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 aircrafts in the past. 1

These loans were not part of the company's regular rental or

charter service. Arkansas Air did not charge for the use of the

plane but passed along the costs of the trip to the person

borrowing the plane -- Henry, in this case. 

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CAMPBELL, Senior Circuit Judge.

Plaintiff-appellant American Eagle Insurance Company ("American

Eagle") filed this diversity action in the Eastern District of Arkansas

seeking a declaration that John H. Thompson was not covered under an

aviation insurance policy issued by it to Arkansas Aircraft Inc. ("Arkansas

Air"). American Eagle sought a determination that it had no duty to defend

or indemnify Thompson in two underlying state tort actions in Georgia.

After a jury concluded by special verdict that Thompson was an employee of

Arkansas Air, the district court ruled as a matter of law that Thompson was

covered by the policy. The court denied American Eagle's motion for

judgment as a matter of law or in the alternative for a new trial.

American Eagle appeals from the final judgment entered in favor of

Thompson. We reverse and remand.

I.

Arkansas Air is the fixed-base operator -- the company that fuels,

services and hangars airplanes -- at the Jonesboro, Arkansas airport. The

company also runs an air charter business and buys and sells used

airplanes. Mark Haggenmacher and Larry Grisham, the owners of Arkansas

Air, occasionally hired John Thompson to fly their planes. Thompson worked

full-time in the real estate business, but sometimes accepted piloting jobs

from various companies in order to keep up his pilot licenses. Thompson

charged an hourly rate for his services; he had no formal employment

relationship with Arkansas Air or with any other company for which he

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
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asked if Arkansas Air could arrange for Thompson to fly him to and from

Hilton Head, South Carolina, on April 27. Haggenmacher called Thompson,

relayed the departure and return times for the flight, and Thompson agreed

to pilot. The flight from Jonesboro to Hilton Head took place as

scheduled. On the return trip, as Thompson was landing for an interim stop

at Statesboro, Georgia, his plane collided in mid-air with another

airplane. Henry and the student pilot of the other aircraft died as a

result of the accident. 

Separate lawsuits arising from the crash were filed on behalf of the

deceased student pilot in Georgia state court against Thompson and Arkansas

Air. Arkansas Air's insurance policy then in effect provided in relevant

part:

[Y]our bodily injury and property damage liability

coverage protects you and any of your employees

while in the scope of his or her employment whom

you permit to fly your aircraft, and any person or

organization using your aircraft while it is

operated by you or your employee. 

American Eagle Aircraft Insurance Policy No. AFN0061519 (emphasis

supplied). Thompson asserted that he was an employee of Arkansas Air at

the time of the crash and therefore was within the policy coverage.

American Eagle filed this action in the district court pursuant to the

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 Air

at the time of the accident. The district court indicated to counsel that

a jury verdict finding that Thompson was an employee of Arkansas Air would

result in a ruling that Thompson was covered under the policy, but that a

jury verdict finding that 
-4-

Thompson was not an employee would leave the question of coverage for the

court to determine after interpreting the insurance contract. The jury

concluded that Thompson was an Arkansas Air employee, and the court

therefore ruled that he was covered by the insurance policy. Thompson was

granted attorney's fees pursuant to Ark. Code Ann. § 27-79-209 (Michie

1992). 

II.

A. Sufficiency of the Evidence

American Eagle asserts on appeal that the district court erred in not

granting 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. See Yannacopoulos v. General

Dynamics Corp., 75 F.3d 1298, 1302 (8th Cir. 1996). We affirm the judgment

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).

Here, 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 Arkansas 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 employees

would direct Thompson as to the date of the flight, the departure time, the

aircraft to be flown, the number of passengers on board the aircraft, the

destinations, and the return times. Thompson himself testified that he was

an employee of Arkansas Air 
 Although the jury instructions explained the nature and

2

function of the burden of proof, they did not explicitly state that

the burden of proof was on American Eagle. The jury was, however,

told on several occasions during trial that American Eagle had the

burden of proof and was never told anything to the contrary.

