Canal Ins. Co. v. Ashmore

• Decision Date: 03 November 1997
• Docket Number: No. 96-2543,96-2543
• Parties: CANAL INSURANCE COMPANY, Plaintiff-Appellant, v. Rodney DeWayne ASHMORE, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1083

126 F.3d 1083

CANAL INSURANCE COMPANY, Plaintiff-Appellant, v. Rodney DeWayne ASHMORE, Defendant-Appellee.

No. 96-2543.

United States Court of Appeals,

Eighth Circuit.

Submitted Jan. 13, 1997.

Decided Oct. 6, 1997.

Rehearing Denied Nov. 3, 1997.

Timothy Edward Howell, Fayetteville, AR, argued, for plaintiff-appellant.

Joseph C. Self, Fort Smith, AR, argued, for defendant-appellee.

Before WOLLMAN and HANSEN, Circuit Judges, and MONTGOMERY, ¹ District Judge.

HANSEN, Circuit Judge.

Canal Insurance Company appeals the judgment of the district court in favor of Rodney DeWayne Ashmore in this diversity-based declaratory judgment action. We reverse.

I.

This insurance dispute arose out of a 1989 motor vehicle accident in Mississippi, involving Rodney Ashmore, who was an occupant of a semi-tractor truck owned by his father, Dale Ashmore, doing business as Ashmore and Sons Trucking. Rodney was seriously injured in the accident. He filed a lawsuit in Mississippi state court against his father, doing business as Ashmore and Sons Trucking, seeking to recover damages for his personal injuries.

Prior to the accident, Canal Insurance Company had issued an insurance policy to Ashmore and Sons Trucking, covering the vehicle involved in the accident. After Rodney brought the state court action against his father and Ashmore and Sons Trucking, Canal brought this federal declaratory judgment action against Dale and Rodney Ashmore, seeking a declaration of its obligations under the policy. Canal asserted that certain policy exclusions apply, negating its obligation to provide a defense to the state lawsuit and precluding coverage for Rodney Ashmore's bodily injuries. The district court initially entered default judgments against both Dale and Rodney Ashmore. On appeal, we affirmed the default judgment against Dale Ashmore, but reversed and remanded for further proceedings on the claim against Rodney. See Canal Ins. Co. v. Ashmore, 61 F.3d 15, 17 (8th Cir.1995).

On remand, Canal's claim against Rodney Ashmore was tried before the district court without a jury. The district court identified three issues pertinent to the question of whether coverage exists under the policy: (1) whether Rodney was an employee of Dale Ashmore at the time of the accident, (2) whether Rodney was driving the truck with Dale's permission at the time of the accident, and (3) whether the policy's Occupant Hazard Exclusion is unenforceable as contrary to Arkansas public policy.

The district court exercised its equitable discretion to refrain from considering the first two factual issues--whether Rodney was either an employee or the driver of the truck at the time of the accident--out of deference to the concurrent Mississippi state court proceedings. Because these factual issues give rise to a possibility that coverage exists, the district court declared that Canal has a duty to defend Dale Ashmore in the Mississippi lawsuit.

As to the third issue--the effect and validity of the Occupant Hazard Exclusion--the district court found the following facts. Dale Ashmore applied through his insurance agent for a general liability insurance policy to cover a 1987 tractor trailer rig used by Ashmore and Sons Trucking. On the insurance application, Dale requested a combined single limit of $750,000 for bodily injury and property damage liability coverage and specifically rejected all uninsured motorist bodily injury and property damage coverage.

Based upon this application, Canal issued its "Basic Automobile Liability Policy," with attached endorsements to Dale Ashmore. The basic policy itself included an exclusion of coverage for bodily injury to any employee of the insured. The attached endorsements included an Occupant Hazard Exclusion (OHE), excluding coverage for bodily injury to any occupant of the vehicle. The OHE endorsement is printed in decidedly larger type than the policy and is on a separate page. The OHE endorsement specifically states that it is part of the policy to which it is attached, and it is referenced on the declarations page of the policy by a code, "E-4(ai)." (Appellant's A.P. at 433.) The insurance agent testified that Dale would not have understood this code. The OHE endorsement was not signed by Dale Ashmore and was not referenced on the insurance application he signed. Additionally, the insurance agent did not remember discussing the OHE endorsement with Dale when negotiating the coverage.

