### The HONORABLE LEVIN H. CAMPBELL, Senior United States Circuit * 

### Judge for the First Circuit, sitting by designation. UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

_______________ No. 95-2672

_______________ American Eagle Insurance * Company, * * Appeal from the United States Plaintiff - Appellant, * District Court for the Eastern * District of Arkansas. v. * * John H. Thompson, * * Defendant - Appellee. *

_______________ Submitted: January 8, 1996 Filed: May 28, 1996

________________ Before WOLLMAN, CAMPBELL, and MURPHY, Circuit Judges. *

_______________

### Arkansas Air had made similar loans of ai rcrafts in the past. 1 

### These loans were not part of the company's regular rental o r charte r service. Arkansas Air did not charge for the use of th e plane but passed along the costs of the trip to the person borrowing the plane -- Henry, in this case.
-2- CAMPBELL, Senior Circuit Judge. Plai ntiff-appellant American Eagle Insurance Company ("America n Eag le") filed this diversity action in the Eastern District of Arkansa s seek ing a declaration that John H. Thompson was not covered under a n aviation insurance policy issued by it to Arkansas Aircraft Inc. ("Arkansa s Air"). American Eagle sought a determination that it had no duty to defen d
or indemnify Thompson in two underlying state tort actions in Georgia

. After a jury concluded by special verdict that T hompson was an employee of Arkansas Air, the district court ruled as a matter of law that Thompson wa s
cove red by the policy. The court denied American Eagle's motion fo r judgment as a matter of law or in the alternative for a new trial

. American Eagle appeals from the final judgment entered in favor o f Thompson. We reverse and remand.

I.

Arkansas Air is the fixed-base operator -- the company that fuels , services and hangars airplanes -- at the Jonesbo ro, Arkansas airport. The company also runs an air charter business and buys and sells use d air planes. Mark Haggenmacher and Larry Grisham, the owners of Arkansa s Air, occasionally hired John Thompson to fly their planes. Thompson worke d full-time in the real estate business, but sometimes accepted piloting job s fromvarious companies in order to keep up his pilot licenses. Thompson char ged an hourly rate for his services; he had no formal employmen t relationsh ip with Arkansas Air or with any other company for which h e piloted.
In April 1993, the owners of Arkansas Air loaned an airplane to one of their friends, Nelson Henry. Henry, not being a pilot, 1

### -3-

asked i f Arkansas Air could arrange for Thompson to fly him to and fro m Hilton Head, South Carolina, on April 27. Haggenmacher called Thompson, relayed the departure and return times for the f light, and Thompson agreed to pilot. The flight from Jonesboro to Hilton Head took place a s scheduled. On the return trip, as Thompson was landing for an interim sto p at Sta tesboro, Georgia, his plane collided in mid-air with anothe r airplane

. Henry and the student pilot of the other aircraft died as a result of the accident.
Separate lawsuits arising from the c rash were filed on behalf of the deceased student pilot in Georgia state court against Thompson and Arkansa s Air. Arkansas Air's insurance policy then in effect provided in relevant part: [Y]our bodily injury and property damage liability

cove rage protects you and any of your employee s while in the scope of his or her employment who m you permit to fly your aircraft, and any person or organization using your aircraft while it i s operated by you or your employee. Americ an Eagle Aircraft Insurance Policy No. AFN0061519 (emphasi s supplied). Thompson asserted that he was an employee of Arkansas Air at the time of the crash and therefore was within the policy coverage

. Ameri can Eagle filed this action in the district court pursuant to th e federal Declaratory Judgement Act, 28 U.S.C. §§ 2201 et seq. , seeking a declaration of noncoverage under Arkansas Air's insurance policy.

The action was tried to a jury which was instructed to answer a single factual question -- whether Thompson was an employee of Arkansas Ai r at the time of the accident. The district court indicated to counsel that a jury verdict finding that Thompson was an empl oyee of Arkansas Air would result in a ruling th at Thompson was covered under the policy, but that a jury verdict finding that

### -4-

Thompson was not an e mployee would leave the question of coverage for the
cou rt to determine after interpreting the insurance contract. The jur y concluded that Thompson was an Arkansas Air employee, and the cour t therefore ruled that he was covered by the insur ance policy. Thompson was granted attorney's fees pursuant to Ark. Code Ann. § 27-79-209 (Michi e 1992).

