Insurance Law: Third Party Coverage in Arkansas

I. THE INSURANCE CONTRACT

You're at a cocktail party, or at church, or maybe at a cocktail party at church, and someone comes up to you:

SOMEONE: You're a lawyer, aren't you?

YOU: Yes.

SOMEONE: Can I ask you a question?

YOU: Sure, but the answer won't be any good unless you pay.

SOMEONE: Fair enough. There was this guy who got hit in the head by a box of papers that someone threw out a window. Is that covered by insurance?

YOU: Have him come see me, we'll find out.

That someone sent Hiram Tweedle to you. Hiram is a sanitation engineer for Garbage Us, the new private waste disposal company that has a contract with Saxon Heights, Arkansas for garbage disposal. He was at the home of O. Julius Bananaberry, the notorious mood ring baron, to pick up the garbage, when suddenly a box of papers fell on his head.

Hiram's medical bills were paid for by workers' compensation. He was off work for a month. He had a ruptured disk which was repaired by surgery. He had physical therapy intermittently for several months. He was hurt, but he got well. He returned to his job with Garbage Us. However, now he's on a less dangerous route in nearby Gotham City.

It occurs to you that a third party claim against Bananaberry might be appropriate. You investigate and you learn that Bananaberry told the workers compensation adjustor that he looked out the window of his study, and dropped the box of papers to the ground. He denies having seen Hiram, either before or after the accident. He first realized something was amiss when he went down to throw the box into the garbage container and saw that the box was already missing.

Woford Ubiquitous, the driver of the trash truck, witnessed the accident. Hiram was going to pick up Bananaberry's trash when a box flew out the second story window. Ubiquitous helped Hiram to safety, then retrieved the box and kept it. He turned it over to an agent of Consolidated Federated Mutual Insurance Company of Sweet Haven, New Hampshire.

Consolidated was not the workers compensation carrier. It must be Bananaberry's carrier.

So you call Consolidated's local office, only to be told by adjustor Snidely Whiplash that Consolidated denies coverage. "Why?" You ask. "I can't tell you that," answers the adjustor.

Even if Bananaberry doesn't have coverage, he's a good defendant. He cornered the market on phlogiston, the substance that makes mood rings function. With his control of most of the phlogiston mining industry in the nation, it doesn't matter much whether he's insured. So you sue him. You take care to furnish a copy of the complaint to the insurance company.

Instead of one of the insurance defense lawyers you're used to, Bananaberry's personal lawyer, Jacqueline Hyde, of Runne, Laquelle, and Hyde signs the answer.

You ask in discovery, does Bananberry have coverage? You learn that Bananaberry asserts that he has coverage under not one but two policies issued by Consolidated, but Consolidated asserts some kind of policy defense. You request a copy of the policies. On reviewing them, you can't figure out why in the world Consolidated isn't defending.

At every step of the litigation, you forward copies of the documentation to Consolidated. Periodically Consolidated drops you a line that they owe no coverage in this case, but usually they just ignore you.

You get a judgment of $50,000. It's not as much as you would have liked, but enough to make pursuing the case worth it to you and your client.

You send the insurer a copy of the judgment by certified mail, return receipt requested. You are again ignored.

You now have to decide whether to execute on phlogiston mines, garnish Bananaberry's lavish income, or pursue his insurance coverage.

Thirty one days after the certified letter you sent with the judgment was received, you sue Consolidated. Consolidated answers alleging it owed no duty to pay because of the criminal acts exclusion in its policy.

Then Bananaberry intervenes, asserting not only that Consolidated owes the coverage and owes him his defense costs back, but also alleging that the claim was denied in bad faith.

Throwing a box of documents out a second story window without looking may be stupid, but a quick survey of the statutes fails to turn up an offense of Defenestration of Documents.

In discovery, you learn that the documents in the box had to do with Bananaberry's cornering the market in phlogiston. Apparently some of the means he used to do that were in violation of the antitrust laws. Fortunately for Bananaberry, the statute of limitations ran on the last conceivable offense shortly before your trial.

