Insurance Law:
Third Party Coverage in Arkansas

Insurance Procedural Issues

When suing on an insurance policy, attach a copy of the policy to the complaint or make factual allegations explaining why you cannot do so. Ark. R. Civ. P. 10(d). When defending on an insurance policy, an exception in an insurance policy is an affirmative defense which should be specifically pleaded.
National Security Fire & Cas. Co. v. Shaver, 14 Ark. App. 217, 686 S.W.2d 808 (1985).

The person seeking insurance coverage has the burden of proving that he or she is covered by the policy. As to exclusions, the burden is different. Once the party who seeks to benefit from insurance coverage has met his or her burden, the burden of proof shifts to the insurer to prove any applicable exclusion to coverage.
Arkansas Farm Bureau Ins. Federation v. Ryman, 309 Ark. 283, 831 S.W.2d 133 (1992).

One of the most common kinds of insurance lawsuits is the declaratory judgment action.
Ark. Code Ann. § 16-111-101 et seq. In Federal Court, that's the Declaratory Judgment Act, 28 U.S.C. § 2201 et seq.

Ordinarily, the plaintiff in a lawsuit has the burden of proof. In a declaratory judgment case, however, that isn't necessarily true. In a declaratory judgment action filed by an insurer, the person seeking the benefit of insurance coverage has the burden of proof of coverage. The burden of proving exclusions remains with the insurer.
American Eagle Insurance Company v. Thompson, 85 F.3d 327 (8th Cir. 1996).

If you have to sue an insurer, and you get at least 80 percent of the amount you sued for, you can also recover a 12 percent penalty and attorney's fees. Ark. Code Ann. § 23-79-208. Note that in a suit to terminate, modify, or reinstate a policy, the 12 percent penalty doesn't apply. Ark. Code Ann. § 23-79-209. The attorney's fees are calculated not on what your contract with your client entitles you to, but a reasonable attorney's fee calculated under the traditional rules for calculating fees. Parker v. Southern Farm Bureau Association, 326 Ark. 1073, 935 S.W.2d 1073 (1996). For you plaintiffs' lawyers, this means you should keep track of your time even if you are working on a contingent fee basis.

Bad faith is fairly limited in Arkansas, but when it applies, you can get extracontractual damages which can be extremely valuable.
Aetna Cas. & Surety Co. v. Broadway Arms Corp., 281 Ark. 128, 664 S.W.2d 463 (1984)

An insurer which believes that an insured acquired coverage based on fraud or material misrepresentations may unilaterally rescind coverage, even after a loss has occurred, when no third-party claims are involved. Douglass v. Nationwide Mutual Ins. Co., 323 Ark. 105, 913 S.W.2d 277 (1996). It's cheaper than a declaratory judgment action.

An insurance policy is to be interpreted by the court as a matter of law. In Farm Bureau Mut. Ins. Co. v. Whitten, 51 Ark. App. 124, 126-27, 911 S.W.2d 270, 271 (1995), the court noted:

The initial determination of whether a contract is ambiguous rests with the court, Moore v. Columbia Mut. Casualty Ins. Co., 36 Ark. App. 226, 228, 821 S.W.2d 59 (1991), and when a contract is unambiguous, its construction is a question of law for the court. Id. When the language of an insurance contract is unambiguous, and only one reasonable interpretation is possible, it is the duty of the court to give effect to the plain wording of the policy. Ingram v. Life Ins. Co. of Ga., 234 Ark. 771, 773, 354 S.W.2d 549 (1962). Further, if the terms of an insurance contract are not ambiguous, it is unnecessary to resort to the rules of construction, Birchfield v. Nationwide Ins., 317 Ark. 38, 41, 875 S.W.2d 502 (1994), and the policy will not be interpreted to bind the insurer to a risk which it plainly excluded and for which it was not paid.
General Agents Ins. Co. of Am. v. People's Bank & Trust Co., 42 Ark. App. 95, 96, 854 S.W.2d 368 (1993);
Baskette v. Union Life Ins. Co., 9 Ark. App. 34, 36-37, 652 S.W.2d 635 (1983).

In State Farm Fire & Casualty Co. v. Midgett, 319 Ark. 435, 892 S.W.2d 469 (1995), however, a trial court gave a jury an instruction on ambiguity. The case was reversed and the insurer got a new trial, but the reasoning was that the insured had not identified a real ambiguity. It would seem to me that a jury should not be interpreting a contract in any case, but the Arkansas Supreme Court did not rule that a jury may never interpret a contract. It is arguable from the language of Midgett that where the insured identifies an ambiguity, an instruction as to the effect of an ambiguity might be proper and the contract should be given to the jury for interpretation.

An insurer can avoid coverage under a liability policy if the insured fails to cooperate with the insurer. The law requires, however, that the insurer show that it was prejudiced by the insured's failure to cooperate. Shelter Mutual Insurance Co. v. Page, 316 Ark. 623, 873 S.W.2d 534 (1994). When an insured doesn't show up for trial, the insurer must show due diligence in trying to locate the insured and procuring his appearance at trial. Id.

The duty to defend is broader than the duty to indemnify. "As a general matter, the duty to defend is determined by comparing the allegations in the underlying complaint to the scope of the coverage provided by the insurance policy. If injury or damage within the policy coverage could result from the underlying suit, the duty to defend arises." Union Insurance Company v. The Knife Company, 897 F.Supp. 1213 (W.D.Ark. 1995). There are exceptions to the general rule that the complaint determines the duty to defend.
For a good discussion of this, see Silverball Amusement, Inc. v. Utah Home Fire Insurance Co., 842 F. Supp. 1151 (W.D. Ark. 1994), aff'd 33 F.3d 1476 (8th Cir. 1994).

