Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ared-4_05-cv-01760/USCOURTS-ared-4_05-cv-01760-2/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

---

1

IN THE UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF ARKANSAS

WESTERN DIVISION

JAMES G. BURGESS PLAINTIFF

 CASE NO. 4:05-CV-1760 GTE

TRUSTMARK INSURANCE COMPANY DEFENDANTS

ORDER

Presently before the Court is Defendant’s Motion to Amend its February 13, 2007, Order

regarding the twelve percent statutory penalty awarded to Plaintiff.

I. Background

In 1991, Plaintiff, Dr. James Burgess, purchased a disability insurance policy from

Continental. At some point Continental assigned the obligations under the Policy to Trustmark,

who began collecting the premiums from Dr. Burgess. The Policy, designated TV2308, provided

for the payment of $14,000 per month after the 90 day elimination period in disability benefits for

Dr. Burgess’ lifetime if the disability commences before age 65 “resulting from injury,” “to age 65

for disability commencing after age 60 resulting from sickness.” Injury is defined as “accidental

bodily injury that occurs while Your policy is in force and results directly and independently of all

other causes in loss covered by the policy.” Sickness is defined as “sickness or disease which is

diagnosed or treated while Your policy is in force.”

 On July 31, 2004, Dr. Burgess was in an accident involving a tractor. On March 18, 2005,

Trustmark sent a letter to Dr. Burgess stating in part:

Case 4:05-cv-01760-GTE Document 30 Filed 03/19/07 Page 1 of 9
1

Each Trustmark letter provided to the Court contains this same introductory sentence.

2

The September 28, 2004 letter from Dr. Williams regarding Dr. Burgess states in part,

“For six months or so now he has had difficulty with back pain. It is mainly nonradicular, but

occasionally will go down the back of the legs to the knee, but no further. It is aggravated

predominantly by walking, sitting and bending. He has had no specific treatment for that. He

brings along a MRI of the lumbar spine that shows degenerative disc disease and moderate

stenosis at L3-4.”

2

We would like to take this opportunity to outline the status of your claim under

policy number TV2308.1

 

As previously outlined to you, the policy defines Injury as follows:

“Injury means accidental bodily injury that occurs while Your

policy is in force and results directly and independently of all other

causes in loss covered by the policy.”

We recently had your file reviewed by our Medical Consultant, a board-certified

Neurologist. The Medical Consultant opined that your medical condition is

mainly due to facet disease causing spinal stenosis. In addition, Dr. Williams’

September 28, 2004 office note states that you complained of six months of back

pain.2

 Furthermore, it appears that your alleged injury may have exacerbated the

symptomatic facet disease, however, your medical condition does not appear to be

solely due to an Injury “directly and independently of all other causes.” 

Therefore, your claim will be considered under the Sickness provision of the

policy. Benefits are payable to the first anniversary date of your policy following

your 65th birthday (February 16, 2008) for conditions due to the result of a

Sickness.

On April 20, 2005, Mr. Coulter sent a letter to Trustmark stating, “we anticipate filing suit

alleging that Dr. Burgess is entitled to full disability benefits for the rest of his life because he was

disabled on an accident on his farm.” Additionally, the letter stated that Dr. Burgess was going to

negotiate the check sent to him without waiving his claim under the policy for the full payment

under the “injury” provision of the policy. The letter also stated that the “check you have tendered

is for payments that Trustmark owes regardless of whether the ‘sickness’ or ‘injury’ provisions

govern the carrier’s duties. . . . If you take a different position with regard to this, then you should

Case 4:05-cv-01760-GTE Document 30 Filed 03/19/07 Page 2 of 9
3

notify us immediately.” On April 28, 2005, Trustmark sent a letter to counsel for Dr. Burgess,

including enclosed copies of letters dated December 9, 2005, and March 18, 2005, stating in part, 

Our decision was based upon the information we had available to us at the time of

the decision. We would be happy to review any other information you wish to

submit in regards to Dr. Burgess’ claim. Again, please be aware that according to

the terms of the policy, Injury is defined as: [restating definition].

The letter agreed with the assessment that the money previously sent to Dr. Burgess is payable

regardless of the classification of “sickness” or “injury.” 