Antitrust concerns must have been serious for Bananaberry. You learn in discovery that Bananaberry was upset when Whiplash told him that he would be well advised to drop the claim for coverage. Whiplash suggested that he would hate to see those papers turn up in the hands of the Feds.

Consolidated takes the position that destruction of the evidence of his illegal business practices constituted obstruction of justice, a crime. The policy contains this 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;

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(c) such bodily injury or property damage is sustained by a different person than intended or reasonably expected; . . .

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

Bananaberry also has a homeowners' policy. That policy contains a business pursuits exclusion under which the insurer denies coverage The "business pursuits" exclusion of the policy 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."

Why did you keep sending information to the insurer when they had already told you in no uncertain terms that they did not intend to defend or pay the claim?

Why did you send the judgment to the insurance company? In particular, why by certified mail?

Why was it preferable to devote your efforts to collecting from the insurer, rather than the well-heeled insured?

If Bananaberry cross-claims against his insurer now, what should his claim be?

Insurance law defies logical explanation because it involves fitting the square peg of insurance into the round hole of contract law. In its purest form, an insurance policy is just a contract between the insurer and the insured. But it differs from the ordinary contract in that it is heavily regulated, it involves issues of public policy, and it is practically never negotiated.

An insurance policy is a contract of adhesion. Take it or leave it. Only the largest institutional purchasers are in a position to negotiate terms. Say, for example, I would like an uninsured motorist policy that would pay if I'm run off the road by a phantom vehicle, whether it hits my car or not. I check the policies that the local insurers have to offer, and every insurer has a provision that reads something like this:

Hit-and-run automobile means an automobile which causes bodily injury to an insured arising out of physical contact of such automobile with the insured or with an automobile which the insured is occupying at the time of the accident, provided: (1) there cannot be ascertained the identity of either the operator or owner of such "hit-and-run automobile. . .

Ward v. Consolidated Underwriters, 259 Ark. 696, 697, 535 S.W.2d 830, 831 (1976).

I am unlikely to be able to talk my insurance agent into dropping the proviso from the definition of hit-and-run vehicle. I can select among options, but the option of getting coverage for a phantom vehicle running me off the road is not one I can get. I have to take the one size fits all policy. Maybe I can tack on some higher limits and a few additional coverages, but that's it.

What do you buy when you buy an insurance policy? The more skeptical among us might feel that what you buy is a lawsuit:

Insurance is different from any other business. If a man goes into a butcher shop, asks for two pounds of ground meat, and tenders $2.89 in payment, he will expect his meat to be forthcoming from the grinder. Imagine the scene were the customer to ask for his meat, and be answered that the butcher has no intention to deliver the same. "Where is my meat?" the customer would reply, possibly in other than dulcet tones. "I won't give you any meat," replies the butcher firmly. "Then give me back my $2.89 and I shall go elsewhere," says the customer. "I won't give you the $2.89 either," replies the butcher, "for you must bring a lawsuit to get it from me."

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Yet such a colloquy proceeds with regularity in the area of insurance. The case of fire insurance leaps instantly to mind when companies frequently deny liability under contracts with their own insureds. Furthermore, if a man's car is damaged negligently by another party, the tort-feasor's insurance carrier, recognizing full well the liability, may well decline to pay forthwith, relying instead upon its ability to wear the injured victim down with legal expenses and the cost of stamps for the exchange of meaningless correspondence.

Jarrett v. E. L. Harper & Son, Inc., 160 W.Va. 399, 405, 235 S.E.2d 362, 366 (1977) (Neely, J., concurring).

What's more, in some circumstances, the customer might be told that the butcher behind the counter isn't the agent of the butcher shop at all, but the agent of the customer. Dodds v. Hanover Insurance Co., 317 Ark. 563, 880 S.W.2d 311 (1994). Arkansas recognizes the difference between a general agent and a soliciting agent, Id., although it is questionable whether most insurance purchasers do.