II.

A. Sufficiency of the Evidence
American Eagle asserts on appeal that the district court erred in not grantin g its motion for judgment as a matter of law pursuant to Fed. R

. Civ. P. 50. When reviewing the district court's refusal to grant judgment
as a matter of law, we resolve factual conflicts and make all reasonable inferences in favor of the prevailing party. Se e Yannacopoulos v. General Dynamics Corp. , 75 F.3d 1298, 1302 (8th Cir. 1996). We affirm the judgmen t of the district court if the evidence allows reasonable jurors to differ
as to the conclusions. Grand Laboratories, Inc. v. Midcon Labs of Iowa , 32 F.3d 1277, 1280 (8th Cir. 1994).

He re, while the jury could doubtless have found to the contrary , there is sufficient evidence to support the jury's verdict that Thompson was an employee of Ar kansas Air. The policy covered "employees," but did not define that term. We believe that the jury could read it to include casual employees as well as full-time employees with offices, salaries , health and retirement packages, and other such benefits. The evidence at trial showed that the owners of Arkansas Air "hired" Thompson on multiple occasions to fly their planes. In these situations, Arkansas Air employee s would direct Thompson as to the date of the flight, the departure time, th e aircraft to be flown, the number of passengers on board the aircraft, the destinations, and the return times. Thompson himself testified that he wa s an employee of Arkansas Air

### Although the jury instructions explained the nature an d 2 

### function of the burden of proof, they did not explicitly sta te that the burden of proof was on Ame rican Eagle. The jury was, however, told on several occasions duri ng trial that American Eagle had the burden of proof and was never told anything to the contrary

. Therefor e, we assume that the jury placed the burden of proof o n American Eagle.
-5- and that Arkansas Air had the right to direct hi s action. See Blankenship

v. Overholt , 301 Ark. 476, 478-79, 786 S.W.2d 81 4, 815 (1990) ("In drawing the line between independent contractor and servant, we look at th e tota lityof the circumstances[, and] the extent of control [that th e employer exercises over the work] is the principal factor in determining the relationship."); accord Dickens v. Farm Bureau Mutual Ins. Co. of Ark. , 315 Ark. 514, 516-17, 868 S.W.2d 476, 477-78 (1994). Although Thompso n also piloted for several other companies, he was not setup formally i n business as a contract pilot with the associated title, advertising, and
rec ords. We find no error in the district court's denial of America n Eagle's motion for judgment as a matter of law.

B. The Burden of Proof
The district court placed the burden of proving that Thompson w as not an employee of Arkansas Air upon American Eagle, after refusing a proposed instruction that would have assigned to Thompson the burden of proving tha t he was an employee. American Eagle argues that a new trial is warranted 2 because the court's assignment of the burden of proof departed fro m Arkansas law and prejudiced "substantial rights." It asserts that th e dist rict court placed the burden of proof upon American Eagle simpl y because, seeking a de claratory judgment, it was in the procedural posture of plaintiff. American Eagle now asks this court to hold that the parties ' reversal of positions for purposes of this decla ratory judgment action did not alter the fact that Thompson, the person seeking coverage, was require d to carry the burden.

### -6- The bu rden of proof in a diversity action is typically a matter o f state law. See Palmer v. Hoffman , 318 U.S. 109, 117 (1943); Sprynczynatyk