What looks like an insurance policy, reads like an insurance policy, appears to provide for monetary payments in certain specified conditions, but isn't an insurance policy at all. It's an ERISA plan? You can identify an ERISA plan by the ERISA disclosures, which are usually at the back of the plan. While it is beyond the scope of this course to discuss ERISA in detail, a few of the significant differences between an ERISA claim and a contract claim are as follows:

1. You must exhaust your administrative remedies with the plan before filing suit.
   Kinkead v. Southwestern Bell Corporation, 111 F.3d 67 (8th Cir. 1997).
   
   
2. Not only is an ERISA plan not construed in the light most favorable to the insured, the decision of the plan administrator is given substantial weight in determining the meaning of the plan. Since the claimant is always appealing an adverse decision, this means that contra proferentum is turned on its head. The plan is construed in the light most favorable to the drafter.
   Maxa v. John Alden Life Insurance Co., 972 F.2d 980 (8th Cir. 1992).
   
   
3. In most ERISA plans, there is a provision that the plan administrator has discretion to administer the plan and make decisions as to eligibility for benefits. This means that a plan administrator's decision must be affirmed by the United States District Court (and that's where you'll be) if it is supported by substantial evidence on the record as a whole.
   Donaho v. FMC Corp., 74 F.3d 894 (8th Cir. 1996).
   
   
4. And that record as a whole is the record made before the plan administrator. You can't sue and introduce additional evidence at trial. In most cases, the District Judge is limited to the administrative record.
   Ravenscraft v. Hy-Vee Emp. Benefit Plan & Tr., 85 F.3d 398 (8th Cir. 1996).
   
   
5. There is no bad faith, pretty much no matter what. I suspect that if plan administrators hired hit men to have ERISA claimants wiped out, the best you could hope for would be a split among the circuits.
   
   
6. In spite of all these bizarre rules, ERISA cases can be won. The main reason is that ERISA administrators are so used to lawyers not having any idea how ERISA works that they get sloppy. They can often be caught not following their own rules. If you have never handled an ERISA case before, talk to someone who has been down the road before you file your contract and bad faith claim in Circuit Court.

B. Identifying the Insured

Insured can be defined as the "named insured," the named insured's spouse, residents of the named insured's household who are related to you, and sometimes some others. In automobile insurance policies, a person driving the vehicle with the permission of the named insured is also an insured.

In business policies, an insured may be defined as including, "your employees, other than your executive directors, but only for acts within the course and scope of their employment by you."
Tri-State Ins. Co. v. Sing, 41 Ark. App. 142, 850 S.W.2d 6 (1993).

An insurance policy which contains an exclusion for acts of "an insured" can refuse to pay an innocent insured if the acts of a guilty "insured" void the policy. For example, in Noland v. Farmers Insurance Company, 319 Ark. 449, 892 S.W.2d 271 (1995). Mr. and Mrs. Noland had an insurance policy on the home. Mrs. Noland conspired to commit arson and was convicted. Mr. Noland was acquitted of the same charges. Mr. Noland then sought to enforce the policy, arguing that an insurer should not be able to deny coverage benefits to an innocent insured because of the misconduct of a co-insured. The language of the policy controlled. The policy provided:

The result in this case could have been different if the policy had contained a separation of insureds provision:

C. Identifying the Cause of the Loss

An occurrence can be defined in different ways in a policy. One example is, "an accident, including continuous or repeated exposure to substantially the same general and harmful conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."

"[I]f an injury occurs without the agency of the insured, it may be logically termed 'accidental,' even though it may be brought about designedly by another person."
Maloney v. Maryland Casualty Co., 113 Ark. 174, 167 S.W. 845 (1914).

Occurrence issues can be very important when there are a number of injuries arising out of exposure to the same conditions. Policy limits can come into play. Insureds or tort plaintiffs will argue for multiple occurrences, but the insurer will call the incident one occurrence.

D. Timing Issues

A typical policy provision:

"Immediately" means within a reasonable time under the circumstances. With most losses, the circumstances are that damage has been done, and evidence of how the damage was done, and how much damage was done, is quickly disappearing.

Also unlike lack of cooperation cases, there is authority that a notice provision is a condition precedent to coverage, meaning that there is no need for the insurer to show prejudice in order to justify denying a claim. See State Farm Fire and Casualty Co. v. Michael, 822 F.Supp. 575 (W.D.Ark. 1993). In that case, the court rejected what it saw as dicta in Campbell & Company v. Utica Mutual Insurance Co., 36 Ark.App. 143, 820 S.W.2d 284 (1991) ("while there are sound reasons for applying the notice prejudice rule to the typical provision in an occurrence policy, those reasons do not apply with equal force to the notice provisions [in a claims made policy]"). It should be remembered that the Federal District Court decided Michael before the lack of cooperation case, Shelter Mutual Insurance Co. v. Page, 316 Ark. 623, 873 S.W.2d 534 (1994). The philosophy behind Page might have led to a different result in Michael. Nevertheless, the first timing issue is to report the claim to your insurer as soon as you know about the claim.

Another important timing issue is clarified in Campell & Co., supra. An occurrence policy provides coverage if the event insured against takes place within the policy period, regardless of when the claim is presented. The "claims made" policy provides coverage only if a claim is made during the policy period.

E. Exclusions

The intent to exclude coverage in an insurance policy should be expressed in clear and unambiguous language, and an insurance policy, having been drafted by the insurer without consultation with the insured, is to be interpreted and construed liberally in favor of the insured and strictly against the insurer. Nationwide Mutual Insurance Company v. Worthey, 314 Ark. 185, 861 S.W.2d 307 (1993). The burden of proof on an exclusion is on the insurer.