The approach in Arkansas is, in theory, "Read the Statute and Read the Policy." State Farm Mut. Auto. Ins. Co. v. Beavers, 321 Ark. 292, 295, 901 S.W.2d 13 (1995), quoting from Douglass and Telegadis, Stacking of Uninsured and Underinsured Motorist Vehicle Coverages, 24 U. Rich. L. Rev. 87 (Fall 1989). Of course, it wouldn't hurt to review the applicable cases on interpretation of the particular policy provision you have in mind.

Insurance is heavily regulated. Statutory regulations on insurance policy provisions are a good starting point when considering any policy provisions. If a policy provision is inconsistent with a statute, the statute controls. In fact, a statute applicable to an insurance policy is considered part of the policy. Carner v. Farmers Ins. of Arkansas, 3 Ark. App. 201, 203, 623 S.W.2d 859, 860 (1981). If you can find a statute that prohibits the policy provision that you are trying to interpret, your job is done. The statute controls.

A. Contract Interpretation

The next step is to read the policy. An insurance policy is supposed to be written in plain English. Consider this regulation:

The fact that policies are supposed to follow this regulation does not prevent the policies from being complicated. It is not unusual, for instance, for an exclusion to have exceptions. Even with modern "plain language" rules, insurance policies can be a maze to read and interpret.

Since the policy is supposed to be written in plain English, it is to be interpreted the same way. Courts often say that they construe the meaning of contract provisions in their plain and ordinary and popular sense,⁽¹⁾ Conley Transportation, Inc. v. Great American Insurance Co., 312 Ark. 317, 849 S.W.2d 494 (1993) "rather than their legal or technical meaning." Union Insurance Co. v. The Knife Co., Ltd., 897 F. Supp. 1213, 1215 (W.D. Ark. 1995). "Courts often ascertain the ordinary and popular sense of undefined words in an insurance policy by consulting a dictionary. Id., quoting from David B. Goodwin, Review Essay: Disputing Insurance Company Disputes, 43 Stan. L. Rev. 779, 784 (1991).

That does not mean that the courts ignore the fact that it is an insurance policy that they are interpreting. A good example is Deal v. Farm Bureau Mutual Insurance Co., 48 Ark. App. 48, 889 S.W.2d 774 (1994). In that case a policy application asked whether the insured had suffered a previous "fire loss." The insured answered in the negative. After a fire, the insurer learned that property the insured owned had been destroyed in a fire in 1976. The insured countered that although the property had been destroyed, he did not have an insurance claim arising out of the fire. The Arkansas Court of Appeals agreed with the insured that the word "loss" has an established meaning in the field of insurance, i.e. "Death, injury, destruction, or damage in such a manner as to charge the insurer with a liability under the terms of the policy." "Loss" in this context is at best ambiguous. The lesson is that if a term has one meaning in English, and another in insurance language, it can be ambiguous.

Rules of construction are applicable to insurance policies. The most commonly cited rule of construction is the one that ambiguities in insurance policies are construed in the light most favorable to the insured:

Provisions of a policy of insurance must be construed most strongly against the insurance company that prepared it, and if a reasonable construction could be placed on the contract that would justify recovery, it would be the duty of the court to so construe.

Southern Farm Bureau Cas. Ins. Co. v. Pettie, 54 Ark. App. 79, 91, 924 S.W.2d 828, 834 (1996).

In order to be ambiguous, a term in an insurance policy must be susceptible to more than one equally reasonable construction. Insurance Co. of North America. v. Forrest City Country Club, 36 Ark. App. 124, 127, 819 S.W.2d 296, 298 (1991).