v. General Motors Corp. , 771 F.2d 1112, 1122 (8th Cir. 1985), cert. denied , 475 U.S. 1046 (1986); Lynch v. Travelers Indemnity Co. , 452 F.2d 1065, 106 8 n.2 (8th Cir. 1972). Under Arkansas law, a party who files suit seeking to benefit from insurance coverage generally bears the burden of proving coverage. See Peoples Protective Life Ins. Co. v. Smith , 257 Ark. 76, 82, 514 S.W.2d 400, 404 (1974); Hunt v. Pyramid Life Ins. Co. , 21 Ark.App. 261 , 266, 732 S.W.2d 167, 169 (1987) (en banc); Snowv. Travelers Ins. Co. , 12 Ark.App. 240, 241-42 674 S.W.2d 943, 944 (1984). Once the person seeking insurance coverage ha s met his burden, the burden shifts to the defendant insuran ce company to prove any applicable exclusion to coverage. Se e National Investors Li fe and Cas. Ins. Co. v. Arrowood , 270 Ark. 617, 621, 606 S.W.2d 97, 100 (Ark. Ct. App. 1980).

In this action brought under the federal Declaratory Judgment Act , 28 U.S.C. § 2201 et seq. , the assignment of the burden of proof i s complica ted by the fact that the usual plaintiff and defendant ar e reversed. Unlike the typical insurance coverage case where the perso n seeking indemnificati on sues the insurance company, the insurance company brought this action as plaintiff. American Eagle argues that the burden placed traditionally on the party seeking coverage should not be shifted to the insurer merely because the insurer is the nominal plaintiff. See Pre ferred Acc. Ins. Co. v. Grasso , 186 F.2d 987, 991 (2nd Cir. 1951) ; Reliance Life Ins. Co

. v. Burgess , 112 F.2d 234, 237-38 (8th Cir.), cert. denied , 311 U.S. 699 (1940). Supporting the con trary view is the argument that the burden of proof should not be placed onan unsuspecting defendant who has been hailed into court. In deciding who bears the burden of proof in this case, we are

### The Third Circuit has held that in a federal declarator y 3 

### judgment action, the burden of proof as to a non-federal matter is determined by the rule of the forum state in similar declarator y actions. See Fireman's Fund Ins. Co. v. Videfreeze Corp. , 5 40 F.2d 1171, 1174-75 (3rd Cir. 1976), cert. denied , 429 U.S. 1053 (1977); see also 6A James W. Moore, Moore's Federal Practice §57.31[3] at 57-265 (1995). In the Videfreeze case, as is also true here, the federal court was unable to fi nd any analogous cases brought under the state declaratory judgment act in which the burden of pr oof was discussed. Therefore, we look to our own Reliance opinion fo r guidance.
-7- guide d by our earlier decision in Reliance , 112 F.2d at 237-38. There , 3

an ins urance company brought suit seeking a declaration of noncoverag e under Missouri law. In assigning the burden of proof to the insuranc e company, this court reasoned:

The question as to whether the burden of proof i n it s primary sense rests upon the plaintiff o r def endant is ordinarily to be determined b y ascertaining from the pleadings which of th e parties without evidence would be compelled t o submit to an adverse judgment before th e introduction of any evidence. It is a fundamental rule that the burden of proof in its primary sense rest s upon the party who, as determined by th e pleadings, asserts the affirmative of an issue and it remains there until the termination of th e action. It is generally up on the party who will be defeat ed if no evidence relating to the issue i s given on either side.

Id. In R eliance , we held that the burden rested with the insuranc e compa ny, as it was the insurance company that had disputed coverage b y asserting an affirmative defense of exclusion, and the insured did no t assert any cause of action nor seek any affirmative relief. Id. at 238; se e also State Farm Mutual Auto. Ins. Co. v. Penning ton , 215 F. Supp. 784, 790 (E.D. Ark.) (placing the burden of proof on an i nsurance company trying to establ ishthe applicability of a policy exclusion through a declarator y judgment action), aff'd , 324 F.2d 340 (8th Cir. 1963).
In applying the factors described in Reliance , we find that

### Professor Moore has been cited for the proposition that the 4 

### burden of proof should be on the plaintiff insurance company in a dec laratoryjudgment action. 6A James W. Moore, Moore's Federa l Practice § 57.31[2] at 57-263 (1995). The relevant section of his treatise provides:

Generally, it is reasonable and fair that one who brings another into court should have the burden of [proof] . . . . Where the insure r seeks a declaration of noncoverage as to a pa rticular accident, the insurance compan y should likewise experience no technica l difficulty in producing proof of the facts it as serts. The insurer here seeks an advance d determination of its liabilities, and th e injured third party is forced to litigate the coverage issue before it has established it s clai magainst the insured. In these cases , since no policy or technical consideratio n dictat es a change in the general rule, th e plaintiff should bear the usual burden o f proving his prima facie case.
However, the situation described by Professor Moore i s distinguishable from the case at hand, because here the injured party(the estate of the deceased student pilot) is not bein g forced to litigate against American Eagle before liability h as been
-8- Thompson asserted the affirmative of the question asked of the jury an d tha t Thompson would lose in the absence of any evidence on the issue

. Americ an Eagle seeks only a declaration of non-liability; unlike th e insuranc e company in Reliance , it does not seek to apply a polic y exclusion. In additi on, American Eagle timely and repeatedly objected to the district court's imposition of the burden of proof. Cf. Liberty Mutua l Ins
. Co. v. Sweeney , 216 F.2d 209, 211 (3rd Cir. 1954) (upholding th e assignment of the bur den of proof to the insurance company when insurance companybrought the action and voluntarily went forward and attempted to prove c ase); Pacific Portland Cement Co. v. Food Machinery & Chemica l Cor p. , 178 F.2d 541, 547 (9th Cir. 1949). Stripped of its procedura l posture, this action is, at base, a claim by Thompson that he is covered under an insurance policy and a denial by the insurer that coverag e properly exists. Under Arkansas law, the burden in such cases falls on th e person seeking insurance coverage. S ee Smith , 514 S.W.2d at 404. We see 4

### de termined. This dispute concerns only American Eagle an d

Thompson, the party seeking coverage.
-9- no reason to deviate from Arkansas burden

### -10-

of proof principles s imply because this action was brought by the insurer under the federal Declaratory Judgment Act.

We hol d that the district court erred in assigning the burden o f proof to American Eag le. Since this error cannot be said to be harmless, we vacate the district court's judgment and rema nd for a new trial. In so doing, however, we address several other issues raised by appellant a s these seem likely to arise again in the course of trial and the court and parties may be aided by our determination now.

C. Evidentiary Rulings

American Eagle argues that the district judge erred in admittin g highly prejudicial he arsay evidence on an issue not before the jury. The testimony in question is that of John Thompson's wife, Sonja Thompson, who tol d the jury of statements made to her by Mike Medlock, an insuranc e agent, and Mark Haggenmacher, one of the owners of Arkansas Air. Mrs

. Thomps on testified as follows on direct examination, after the cour t overruled American Eagle's objections:

A. Well, that morning at the airport, when we got to -- when I got to the airport, the insuranc e agent w as there and he had the files, the --- th e papers with him, you know, insurance or whatever. Q. That -- you're talking -- when you say "th e insurance agent," Mike Medlock?
A. Mike Medlock, yes. Q. Okay.

### Hearsay, as defined in Fed. R. Evid. 801(c), is any out-of- 5 

### court assertion offered to pro ve the truth of the matter asserted. Statements, made out-of-court, not offered to prove the truth of the matter asserted are not hearsay because reliability is not at issue. See United States v. Amahia , 825 F.2d 177, 181 (8th Cir

. 19 87). By instructing the jury that Haggenmacher's statement s could only be considered for the limited purpose of showing hi s state of mind, the court averted a hearsay problem. In its Memorandum and Order discussing American Eagle's moti on for judg ment as a matter of law, the court changed its rational e -11- A. He had that with him in the manila file an d all th e papers and everything, and I was sittin g there, you know, waiting, early. And he -- and he talked with Mark, and then he came over and they -- he sit [sic] down beside me, and Mark stood there, and he told me not to worry about -- Q. Now, who -- who told -- who told --
A. Mike Medlock.

. . . A. Now, Mike Medlock did most of the talking a t this point. And he -- he slapped the insuranc e papers and all that and he said, "Don't worry about any thing," he said, "Tommy is covered. We've go t it handled. Just don't wor ry about anything." And -- and I said, "Well, well, good," you know. Q. Okay. And what did Mark Haggenmacher say?
A. He said, "Do yo u understand that?" And I said "Yes." And that's about al l Mark said at the time.