The district court determined that the OHE was not part of Dale's policy. The district court concluded that the language of the insurance application required all exclusions to be included in that application and signed by the applicant in order to become part of the policy. Because the OHE was not referenced in the insurance application signed by Dale and was never specifically discussed or negotiated, the district court concluded that the OHE was not part of the policy and thus did not exclude bodily injury coverage for occupants of Dale's vehicle.

Canal appeals.

II.

The parties are in agreement that Arkansas law applies in this diversity suit. We review de novo the district court's determination and interpretation of state law. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1220, 113 L.Ed.2d 190 (1991).

First, Canal argues that the district court erroneously determined that the OHE was not part of the policy.

"Under Arkansas law, insurance exclusions must be clearly stated and are strictly construed against the insurer." Columbia Ins. Co. v. Baker, 108 F.3d 148, 149 (8th Cir.1997) (citing Noland v. Farmers Ins. Co., 319 Ark. 449, 892 S.W.2d 271, 272 (1995)). "It is also a long standing rule that, where the terms of the policy are clear and unambiguous, the policy language controls; and absent statutory strictures to the contrary, exclusionary clauses are generally enforced according to their terms." Noland, 892 S.W.2d at 272.

In this case, the district court concluded that the OHE endorsement was not part of the insurance policy because it was neither referenced in the application nor signed by Dale Ashmore, the applicant. We know of no general legal authority requiring all policy exclusions to be referenced in an insurance application and to be signed by the applicant in order to become part of an insurance policy. Absent statutory authority to the contrary, Arkansas abides by the general rule that an insurance agent has no duty to advise an applicant of all aspects of coverage contained in an insurance policy. Scott-Huff Ins. Agency v. Sandusky, 318 Ark. 613, 887 S.W.2d 516, 517 (1994). Cf. Smith v. Shelter Mut. Ins. Co., 327 Ark. 208, 937 S.W.2d 180, 182 (1997) (noting that in 1984, the Arkansas Insurance Commissioner promulgated a requirement that driver-specific exclusion endorsements must contain the insured's signature to demonstrate acceptance of the restricted coverage). Arkansas places the duty on the policyholder to educate himself concerning his insurance coverage. Continental Cas. Co. v. Didier, 301 Ark. 159, 783 S.W.2d 29, 31 (1990). Despite this general rule, the district court concluded that the specific language of the insurance application in this case required all exclusions to be referenced in the application and signed by the applicant.

We turn then to the plain language of the pertinent clause of the insurance application in this case. The application provided, "if a policy is issued pursuant to this application, the application and any restrictive and/or Exclusion Endorsement Text, which is included on the application and signed by me [the applicant], shall become part of the policy." (Appellant's Adden. at 28.) The district court interpreted this phrase to mean that an exclusion endorsement could become part of the policy "only " when it was specifically referenced in the application and signed by the applicant. (Id. at 14-15.)

Canal argues, and we agree, that the district court simply misread the plain language of this clause. As we read it, this clause merely ensures that any signed endorsements that are attached to the application will become part of the insurance policy. It does not go so far as to require that all exclusions must be signed and attached to the application in order to become part of the policy. By reading the sentence in an overly restrictive manner, we believe that the district court went beyond the scope of the plain language and superimposed an unintended meaning on the clause.

We conclude that neither Arkansas law nor the language of the application requires every exclusion to be referenced in the application and signed by the applicant in order to become part of the insurance policy. Similarly, the insurance agent's failure to inform Dale Ashmore of the OHE endorsement does not preclude the endorsement from becoming part of the policy to which it was attached and in which it was specifically referenced by code. The district court erred by finding that the OHE endorsement was not part of Dale Ashmore's insurance policy.

Having determined that the OHE endorsement was in fact a part of the policy, we must determine the validity and effect of the exclusion under Arkansas law and public policy. Because the district court determined that the OHE was not part of the policy, it did not reach this issue. We may nevertheless consider the issue in the first instance, because deciding the validity of the OHE endorsement involves a purely legal question and requires no additional evidence. ² See In re Young, 82 F.3d 1407, 1416 (8th Cir.1996). While we would certainly respectfully appreciate and carefully consider the views of the experienced district judge with respect to...