Therefore, we assume that the jury placed the burden of proof on

American Eagle. 

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and that Arkansas Air had the right to direct his action. See Blankenship

v. Overholt, 301 Ark. 476, 478-79, 786 S.W.2d 814, 815 (1990) ("In drawing

the line between independent contractor and servant, we look at the

totality of the circumstances[, and] the extent of control [that the

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 Thompson

also piloted for several other companies, he was not setup formally in

business as a contract pilot with the associated title, advertising, and

records. We find no error in the district court's denial of American

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 was not

an employee of Arkansas Air upon American Eagle, after refusing a proposed

instruction that would have assigned to Thompson the burden of proving that

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 from

Arkansas law and prejudiced "substantial rights." It asserts that the

district court placed the burden of proof upon American Eagle simply

because, seeking a declaratory 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 declaratory judgment action did

not alter the fact that Thompson, the person seeking coverage, was required

to carry the burden. 
-6-

The burden of proof in a diversity action is typically a matter of

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, 1068

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); Snow v. Travelers Ins. Co., 12

Ark.App. 240, 241-42 674 S.W.2d 943, 944 (1984). Once the person seeking

insurance coverage has met his burden, the burden shifts to the defendant

insurance company to prove any applicable exclusion to coverage. See

National Investors Life 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 is

complicated by the fact that the usual plaintiff and defendant are

reversed. Unlike the typical insurance coverage case where the person

seeking indemnification 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

Preferred 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 contrary view is the argument

that the burden of proof should not be placed on an 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 declaratory

3

judgment action, the burden of proof as to a non-federal matter is

determined by the rule of the forum state in similar declaratory

actions. See Fireman's Fund Ins. Co. v. Videfreeze Corp., 540 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 find any analogous cases brought under

the state declaratory judgment act in which the burden of proof was

discussed. Therefore, we look to our own Reliance opinion for

guidance.

-7-

guided by our earlier decision in Reliance, 112 F.2d at 237-38. There,

3

an insurance company brought suit seeking a declaration of noncoverage

under Missouri law. In assigning the burden of proof to the insurance

company, this court reasoned:

The question as to whether the burden of proof in

its primary sense rests upon the plaintiff or

defendant is ordinarily to be determined by

ascertaining from the pleadings which of the

parties without evidence would be compelled to

submit to an adverse judgment before the

introduction of any evidence. It is a fundamental

rule that the burden of proof in its primary sense

rests upon the party who, as determined by the

pleadings, asserts the affirmative of an issue and

it remains there until the termination of the

action. It is generally upon the party who will be

defeated if no evidence relating to the issue is

given on either side.

Id. In Reliance, we held that the burden rested with the insurance

company, as it was the insurance company that had disputed coverage by

asserting an affirmative defense of exclusion, and the insured did not

assert any cause of action nor seek any affirmative relief. Id. at 238; see

also State Farm Mutual Auto. Ins. Co. v. Pennington, 215 F. Supp. 784, 790

(E.D. Ark.) (placing the burden of proof on an insurance company trying to

establish the applicability of a policy exclusion through a declaratory

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

declaratory judgment action. 6A James W. Moore, Moore's Federal

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 insurer

seeks a declaration of noncoverage as to a

particular accident, the insurance company

should likewise experience no technical

difficulty in producing proof of the facts it

asserts. The insurer here seeks an advanced

determination of its liabilities, and the

injured third party is forced to litigate the

coverage issue before it has established its

claim against the insured. In these cases,

since no policy or technical consideration

dictates a change in the general rule, the

plaintiff should bear the usual burden of

proving his prima facie case.

However, the situation described by Professor Moore is

distinguishable from the case at hand, because here the injured

party (the estate of the deceased student pilot) is not being

forced to litigate against American Eagle before liability has been

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Thompson asserted the affirmative of the question asked of the jury and

that Thompson would lose in the absence of any evidence on the issue.