This rule is so old and venerable it has a Latin name, contra proferentum. It comes from ordinary contract law. In contract law, an ambiguous provision is construed against the drafter. This rule is followed with particular vigor in the insurance context because insurance is a contract of adhesion in which the terms are not subject to negotiation. This language is so favorable to insureds, that they seek to quote it whenever possible. The problem is, that this language is not applicable unless there is an ambiguity. The party asserting that there is an ambiguity has the duty to point the ambiguity out to the court. Reynolds v. Shelter Mutual Ins. Co., 313 Ark. 145, 852 S.W.2d 799 (1993). Only when an ambiguity has been found can the doctrine of contra proferentum apply.

Another rule of construction is that the policy should be read so as to give meaning to all its parts:

In construing a contract, even one for insurance drawn by the insurer, we must assume that the use of different language to define different obligations was deliberate and accompanied by an intention to convey different meanings rather than the same one. Different clauses of a contract must be read together and the contract construed so that all of its parts harmonize, if that is at all possible, and, giving effect to one clause to the exclusion of another on the same subject where the two are reconcilable, is error. Kelsey and Fletcher v. Brown and Hackney, 165 Ark. 613, 264 S.W. 930; American Indemnity Co. v. Hood, 183 Ark. 266, 35 S.W.2d 353. A construction which neutralizes any provision of a contract should never be adopted if the contract can be construed to give effect to all provisions. Fowler v. Unionaid Life Ins. Co., 180 Ark. 140, 20 S.W.2d 611.

Continental Casualty Co. v. Davidson, 250 Ark. 35, 40-41, 463 S.W.2d 652, 655 (1971).

Since we place such importance on the language of an insurance policy, we require that insureds read that language. They fail to do so at their peril. The insured has a duty to educate himself or herself about the language of the policy. Scott-Huff Insurance Agency v. Sandusky, 318 Ark. 613, 887 S.W.2d 516 (1994).

What is the insurance policy? Usually, an insurance policy is a self contained document, clearly marked. But in Entertainment Innovations, Inc. v. Scottsdale Insurance Co., 839 F.Supp. 654 (W.D. Ark. 1993), the policy was delivered in a three page "jacket." The jacket had definitions printed in it. Since the policy was apparently delivered in the jacket, the court decided that the definitions in the jacket were part of the policy. This was true even though the rest of the policy made no reference to the jacket.

INSURANCE PROCEDURAL ISSUES.

Special Pleading Rules. 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).

Burden of proof. 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 (8^th Cir. 1996).

Penalty and Attorney's Fees. 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. 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)

Unilateral rescission. 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.

Jury instruction on ambiguity. 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.

Breach of Cooperation Clauses. 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.

Duty to Defend. 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).

Not a duck. 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

Identifying the insured is a matter of reading the policy. 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:

Intentional Acts. If any insured directly causes or arranges for a loss of covered property in order to obtain insurance benefits, this policy is void. We will not pay you or any other insured for this loss.

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

Except with respect to the limits of insurance, and any rights or duties specifically assigned in this coverage part to the first Named Insured, this insurance applies:

(a) As if each named Insured were the only named Insured: and

(b) Separately to each Insured against whom claim is made or suit is brought.

Silverball Amusement, Inc. v. Utah Home Fire Insurance Co., 842 F.Supp. 1151 (W.D.Ark. 1994).

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

An insured should report claims immediately. A typical policy provision:

Duties After Loss. In case of an accident or occurrence, the insured shall perform the following duties that apply. You shall cooperate with us in seeing that these duties are performed:

a. Give written notice to us or our agent as soon as practicable, which sets forth:

(1) the identity of this policy and insured;

(2) reasonably available information on the time, place and circumstances of the accident or occurrence; and

(3) names and addresses of any claimants and available witnesses;

b. Immediately forward to us every notice, demand, summons or other process relating to the accident or occurrence.

"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.

II. HOMEOWNERS' INSURANCE POLICIES

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.

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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.

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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. Defeamation 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.

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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;

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(c) such bodily injury or property damage is sustained by a different person than intended or reasonably expected; . . .

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

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).

1. ¹They often say the same about statutes. In fact, I'm curious about exactly where it is that courts do not purport to interpret language in its plain, ordinary and popular sense.