At trial, American Eagle argued that the above testimony wa s inadmis sible hearsay, unduly prejudicial, and irrelevant to the issu e before the jury -- wh ether Thompson was an employee of Arkansas Air. The trial court allowed Medlock's statements finding that they were relevant to the issue of employment and they fell within an exception to the hearsa y rule for admissions o f a party-opponent. See Fed. R. Evid. 801(d)(2)(D). Haggenmacher's statement was admitted, not as proof of the truth of th e matter asserted, but as evidence of Haggenmacher's understanding of th e employment relationship between Thompson and Arkansas Air. Admitted for such pur pose, Haggenmacher's statement was not hearsay. Federal la w 5

### for allowing Medlock's statements into evidence, stating th e

statements were admissible to show the state of mind of Medl ock and Haggenmacher, and as such, were not hearsay. The problem wi th this theoryis that the jury was not given an appropriate limitin g inst ruction with respect to Medlock's statements. Instead, th e jury was told that it could consider Medlock's statements for the truth o f the matter asserted. The court's failure to give a limiting instruction leads us to conclude that the jury, in al l prob ability, considered the evidence as proof of the matte r asserted. Thus, Medlock's statements fall within the defini tion of hearsay.
-12- governs the determination of whether

### -13-

evidence is admissible. Miller v. Yazoo Mfg. Co. , 26 F.3d 81, 82 (8th Cir

. 1994). Evidentiary r ulings are within the discretion of the trial judge, and are reviewed for an abuse of discretion. See Firemen's Fund Ins. Co.

v. Thien , 63 F.3d 754, 757 (8th Cir. 1995) ("We review the district court' s rulin gs admitting or excluding evidence for abuse of discretion.") ; Banghart v. Origoverken, A.B. , 49 F.3d 1302, 1304 (8th Cir. 1995).

In deciding whether the district court abused its discretion i n admitting Medlock's statements, we must decide whether the statements fall within the hearsay exception for admissions of a party-opponent. See Fed. R. Evid. 801(d)(2). The Rule states:

A statement is not hearsay if -- (2) Admission by party-opponent. The statement i s off ered against a party and is . . . (D) a statement b y the par ty's agent or servant concerning a matter withi n the scope of the agency relationship . . . .

Fed. R. Evid. 801(d). To fit within this exception to the hearsa y doctrine, Thompson, the party offering the testimony, was required

### -14-

to e stablish a foundation demonstrating that Medlock was an agent o f American Eagle at the time the statements were made. See Gulbranson v . Duluth, Missabe & Iron Range Ry. , 921 F.2d 139, 142 (8th Cir. 1990); see also Glen Weissenberg er, Federal Evidence § 810.20 at 418-19 (1995) ("The propon ent of the vicarious admission must establish a foundation whic h demonstrates that the declarant at the time of t he making of the statement
was an e mployee or an agent of the party against whom the statement i s offered."). Although the federal rules of evide nce do not define the term agent, courts have held that "Congress intended Rule 801(d)(2)(D) 't o des cribe the traditional master-servant relationship as understood b y
common law agency doctrine.'" Lippay v. Christos , 996 F.2d 1490, 1497 (3r d Cir. 1993) (quoting Borenv. Sable , 887 F.2d 103 2, 1038 (10th Cir. 1989));
see also United States v. Saks , 964 F.2d 1514, 1523-24 (5th Cir. 1992)

. The co mmon law of agency is set forth in the Restatement (Second) o f Agency. See Boren , 887 F.2d at 1038. The Resta tement explains the nature of agency as follows:

(1) Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, andconsent by the other so to act. Restatement (Second) of Agency § 1 (1958).