American Eagle seeks only a declaration of non-liability; unlike the

insurance company in Reliance, it does not seek to apply a policy

exclusion. In addition, American Eagle timely and repeatedly objected to

the district court's imposition of the burden of proof. Cf. Liberty Mutual

Ins. Co. v. Sweeney, 216 F.2d 209, 211 (3rd Cir. 1954) (upholding the

assignment of the burden of proof to the insurance company when insurance

company brought the action and voluntarily went forward and attempted to

prove case); Pacific Portland Cement Co. v. Food Machinery & Chemical

Corp., 178 F.2d 541, 547 (9th Cir. 1949). Stripped of its procedural

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 coverage

properly exists. Under Arkansas law, the burden in such cases falls on the

person seeking insurance coverage. See Smith, 514 S.W.2d at 404. We see 4
determined. This dispute concerns only American Eagle and

Thompson, the party seeking coverage.

-9-

no reason to deviate from Arkansas burden 
-10-

of proof principles simply because this action was brought by the insurer

under the federal Declaratory Judgment Act.

We hold that the district court erred in assigning the burden of

proof to American Eagle. Since this error cannot be said to be harmless,

we vacate the district court's judgment and remand for a new trial. In so

doing, however, we address several other issues raised by appellant as

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 admitting

highly prejudicial hearsay evidence on an issue not before the jury. The

testimony in question is that of John Thompson's wife, Sonja Thompson, who

told the jury of statements made to her by Mike Medlock, an insurance

agent, and Mark Haggenmacher, one of the owners of Arkansas Air. Mrs.

Thompson testified as follows on direct examination, after the court

overruled American Eagle's objections:

A. Well, that morning at the airport, when we got

to -- when I got to the airport, the insurance

agent was there and he had the files, the --- the

papers with him, you know, insurance or whatever.

Q. That -- you're talking -- when you say "the

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 prove 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.

1987). By instructing the jury that Haggenmacher's statements

could only be considered for the limited purpose of showing his

state of mind, the court averted a hearsay problem. 

In its Memorandum and Order discussing American Eagle's motion

for judgment as a matter of law, the court changed its rationale

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A. He had that with him in the manila file and

all the papers and everything, and I was sitting

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 at

this point. And he -- he slapped the insurance

papers and all that and he said, "Don't worry about

anything," he said, "Tommy is covered. We've got

it handled. Just don't worry about anything." And

-- and I said, "Well, well, good," you know.

Q. Okay. And what did Mark Haggenmacher say?

A. He said, "Do you understand that?" And I said

"Yes." And that's about all Mark said at the time.

At trial, American Eagle argued that the above testimony was

inadmissible hearsay, unduly prejudicial, and irrelevant to the issue

before the jury -- whether 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 hearsay

rule for admissions of a party-opponent. See Fed. R. Evid. 801(d)(2)(D).

Haggenmacher's statement was admitted, not as proof of the truth of the

matter asserted, but as evidence of Haggenmacher's understanding of the

employment relationship between Thompson and Arkansas Air. Admitted for

such purpose, Haggenmacher's statement was not hearsay. Federal law

5
for allowing Medlock's statements into evidence, stating the

statements were admissible to show the state of mind of Medlock and

Haggenmacher, and as such, were not hearsay. The problem with this

theory is that the jury was not given an appropriate limiting

instruction with respect to Medlock's statements. Instead, the

jury was told that it could consider Medlock's statements for the

truth of the matter asserted. The court's failure to give a

limiting instruction leads us to conclude that the jury, in all

probability, considered the evidence as proof of the matter

asserted. Thus, Medlock's statements fall within the definition of

hearsay. 

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governs the determination of whether 
-13-

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

1994). Evidentiary rulings 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

rulings 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 in

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 is

offered against a party and is . . . (D) a statement by

the party's agent or servant concerning a matter within

the scope of the agency relationship . . . .