On October 21, 2005, Trustmark sent a letter to counsel for Dr. Burgess stating in part,

In the interim, we have continued to provide your client with monthly Total

Disability benefits. Please understand that we have issued these payments, on an

exceptional basis, in an effort to be of service to your client, without waiving any

of our right or defenses afforded by the contract or under law. Our payment of

these benefits should not be construed as acceptance of liability for the period in

which we are providing benefits.

On November 17, 2005, Plaintiff filed the present breach of contract suit. Pursuant to the

Court’s final scheduling order dated April 6, 2006, the case was set for jury trial beginning on

September 25, 2006. On July 10, 2006, the Court referred the case to Magistrate Forester for a

settlement conference, which was scheduled for August 22, 2006. 

In his affidavit, Mr. Coulter states that the morning of the settlement conference,

Trustmark’s counsel “showed up with his client’s doctor’s report, conceding that Dr. Burgess was

disabled from a broken back suffered in July 2004.” On September 19, 2006, the Court entered a

Consent Judgment stating, “Defendant Trustmark Insurance Company has agreed that Plaintiff

James Burgess is disabled as a result of the accidental bodily injury he suffered on July 31, 2004. 

For so long as Dr. Burgess cannot perform the substantial and material duties of his regular

Case 4:05-cv-01760-GTE Document 30 Filed 03/19/07 Page 3 of 9
4

occupation, and for so long as he submits semi-annually to Trustmark a continuous claim form

verifying his disability, Trustmark shall pay Dr. Burgess $14,000 a month for the rest of his life.”

II. Motion to Amend Order

Plaintiff requested, and the Court awarded, the statutory 12% penalty pursuant to Arkansas

Code Annotated § 23-79-208. Section 23-79-208 provides in pertinent part:

(a)(1) In all cases in which loss occurs and the cargo, property, marine, casualty,

fidelity, surety, cyclone, tornado, life, accident and health, medical, hospital, or

surgical benefit insurance company and fraternal benefit society or farmers'

mutual aid association or company liable therefor shall fail to pay the losses

within the time specified in the policy after demand is made, the person, firm,

corporation, or association shall be liable to pay the holder of the policy or his or

her assigns, in addition to the amount of the loss, twelve percent (12%) damages

upon the amount of the loss, together with all reasonable attorney's fees for the

prosecution and collection of the loss. [Emphasis added.]

In an opinion by Judge Howard in this district, the court stated, “The penalty nature of

section 23-79-208 ‘is directed against unwarranted delaying tactics of insurers.’” McKee v.

Federal Kemper Life Assur. Co., 726 F. Supp. 245, 247 (E.D. Ark. 1989), aff’d 927 F.2d 326,

328-329 (8th Cir. 1991) (quoting Simmons First National Bank v. Liberty Mutual Insurance Co.,

282 Ark. 194, 198, 667 S.W.2d 648 (1984)). “The legislature has recognized a social and moral

purpose in providing for the allowance of a statutory penalty and attorney's fees in litigation

between insured and insurer. These reasons include discouraging oppressive delay in recognition

of liability, deterring arbitrary or capricious denial of claims, and insuring the ability of claimants

to obtain legal representation.” Id. (citing USAA Life Insurance Co. v. Boyce, 294 Ark. 575, 578,

745 S.W.2d 136 (1988)). “The Arkansas courts have recognized that because the statute is highly

penal in nature it is to be strictly construed.” Id. (citing Callum v. Farmers Union Mutual Ins.,

256 Ark. 376, 381, 508 S.W.2d 316 (1974). 

Case 4:05-cv-01760-GTE Document 30 Filed 03/19/07 Page 4 of 9
5

Defendant argues that the twelve percent statutory penalty is not available in this action

because it is a declaratory judgment action. In support of this argument, Defendant cites

Transcontinental Ins. Co. v. Rainwater Constr. Co., ___ F. Supp. 2d, 2007 WL 473694 (E.D. Ark.

Feb 8, 2007) (refusing to impose penalty in insurer’s declaratory judgment action after finding that

insurer had duty to defend or indemnify insured in state court action). There, Judge Howard

stated, “The Court is not convinced that the 12% penalty applies to claims under Section 23-79-

209, and the Arkansas Supreme Court has so held. Shelter Mut. Ins. Co. v. Smith, 300 Ark. 348,

353 (1989). Certainly, had the Arkansas legislature wanted to include such a penalty it would

have done so. In not doing so, the Arkansas legislature distinguished between first party claims

and third party claims.” Id.