The recor d before us does not demonstrate that Medlock was American Eagle's agent at the time he made the relevant statements to Mrs. Thompson

. In fact, the evidence shed no light at all on any relationship betwee n Medlock and American Eagle. The evidence showedthat Medlock was Arkansas Air 's i nsurance agent, and that he had been so for eight or nine years

. Haggenmacher testified that Medlock had negotiated Arkansas Air's insuranc e policies with "several insurance companies." No evidence indicated that American Eagle authorized Medlock to act on its behalf. We are constraine d to conclude that Mrs. Thompson failed to meet her burden of

### The district court gave the jurors an appropriate limitin g 6 

### instruction, stating that they could not consider the truth of the mat ter asserted, i.e. , whether there is coverage, but could onl y consider the testimony as it bore on the existence of an emp loyment relationship.

American Eagle argues that the statements of bot h 7 

### Hagg enmacher and Medlock should have been excluded because the y were u nduly prejudicial. Fed. R. Evid. 403 provides tha t "[a] lthoughrelevant, evidence may be excluded if its probativ e value is substantially outweighed by the danger of unfai r prejudice, confusion of the issues, or misleading the jury." Given our ruling that it was error to admit Medlock's statements, w e decline to address the Rule 403 admissibility of either Medlock's or Haggenmacher's statements, leaving that or any related question for determination by the court at retrial.
-15- establishing the necessary agency relationship, see Gulbranson , 921 F.2d at 142; Lippay , 996 F.2d at 1497, and that the district court erred i n admitting Medlock's statements pursuant to Rule 801(d)(2)(D).

American Eagle also challenges the admission of Haggenmacher' s relate d statement ("Do you understand that?") in response to Medlock' s
assurance of coverage. The district court held that this statement wa s admissible not to show the truth of the matter asserted, but to show the sta te of mind of the speaker who was one of the owners of Arkansas Air. 6 See 4 Jack B. Weinste in et al., Weinstein's Evidence § 801(c)[01] at 801- 103 (1996) (A statement offered to show the stat e of mind of the declarant is analytically not hearsay . . . ."). The district court reasoned that the statement was not hearsay to the extent that it revealed the state of mind and belief of a co-owner of Arkansas Air th at Thompson was covered by its insurance policy. According to the district court, this state of mind
was relev ant to the question before the jury of whether Thompson was a n employee of Arkansas Air. Various aspects of th is ruling are close, as is the further question of Rule 403 admi ssibility. In view of the fact that 7 Haggenmacher's statement is dependent for its context on Medlock' s statements, we hesitate to review the court's ru ling at this juncture. It seems almost

### Section 23-79-209 provides in relevant part: 8



### In all suits in which the judgment or decre e of a court is against a life, fire, health , accident, or liability insurance company , either in a suit by it to cancel or lapse a policyor to change or alter the terms o r cond itions thereof in any way that may hav e the effect of depriving the holder of th e policy of any of his rights thereunder, or in a su it for a declaratory judgment under th e pol icy, or in a suit by the holder of th e policy to require the company to reinstate the poli cy, the company shall also be liable t o pay the holder of the policy all reasonabl e attorneys' fees for the defens e or prosecution of the suit, as the case may be. Ark. Code Ann. § 23-79-209 (Michie 1992).
-16- certain that, at a new trial, the basis for admission of both statements will be reexamined by counsel and new arguments may be presented then. It woul d not seem helpful to attempt to anticipate and dispose of thes e arguments at this point in time.

D. Attorney's Fees under Section 23-79-209

Section 23-79-209 of the Arkansas Code provides that an insuranc e company that loses anaction to declare rights under a policy "shall also be liable to pay the holder of the policyall reasonable attorneys' fees for t he defense or prosecution of the suit" (emphasis supplied). Th e 8 district court granted Thompson attorney's fees under this statute, findin g that although he was not the "holder of the policy", he was a beneficiary of the pol icy and that was a sufficiently close relationship with th e holder of the policy to entitle him to attorney's fees. American Eagl e asserts that the dist rict court's ruling is contrary to the clear wording of the statute which speaks only of the "holder of the policy." We do not dec ide this issue of state statutory interpretation at this time, give n that it may never arise on retrial.

### -17-

The judgment of the district court is reversed and remanded for a new tria l consistent with this opinion.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.