Fed. R. Evid. 801(d). To fit within this exception to the hearsay

doctrine, Thompson, the party offering the testimony, was required 
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to establish a foundation demonstrating that Medlock was an agent of

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 Weissenberger, Federal Evidence § 810.20 at 418-19 (1995) ("The

proponent of the vicarious admission must establish a foundation which

demonstrates that the declarant at the time of the making of the statement

was an employee or an agent of the party against whom the statement is

offered."). Although the federal rules of evidence do not define the term

agent, courts have held that "Congress intended Rule 801(d)(2)(D) 'to

describe the traditional master-servant relationship as understood by

common law agency doctrine.'" Lippay v. Christos, 996 F.2d 1490, 1497 (3rd

Cir. 1993) (quoting Boren v. Sable, 887 F.2d 1032, 1038 (10th Cir. 1989));

see also United States v. Saks, 964 F.2d 1514, 1523-24 (5th Cir. 1992).

The common law of agency is set forth in the Restatement (Second) of

Agency. See Boren, 887 F.2d at 1038. The Restatement 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, and consent by the other so

to act.

Restatement (Second) of Agency § 1 (1958). 

The record 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 between

Medlock and American Eagle. The evidence showed that Medlock was Arkansas

Air's insurance agent, and that he had been so for eight or nine years.

Haggenmacher testified that Medlock had negotiated Arkansas Air's insurance

policies with "several insurance companies." No evidence indicated that

American Eagle authorized Medlock to act on its behalf. We are constrained

to conclude that Mrs. Thompson failed to meet her burden of 
 The district court gave the jurors an appropriate limiting

6

instruction, stating that they could not consider the truth of the

matter asserted, i.e., whether there is coverage, but could only

consider the testimony as it bore on the existence of an employment

relationship.

 American Eagle argues that the statements of both

7

Haggenmacher and Medlock should have been excluded because they

were unduly prejudicial. Fed. R. Evid. 403 provides that

"[a]lthough relevant, evidence may be excluded if its probative

value is substantially outweighed by the danger of unfair

prejudice, confusion of the issues, or misleading the jury." Given

our ruling that it was error to admit Medlock's statements, we

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 in

admitting Medlock's statements pursuant to Rule 801(d)(2)(D). 

American Eagle also challenges the admission of Haggenmacher's

related statement ("Do you understand that?") in response to Medlock's

assurance of coverage. The district court held that this statement was

admissible not to show the truth of the matter asserted, but to show the

state of mind of the speaker who was one of the owners of Arkansas Air.6

See 4 Jack B. Weinstein et al., Weinstein's Evidence § 801(c)[01] at 801-

103 (1996) (A statement offered to show the state 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 that Thompson was covered by

its insurance policy. According to the district court, this state of mind

was relevant to the question before the jury of whether Thompson was an

employee of Arkansas Air. Various aspects of this ruling are close, as is

the further question of Rule 403 admissibility. 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 ruling at this juncture. It

seems almost 
 Section 23-79-209 provides in relevant part: 8

In all suits in which the judgment or decree

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

policy or to change or alter the terms or

conditions thereof in any way that may have

the effect of depriving the holder of the

policy of any of his rights thereunder, or in

a suit for a declaratory judgment under the

policy, or in a suit by the holder of the

policy to require the company to reinstate the

policy, the company shall also be liable to

pay the holder of the policy all reasonable

attorneys' fees for the defense or prosecution

of the suit, as the case may be.

Ark. Code Ann. § 23-79-209 (Michie 1992).

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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

would not seem helpful to attempt to anticipate and dispose of these

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 insurance

company that loses an action to declare rights under a policy "shall also

be liable to pay the holder of the policy all reasonable attorneys' fees

for the defense or prosecution of the suit" (emphasis supplied). The

8

district court granted Thompson attorney's fees under this statute, finding

that although he was not the "holder of the policy", he was a beneficiary

of the policy and that was a sufficiently close relationship with the

holder of the policy to entitle him to attorney's fees. American Eagle

asserts that the district court's ruling is contrary to the clear wording

of the statute which speaks only of the "holder of the policy." We do not

decide this issue of state statutory interpretation at this time, given

that it may never arise on retrial.
-17-

The judgment of the district court is reversed and remanded for a new trial

consistent with this opinion.

A true copy.

Attest:

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