Defendant also cites Silverball Amusement, Inc. v. Utah Home Fire Ins. Co., 842 F. Supp.

1151, 1165 (W.D. Ark. 1994), aff’d 33 F.3d 1476 (8th Cir. 1994). In Silverball, a declaratory

judgment action, the district court found that Arkansas Code Annotated § 23-79-209 applied, and

directing the insurer to defend the insured in a lawsuit, pay any damages that may be incurred

therein based on the negligence allegations in the complaint, and reimburse the insured for

reasonable attorney's fees and costs of bringing the action for a declaratory judgment. Id. In

finding that the twelve percent statutory penalty did not apply, the court quoted Shelter Mutual

Insurance Company v. Smith, 300 Ark. 348, 779 S.W.2d 149 (1989), which states that Arkansas

Code Annotated § 23-79-209 “specifically applies to declaratory judgment actions, and excludes

the allowance of a penalty although providing for an award of attorney's fees.” Id.

In Smith, the Arkansas Supreme Court determined that Arkansas Code Annotated § 23-79-

209, as opposed to Arkansas Code Annotated § 23-79-208, applied to that declaratory judgment

Case 4:05-cv-01760-GTE Document 30 Filed 03/19/07 Page 5 of 9
6

action, noting that “[w]e have interpreted [Ark. Code Ann. § 23-79-208] to require the insured to

have suffered a loss, and to have recovered a money judgment.” 300 Ark. at 351, 779 S.W.2d at

151. The Court, in discussing Home Insurance Company v. Crawford, 251 Ark. 843, 475 S.W.2d

889 (1972), stated, “[a]lthough the form of the suit in Home Insurance was that of a declaratory

judgment, because a money loss did occur and [the insured] satisfied the requirements of Ark.

Code Ann. § 23-79-208 (1987), she was allowed to recover both attorney’s fees and a penalty.” 

Id. at 353, 779 S.W.2d at 152. However, in Smith, “no loss was suffered by the [insureds] and no

money judgment was recovered, and thus the [insureds] failed to satisfy the requirements of Ark.

Code Ann. § 23-79-208 (1987).” Id. Therefore, it is clear that there is no bright-line rule that bars

recovery of the twelve percent statutory penalty in all declaratory judgment actions. 

The district court in Woods Masonry, Inc. v. Monumental General Cas. Ins. Co., 198 F.

Supp. 2d 1016, 1036 n.11 (N.D. Iowa 2002), discussed the award of a twelve percent statutory

penalty in declaratory judgment actions, and found that “so long as the court finds that a monetary

loss occurred, that payment is due, and that the insurer failed to make payment within the time

specified in the policy after demand was made, penalties are properly assessed under section 23-

79-208.” The court noted that in Silverball, “the Arkansas district court's holding that section 23-

79-209 applies to all declaratory judgment actions and precludes the imposition of penalties under

section 23-79-208 is more limited in scope than may be immediately apparent from the broad

language of the opinion,” stating that “[t]he order did not require the payment of any insurance

proceeds because the tort action against the insured had not yet resulted in a judgment against the

insured.” Id. However, the court found that in the case before it, the court’s order required the

insurer to provide coverage of a claim by an employee of the insured, and “therefore, involves

Case 4:05-cv-01760-GTE Document 30 Filed 03/19/07 Page 6 of 9
7

more than a pure declaratory judgment action, which ‘orders nothing be done.’” Id. (citing

Newcourt Fin., Inc. v. Canal Ins. Co., 341 Ark. 181, 15 S.W.3d 328, 332 n. 2 (2000) (citing

Ark.Code Ann. §§ 16-111-101 et seq.)). The Court discussed the commentary to Arkansas’

Declaratory Judgment Act stating, “The judgment is not based on any wrong already done or any

breach committed. It is not required to be executed, as it orders nothing be done. It simply

declares rights and duties so that parties may guide themselves in the proper legal road, and, in

fact, and in truth, avoid litigation.” Id. (citing Ark.Code Ann. §§ 16-111-101 et seq.). 

