Insurance Law:
Third Party Coverage in Arkansas

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A. Overview of the Homeowner's Policy

Homeowners policies are a mixed breed. Part of the policy is a liability policy. Another part is property insurance.

The property insurance typically covers the dwelling and personal property against destruction or damage. Usually personal property is covered whether it is on the dwelling premises or not.

Typically there are exclusions and special limitations on certain kinds of personal property. Cash, computers, furs, securities, firearms, jewelry, and silverware are often insured only up to a set amount. Often you can buy supplemental coverage with higher limits on these items. Ordinarily other property, such as pets, motor vehicles, aircraft, and outdated data storage devices which can't be replaced on the open market are not covered at all.

The dwelling coverage usually provides for coverage if the dwelling is destroyed or damaged by certain events. The policy will usually provide for additional living expenses if the residence becomes uninhabitable. Some losses may not be included. Look for exclusions for flood, earthquake, or volcano. Even when supplemental coverage is available for this kind of loss, it often comes with heavy deductibles.

Property insurance has its own exclusions, including:

Earth movement exclusion.
Dupps v. The Travelers Insurance Company, 80 F.2d 312 (8^th Cir. 1996).
Collapse exclusion. Collapse is often covered only in certain circumstances. It may not be covered for settling or cracking. Sometimes it is covered for matters like insect damage, ice, snow or sleet collecting on the roof, etc.
Freezing may or may not be covered.
Theft in a dwelling under construction may be restricted or not covered at all.
Wear, tear, marring, scratching, deterioration, latent defect, and mechanical breakdown may be excluded.
Mold, and wet or dry rot is often excluded.
There are often exclusions for damage arising out of war, nuclear hazards, and other such matters.
There may be exclusions for flood damage or other water damage.

Sometimes special proof can be required for losses to be covered. In burglary cases, for example, "visible evidence of forcible entry" may be required. Thomas Jefferson Ins. Co. v. Stuttgart Home Ctr., 4 Ark. App. 75, 627 S.W.2d 571 (1982). Sometimes the policies are very specific, with language such as "felonious entry therein by actual force and violence, of which force and violence there are visible marks made by tools, explosives, electricity or chemicals upon, or physical damage to the exterior of the premises at the place of such entry." Id.

Increase in hazard provisions state that the insured does not cover loss or damage to the property which results from an increase in hazard, if increased by any means within the control or knowledge of the insured.

The Arkansas Supreme Court quoted from American Jurisprudence as follows:

"Such a provision is valid and enforceable and must be given a reasonable construction. It relates to a new use which would increase the risk or hazard of fire, and not to a continuation of a former or customary use, or to a change in risk without increase of hazard. It contemplates an alteration in the situation or circumstances affecting the risk which would materially and substantially enhance the hazard, as viewed by a person of ordinary intelligence, care, and diligence. The provision does not prohibit the owner from exercising the usual and ordinary acts of ownership, or exempt the insurer from liability resulting from the carelessness or negligence of the insured, unless it amounts to fraud or willful misconduct, or unless it is so continuous or of such a nature as to increase the hazard more or less permanently. While there is authority to the effect that the provision is broken by a temporary increase of risk which is caused by the manner of using the premises and which is not a casual, inadvertent, or inevitable thing, the general rule may be said to be that the provision applies to changes of a permanent nature, and not to mere temporary changes in the use of the premises.
Orient Insurance Company v. Cox, 218 Ark. 804, 811, 238 S.W.2d 757 (1951).

B. Liability Coverage Provisions

The other coverage offered is liability coverage. The policy covers any amounts that the insured becomes legally obligated to pay because of negligence, up to the policy limits. Of course, again, coverage is often subject to numerous exclusions. The most commonly litigated issues in homeowners' insurance cases are the exclusions.

1. The Insuring Agreement

The insuring agreement is the contract, the insurance policy. Most of the issues have been discussed in basics, above.

In one interesting case, a homeowner's policy was held to require the insurer to provide a defense for an insured who was sued for alienation of affections. Smith v. St. Paul Guardian Ins. Co., 622 F.Supp. 867 (D.C.Ark., 1985). The case is particularly interesting because of the "plain language" policy quotes in the opinion. Some examples:

What's legal liability? Any injury, damage or loss that you're responsible for under the law.

