Eagle Star Insurance Company, Ltd. v. Deal

• Citation: 474 F.2d 1216
• Decision Date: 09 March 1973
• Docket Number: No. 72-1157.,72-1157.
• Parties: EAGLE STAR INSURANCE COMPANY, LTD., Appellant, v. Jo C. DEAL et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

474 F.2d 1216 (1973)

EAGLE STAR INSURANCE COMPANY, LTD., Appellant, v. Jo C. DEAL et al., Appellees.

No. 72-1157.

United States Court of Appeals, Eighth Circuit.

Submitted October 17, 1972.

Decided March 9, 1973.

COPYRIGHT MATERIAL OMITTED

E. C. Gilbreath, Fort Smith, Ark., for appellant.

James W. Gallman, Fayetteville, Ark., for appellees.

Before LARAMORE, United States Court of Claims Senior Judge, and BRIGHT and ROSS, Circuit Judges.

LARAMORE, Senior Judge.

This case involves an insurance coverage question arising out of an aircraft accident which occurred on March 6, 1971, while Dr. Phil L. Deal was piloting his plane with five passengers aboard. Upon approach for landing at Harrison, Arkansas, Deal's plane crashed, killing everyone on board. Eagle Star Insurance Company, Ltd. had issued to Deal an aircraft liability policy which was in full force and effect on his aircraft at the time of the accident. However, Eagle Star brought suit for declaratory judgment asserting that there was no coverage in this case because of the "employee exclusion" clause,¹ under which it contended that the five deceased passengers were employees of Dr. Deal or that they were entitled to workmen's compensation benefits. Eagle also contended that Deal was making an improper use of the aircraft which, if true, would also void coverage.

In an opinion reported at 337 F.Supp. 1264 (W.D.Ark.1972), the District Court held, contra to Eagle's contentions, that there was coverage under the policy issued by Eagle Star to Dr. Deal. The court found, as a matter of fact, that the five decedent passengers were employees of Ozark Lab, Inc., not Dr. Deal, and that, in any case, the five decedents were not engaged in the duties of their employment at the time of the accident. Although the court noted that it was without jurisdiction to determine entitlement to workmen's compensation benefits, the court found, for purposes of the exclusion relied upon by Eagle, that decedent passengers were not entitled to workmen's compensation benefits. In addition, the lower court held that the exclusion for improper use of the aircraft was not applicable.

Appellant, Eagle Star, asserts that the above factual findings are unsupported by substantial evidence and the holding of the District Court is clearly erroneous. While the evidence in this case is essentially undisputed, appellant contests the inferences and the conclusions of law based thereon. For the reasons set forth herein, we must sustain the appellant's position.

The uncertainty which exists in this case arises largely from the fact that in October 1968, Dr. Deal organized "Ozark Lab, Inc.," an Arkansas corporation of which Dr. Deal was president, sole director and sole shareholder. It appears uncontradicted that Deal set up Ozark solely as a means of denuding himself of his employees for pension and profit sharing purposes. That is, he wished to remove his staff from "his employment" as an orthodontist, so that when he later adopted a retirement or deferred compensation plan for himself it would not be necessary for him to make contributions for his qualifying employees.² Aside from this purpose, the evidence does not disclose any further independent business purpose for Deal's organization of Ozark Lab, Inc. As the District Court indicated, Deal went through the various formalities of making Ozark a separate business entity, including maintenance of separate books of accounting and filing of appropriate tax returns. By April 1, 1970, Dr. Deal had transferred all of his former, non-domestic employees to Ozark, and two of his subsequently hired employees were placed directly on the Ozark Lab payroll. At the time of the accident, all five of the decedent passengers were "employed" by Ozark Lab.

Appellant refers to the foregoing motives and various additional evidence as indicating that "Ozark Lab, Inc. amounted to nothing more than a payroll account for Phil L. Deal," and as a result such entity should be disregarded. The District Court, on the other hand, concluded that Eagle had "not met the burden of proof necessary to pierce the corporate veil," or otherwise demonstrate that Ozark was invalid. While substantiation of Ozark's invalidity would serve to illustrate that the decedent passengers were de facto employees of Deal's, the insufficiency of the evidence to "pierce the corporate veil" is not, however, controlling of the issue of whether the decedents were Dr. Deal's "employees".³ For notwithstanding the fact that Ozark may have been a valid corporation with the decedents technically being "employees" of that entity, it is possible that they were also employees of Dr. Deal. This possibility was recently noted in Beaver v. Jacuzzi Brothers, Inc., 454 F.2d 284 (8th Cir. 1972), where this court, in determining whether a person was an employee under Arkansas law, stated:

* * * As a matter of common experience and of present business practices in our economy, it is clear that an employee may be employed by more than one employer even while doing the same work. Biggart v. Texas Eastern Transmission Corp., 235 So.2d 443, 445 (Miss.1970).