The court also discussed Newcourt Financial, Inc. v. Canal Insurance Co., 341 Ark. 181, 15

S.W.3d 327, 329 (2000), in which the insurer brought a declaratory judgment action, seeking a

judgment that it was not liable to the insured in an automobile insurance claim because the

insured committed arson, and the insured brought a counterclaim for the payment of the insurance

claim. The Arkansas Supreme Court found that the trial court erred in failing to impose the

statutory penalty of twelve percent under section 23-79-208 because "[b]y ordering that Canal [the

insurer] pay benefits to Newcourt, the circuit court effectively granted Newcourt's counterclaim

under section 23-79-208. . . . [B]ecause the court ordered payment under the policy, it necessarily

did so pursuant to the counterclaim for payment for a 'loss' under section 23-79-208 since the

declaratory-judgment action would not provide such relief." Id. at 332. The district court in

Woods Masonry, found that the case before it was similar to that in Newcourt because “while

technically a declaratory judgment action, the effect of the order involves a ‘loss’ under section

23-79-208 and an order of payment” since “the court's order requires [the insurer] to pay the

benefits entitled to [the insured’s employee] for his work-related injury.” Woods Masonry, 198 F.

Supp. 2d at 1036 n.11 (noting that in Home Insurance, the Arkansas Supreme Court held even

Case 4:05-cv-01760-GTE Document 30 Filed 03/19/07 Page 7 of 9
8

though the suit was one for declaratory judgment brought by the insurer, nothing in section 23-79-

209 “prevents the allowance of the [12%] penalty upon a counterclaim for a loss.”). 

Furthermore, in Woods Masonry, the court also stated that section 23-79-209 applies to

suits brought by the insurer, and only applies to suits brought by the insured when the lawsuit is “a

suit by the holder of the policy to require the company to reinstate the policy.” Id. (citing

Newcourt Fin., Inc., 15 S.W.3d at 331) (“From its plain language section 23-79-209 applies to

actions where judgment is ultimately rendered against certain insurance companies in suits

initiated by the companies. It specifically includes a declaratory-judgment action. It also applies to

suits filed by holders of policies seeking to reinstate a canceled policy.”). 

In this case, the Court stated:

Trustmark’s March 18, 2005, letter constituted a statement of its decision that Dr.

Burgess’ claim fell within the sickness provision of the policy, and not the injury

provision of the policy. Therefore, although both parties admit that Dr. Burgess

was due the benefits he received prior to February 2008 regardless of whether he

was receiving the benefits under the sickness or injury provision, he was actually

receiving the pre-2008 benefits under the sickness provision of the policy.” Dr.

Burgess rightfully contested this determination by Trustmark upon Trustmark’s

refusal to recognize the evidence to the contrary available to it. When Dr. Burgess

submitted his claim statement, it is clear that he did so under the injury provision

of the policy. The form provides separate areas for sickness and accident, and Dr.

Burgess filled out the accident portion. While Trustmark did pay certain loss

benefits to Dr. Burgess, it failed to pay under the proper loss provision, which

would have substantial consequences to Dr. Burgess in the near future. 

 

Additionally, the Consent Judgment entered in this case provides, “For so long as Dr. Burgess

cannot perform the substantial and material duties of his regular occupation, and for so long as he

submits semi-annually to Trustmark a continuous claim form verifying his disability, Trustmark

shall pay Dr. Burgess $14,000 a month for the rest of his life.” Here, although the form of the suit

Case 4:05-cv-01760-GTE Document 30 Filed 03/19/07 Page 8 of 9
9

is that of a declaratory judgment, the Court clearly found that although Dr. Burgess was receiving

payment, Defendant Trustmark had been paying the insured Plaintiff under the wrong provision,

which would have the effect of denying Plaintiff a substantial amount of money in the near future. 

Furthermore, this case was not initiated by the insurer, and is not a suit by the holder of the policy

to require the company to reinstate the policy. Therefore, the Court finds that it properly awarded

the twelve percent statutory penalty in the amount of $234,920. Defendant’s Motion to Amend

Order is denied. 

Accordingly,

IT IS THEREFORE ORDERED that the Defendant’s Motion to Amend Order (Dkt. #21)

be, and it is hereby, DENIED. 

IT IS FURTHER ORDERED that Defendant’s Motion to Stay (Dkt. # ) be, and it is

hereby, DENIED as moot.

Dated this 19th day of March, 2007.

/s/Garnett Thomas Eisele___________

UNITED STATES DISTRICT JUDGE

Case 4:05-cv-01760-GTE Document 30 Filed 03/19/07 Page 9 of 9