What do we mean by accident or incident? Anything that cauases property damage, personal injury or death without you expecting or intending it.. If you could've expected the result, you're not covered. The only exception is assault and battery committed to save a life or property.

What is personal injury? Bodily injury of course, but also injuries to a person's feeeling or reputation. Like mental injury. Mental anguish. Shock. Wrongful eviction. Libel. Slander. Defamation of character. Invasion of privacy. False arrest.
Id. at 868 [emphasis added by the court.].

Also remember that a policy jacket may be part of the insuring agreement. Entertainment Innovations, Inc. v. Scottsdale Insurance Co., 839 F.Supp. 654 (W.D. Ark. 1993).

2. The Intentional Act Exclusion

An example of the intentional act exclusion is this one:

Exclusions There are certain instances which we do not intend to cover for liability. Under this policy, liability to others and medical expenses do not apply to personal injury or property damage:

1. Which is expected or intended by an insured.

CNA Ins. Co. v. McGinnis, 10 Ark. App. 234, 663 S.W.2d 182 (1994) rev'd CNA Ins. Co. v. McGinnis, 282 Ark. 90, 666 S.W.2d 689 (1984).

The test is whether a plain ordinary person would expect and intend damage to result from the actions involved.

3. The Automobile Exclusion

A typical automobile exclusion reads as follows:

This policy does not apply to bodily injury or property damage arising out of the ownership, maintenance operation, use, loading or unloading of any motor vehicle owned or operated by, or rented or loaned to any insured; but this provision does not apply to bodily injury or property damage occurring on the resident premises if the motor vehicle is not subject to motor vehicle registration because it is used exclusively on the residence premises or kept in dead storage on the residence premises.

Paraphrased from Holliman v. MFA Mutual Insurance Co., 289 Ark. 276, 711 S.W.2d 159 (1986).

4. Non-Resident Exclusions

5. The Business Pursuits Exclusion

This exclusion provides that the liability coverage does not apply "to bodily injury or property damage arising out of business pursuits except activities therein which are ordinarily incident to non-business pursuits." U.S.Fire Insurance Co. v. Reynolds, 11 Ark. App. 141, 667 S.W.2d 664 (1984). As you can see, there is an exclusion, and an exception to the exclusion.

Business is often undefined, or when it is defined, is defined with a list of synonyms, such as "trade, profession, or occupation." Business is done with a profit motive. So for the business exclusion to apply, the courts usually look for a profit motive. In Shelter Mut. Ins. Co. v. Smith, 300 Ark. 348, 779 S.W.2d 149 (1989), the Court dealt with a factual dispute whether a horse racing pursuit was a business or a hobby. As there was conflicting evidence, the jury's verdict for the insureds was upheld.
See also Shelter Ins.Co. v. Hudson, 19 Ark. App. 296, 720 Ark. 326 (1986).

It is tempting to look to the location of the occurrence to determine if the business exclusion applies. The Arkansas Court of Appeals quoted a law journal article on that point as follows:

There seems almost unanimous accord in the decisions that the location at which an act is performed is not decisive on the question of whether the act constitutes part of an excluded business pursuit. Rather, it is the nature of the particular act involved and its relationship, or lack of relationship, to the business that controls. Personal acts, such as pranks, do not become part of a business pursuit, so as to be outside of the coverage, merely because performed during business hours and on business property. In order for an act to be considered part of a business pursuit it must be an act that contributes to, or furthers the interest of, the business and one that is peculiar to it. It must be an act that the insured would not normally perform but for the business, and must be solely referable to the conduct of the business.
Frazier, The "Business Pursuits" Exclusion in Personal Liability Insurance Policies. What the Courts Have Done With It, 1970 Ins. L. J. 519, 533, quoted in U.S. Fire Insurance Co. v. Reynolds, 11 Ark. App. 141, 146 667 S.W.2d 664 (1984).

There's an excellent annotation on the subject, David J. Marchitelli, J.D., Construction and Application of "Business Pursuits" Exclusion Provision in General Liability Policy, 35 A.L.R. 5th 375, which is a good place to start research on this issue.

