the policy is ambiguous as to coverage for defamation	Policy language listing intentional torts (e.g., defamation) plus occurrence defined as an "accident" creates ambiguity favoring coverage	Policy language is clear: occurrence = accident and there is an intent-to-injure exclusion, so coverage excludes defamation committed with intent to injure	No ambiguity; policy covers defamation generally but excludes defamation committed with intent to injure
Whether the coverage provision is illusory given the intent-to-injure exclusion	If intent-to-injure excludes most actionable defamation (esp. against corporations/public figures requiring actual malice), coverage is functionally nonexistent	Doctrines of illusory coverage don't apply because policy still covers many defamation claims (e.g., private-figure claims without intent to injure)	Coverage not illusory; some defamation claims remain covered, so doctrine inapplicable here
Whether Continental has a duty to defend based on the underlying complaint	Duty to defend exists because Minnesota defamation law does not require intent to injure; insurer should defend unless all alleged claims clearly fall outside coverage	Duty to defend is measured by the allegations in the complaint, which here expressly plead intent to injure, invoking the exclusion	No duty to defend: every underlying claim expressly alleged intent to injure, which the policy excludes
Whether dismissal should have been without prejudice because indemnity may be possible later	Even if indemnity might arise post-trial, the complaint only pled duty to defend; thus dismissal with prejudice improper	District court properly dismissed the duty-to-defend claim with prejudice because plaintiffs failed to state a claim for that relief	Dismissal with prejudice was not an abuse of discretion; plaintiffs failed to state a duty-to-defend claim

Key Cases Cited

American Family Ins. Co. v. Walser, 628 N.W.2d 605 (Minn. 2001) (occurrence defined as an accident covers unintended results; intentional-act exclusions apply only to acts intended to cause injury)
Meadowbrook, Inc. v. Tower Ins. Co., Inc., 559 N.W.2d 411 (Minn. 1997) (duty-to-defend determined by comparing policy language to underlying complaint)
Callas Enterprises, Inc. v. Travelers Indem. Co. of Am., 193 F.3d 952 (8th Cir. 1999) (insurer had no duty to defend defamation claim where complaint alleged facts triggering a knowledge-of-falsity exclusion)
Wozniak Travel, Inc. v. General Cas. Co. of Wis., 762 N.W.2d 572 (Minn. 2009) (policy terms construed in insured's favor; exclusions construed narrowly)
Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: complaint must state a plausible claim)
AMCO Ins. Co. v. Inspired Techs., Inc., 648 F.3d 875 (8th Cir. 2011) (insurer bears burden to show underlying claims fall completely outside coverage)