Although Beaver and Biggart deal with the employer-employee relationship within the context of workmen's compensation, we find this general principle to be equally applicable to the determination of employee status within the context of an insurance exclusion, as it is an observation of the economic realities of today's business world and there is nothing peculiarly esoteric about this fact which would make it indigenous to workmen's compensation law. Consequently, we cannot agree with the lower court's suggestion that interpretations of workmen's compensation laws are not relevant to insurance exclusions. Campbell v. American Farmers Mutual Ins. Co., 238 F.2d 284 (8th Cir. 1956). Although there are differences in the general construction of each (e. g., exceptions and words of limitation in liability policies are to be strictly construed against an insurer, Aetna Casualty & Surety Co. v. Stover, 327 F.2d 288 (8th Cir. 1964), while workmen's compensation laws must be liberally construed in furtherance of the purpose for which they were enacted, Huffstettler v. Lion Oil Co., 208 F.2d 549 (8th Cir. 1954)),⁴ there can be little doubt that the essential elements of employment remain the same regardless of the context. Moreover, a review of cases in both areas discloses their common reliance on the older, more general principles of master-servant, despite the different contexts.

The Arkansas courts have not addressed this question directly, but we do note that in Walker v. Countryside Casualty Company, 239 Ark. 1085, 396 S.W. 2d 824 (1965), the Arkansas Supreme Court adopted rather liberal criteria in determining whether a casual employee was, in fact, an "employee" for purposes of an insurance exclusion clause. Utilization of this liberal criteria resulted in finding that the injured party was an employee, which in turn denied him coverage under the liability policy, notwithstanding the general rules of construction in favor of coverage.

In any event, it is clear that undefined terms of an insurance policy, such as "employee," must be construed in their plain, ordinary and everyday sense and the parameters of the definition should reflect the legal characteristics most frequently attributed to the word. Jefferson Insurance Co. of Pine Bluff, Ark. v. Hirchert, 281 F.2d 396 (8th Cir. 1960); State Farm Mutual Automobile Insurance Co. v. Pennington, 324 F.2d 340 (8th Cir. 1963). Such guidelines suggest that economic reality and substance, rather than legalistic form, should be determinative of the word's meaning.

In considering the employment relationship, the factors to which the Arkansas courts have most frequently referred include employer's right to direct and control the employee, the right or power to hire or discharge, employer's furnishing of tools, duration and time of employment, and fact, manner and basis of payment. Irvan v. Bounds, 205 Ark. 752, 170 S.W.2d 674 (1943); Clemons v. Bearden Lumber Co., 236 Ark. 636, 370 S.W.2d 47 (1963). These factors have usually been applied in distinguishing between an "employee" and an "independent contractor," but as the business relations have become more complex, e. g., with sub and sub-sub contractors, and temporary agencies as in Beaver, the element of control has emerged as generally being the most important determinant. Clemons v. Bearden, supra; Brinkley Heavy Hauling Co. v. Youngman, 223 Ark. 74, 264 S.W.2d 409 (1954); Beaver v. Jacuzzi Brothers, supra. Nonetheless, the status of employment is a question of fact to be considered in light of all of the surrounding facts and circumstances. Walker v. Countryside Casualty Co., supra.

A review of the facts in this case against the framework set out above leads us to the inescapable conclusion that the decedent passengers were, in fact, employees of Dr. Deal. Although Dr. Deal went through the necessary formalities to set up Ozark and maintain it as a separate business, the thrust of the evidence is to the effect that there were no substantive changes in his orthodontic practice or in his relationship to the decedent passengers. He continued to exercise control over his staff in the details of their work in assisting him and he continued to exercise his authority to hire and discharge personnel as necessary.

Appellees contend, however, that these circumstances fail to account for the fact that Dr. Deal was also president of Ozark and that it was only natural for him to exercise such control as a result of this position. This assertion would bear more weight if not for two factors. First, Dr. Deal drew no salary from Ozark Lab, Inc. From this we must infer that Dr. Deal did not see his role as president of Ozark and its appurtenant duties to be of sufficient demand on his time to merit remuneration. Instead, he obviously saw his control and authority as...