IV. GENERAL LIABILITY INSURANCE

A. Coverage Under a Commercial General Liability Policy

Commercial General Liability policies (CGL Policies) typically provide personal injury and property damage liability coverage. Often you also see advertising injury and other coverages made available.

Basically the insurer agrees to pay the amount the insured becomes legally obligated to pay because of personal injury or property damage caused by an occurrence within the policy period. The right and duty to defend is included as well.

Advertising injury is injury arising out of slander or libel, violation of a right of privacy, misappropriation of advertising ideas or style of doing business, and copyright infringement.

As with homeowners coverage, the meat of the general liability policy is in its exclusions.

B. Exclusions from Coverage

The Automobile Repair Exclusion.

Many insurance policies have automobile repair exclusions. An example is found in Columbia Insurance Company v. Duke, 108 F.3d 148 (8^th Cir. 1997):

We do not provide Liability Coverage for any person:

While employed or otherwise engaged in the business of :

a. selling;

b. repairing;

c. servicing;

d. storing; or

e. parking;

vehicles designed for use mainly on public highways.

These policies are designed to exclude those engaged in the business of repairing automobiles. They apply to anyone who has undertaken to repair the insured's automobile for hire.

These provisions are one of the many reasons nobody should ever reject uninsured motorist coverage. They make it possible for uninsured vehicles to be on the road.

The Criminal Acts Exclusion.

We do not cover any bodily injury or property damage intended by, or which may reasonably be expected to result from the intentional or criminal acts or omissions of, any insured person. This exclusion applies even if:

(a) such insured person lacks the mental capacity to govern his or her conduct;

* * * * * *

This exclusion applies regardless of whether or not such insured person is actually charged with, or convicted of, a crime.

Allstate Insurance Company v. Burroughs, 914 F. Supp. 308 (W.D. Ark., 1996)

In this case a fourteen year old boy took a gun from his grandfather's residence. He gave the gun to another boy, who gave it to a third boy, who shot a fourth person. The insurer got a declaratory judgment that it owed no duty to defend or provide coverage to the fourteen year old boy because his act in providing the gun to the first minor was a violation of Ark. Code Ann. � 5-73-109, furnishing a deadly weapon to a minor.

A person commits the offense of furnishing a deadly weapon to a minor when he sells, barters, leases, gives, rents, or otherwise furnishes a firearm or other deadly weapon to a minor without the consent of a parent, guardian, or other person responsible for general supervision of his welfare.

The insured argued that it would be contrary to public policy to exclude coverage for strict liability crimes. The argument was rejected. The court reasoned that, "[T]he express language of the policy includes all criminal acts, no matter what the mental state required for their commission. An insurer may contract with its insured upon whatever terms the parties may agree upon which are not contrary to statute or public policy." Id. at 312.

The Pollution Exclusion

It is agreed that the exclusion relating to the actual, alleged or threatened discharge, dispersal, release or escape of pollutants is replaced by the following:

(1) Bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants.

(2) Any loss, cost or expense arising out of any governmental direction or request that the named insured test for, monitor, clean up, remove contain, treat, detoxify or neutralize pollutants.

Subparagraph (1) above does not apply to bodily injury or property damage caused by heat, smoke or fumes from a hostile fire. As used in this exclusion, a hostile fire means one which becomes uncontrollable, or breaks out from where it was intended to be.

Pollutants means any solid, liquid, gaseous thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
Minerva Enter., Inc. v. Bituminous Casualty Corp., 312 Ark. 128, 851 S.W.2d 403 (1993).

See Parker Solvents v. Royal Ins. Companies, 950 F.2d 571 (8^th Cir. 1991), applying the reasoning of Continental Ins. Co. v. Northeastern Pharm. & Chemical Co., 842 F.2d 977 (8^th Cir.), cert. denied, 488 U.S. 821 (1988), for a discussion of problems with applying standard commercial general liability policies to pollution claims. See also Grisham v. Commercial Union Ins. Co., 951 F.2d 872 (8^th Cir. 1991).

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Insurance Law: Third Party Coverage in Arkansas

II. HOMEOWNERS' INSURANCE POLICIES