Opinion ID: 1876719
Heading Depth: 1
Heading Rank: 4

Heading: Whether the Liability Pool Constitutes Insurance for Purposes of the Direct-Action Statute

Text: Sowders argues that the circuit court erred in ruling that the liability pool administered by Sisters of Mercy did not constitute insurance for purposes of the direct-action statute. St. Joseph's is a member of the Sisters of Mercy Health System, St. Louis Pooled Comprehensive Liability Program (Program). The purpose of the Program is to provide the corporations controlled by the Sisters of Mercy Health System, St. Louis, Inc., and certain other entities and individuals . . . a mechanism to evaluate and defend claims of liability and to centralize the handling of such claims and accumulate funds for the payment of those potential losses. . . . The Eighth Circuit Court of Appeals has explained the Program, as it applied to another member, St. John's Regional Health Center in Missouri, [1] as follows: The Saint Louis Province of the Sisters of Mercy, through the Sisters of Mercy, Inc., manages, operates, and controls a multi-state network of nonprofit hospitals. St. John's is one of those hospitals. The Sisters of Mercy, Province of St. Louis, Self-Insurance Trust is a fund from which tort liabilities incurred by its hospitals (business units) are to be paid. Sisters of Mercy, Inc., maintains this fund by pooling assessments from each business unit, based on that hospital's past history of claims and on future risk projections. The funding of the pool is reassessed periodically on the basis of the amount each hospital has paid into the fund, and the amount each has needed to withdraw. The fund covers only hospitals controlled by the Saint Louis Province of the Sisters of Mercy or one of its business units. If a hospital leaves the fold of the Saint Louis Province of the Sisters of Mercy, it may no longer participate in the fund and the fund will no longer protect it. St. John's Reg'l Health Ctr. v. Am. Cas. Co., 980 F.2d 1222, 1225 (8th Cir.1993) (internal citations omitted). The Program further provides that it does not furnish the Participants or Indemnitees with a contract of insurance. Despite this language, Sowders contends that the Program is insurance and that Sisters of Mercy is a liability insurer for the purposes of Arkansas's direct-action statute. Thus, she claims that she has a right to sue Sisters of Mercy under the direct-action statute. Pursuant to the direct-action statute, when liability insurance is carried by an organization not subject to suit for tort, individuals claiming damage as a result of the negligent acts of the organization or its employees shall have a direct cause of action against the insurer with which liability insurance is carried. . . . Ark.Code Ann. § 23-79-210(a)(1) (Repl.2004). The statute does not require the organization not subject to suit for tort to carry liability insurance; rather, it provides for a direct action against the insurer by the injured or damaged person in the event liability insurance is so carried. Ark.Code Ann. § 23-79-210(c)(1) (Repl.2004). As used in the Arkansas Insurance Code, unless the context otherwise requires: (1)(A)(i) Insurance is any agreement, contract, or other transaction whereby one party, the insurer, is obligated to confer benefit of pecuniary value upon another party, the insured or beneficiary, dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such an event. (2) Insurer includes every person engaged as an indemnitor, surety, or contractor in the business of entering into contracts of insurance; Ark.Code Ann. § 23-60-102 (Repl.2001). We have not previously addressed the issue of whether an organization such as Sisters of Mercy, as administrator of the Program, is an insurer, and thus, subject to suit, for the purposes of the direct-action statute. However, in deciding whether a particular agreement fits the definition, we have focused on the following three factors: (1) whether the plan is mandatory; (2) whether a profit motive exists in offering the plan; and (3) whether the plan is intended to be actuarially sound. Cherry v. Tanda, 327 Ark. 600, 940 S.W.2d 457 (1997); Douglass v. Dynamic Enter. Inc., 315 Ark. 575, 869 S.W.2d 14 (1994); Waire v. Joseph, 308 Ark. 528, 825 S.W.2d 594 (1992). In Cherry, supra , the City of Fort Smith entered into a contract with Tanda, Inc., for the construction of a sanitary landfill. As part of the agreement, Tanda agreed to indemnify the city for all claims and damages arising out of the performance of the contract. During the construction, the walls of the excavation site collapsed, causing the death of a Tanda employee, David Cherry. Howard Cherry, as administrator of the estate of David Cherry, filed a wrongful-death action against Tanda pursuant to the direct-action statute, alleging that Tanda was an insurer of the City. Tanda filed a motion to dismiss, and the trial court granted the motion. On appeal, Cherry argued that Tanda, pursuant to the indemnification agreement, was the City's insurer such that he could maintain a direct action against Tanda. We disagreed, stating: The basic flaw in Cherry's argument is that the Arkansas Insurance Code specifically defines an insurer as every person engaged as indemnitor, surety, or contractor in the business of entering into contracts of insurance.  Ark.Code Ann. § 23-601-101 (Repl.1994) (emphasis added). Tanda is in the business of construction, not insurance, and the indemnification agreement was a mere incidental obligation of its contractual relationship with the City as a contractor. In other words, Tanda is not in the business of entering into contracts of insurance as required by the statute, and thus, Cherry cannot maintain a direct action under Ark.Code Ann. § 23-79-210 against Tanda as insurer of an immune entity. Cherry, 327 Ark. at 611, 940 S.W.2d at 461-62. Additionally, we noted: In this case, Tanda was not receiving money in exchange for its promise to indemnify nor was the plan actuarially sound. In fact, the indemnity plan was a liability, not an asset to Tanda. Finally, in the construction contract, the City agrees to obtain its own liability and property insurance. Hence, it is clear that the parties never intended Tanda to be the insurer of the City. Under these circumstances, we decline to construe the indemnity agreement as an insurance contract, and thus Cherry is not entitled to maintain a direct action as an insurer of the City. Id. at 612, 940 S.W.2d at 462. In Waire, supra , a case involving governmental immunity, Waire filed suit against the Searcy School District, two of its employees, and the Arkansas School Boards Insurance Cooperative (ASBIC) after her son was injured during track practice. Waire alleged that an agreement between the school and the ASBIC was a policy of insurance, thereby allowing her to bring a direct action against ASBIC. The trial court disagreed, and this court affirmed. In affirming, we emphasized that the agreement expressly stated that it was not an insurance policy. We noted that the agreement provided that the participants intend only to jointly retain losses associated with specified risks and perils and do not intend to conduct the business of insurance. Waire, 308 Ark. at 531, 825 S.W.2d at 596. In addition, we rejected Waire's argument that ASBIC was an insurer, noting that the school district was not required to enter into a contract with ASBIC, that ASBIC was not operated for profit, and that ASBIC was not actuarially sound. The appellees contend that, under Cherry , Sisters of Mercy is not an insurer, and the Program is not insurance. They contend that Sisters of Mercy is not in the business of entering into contracts of insurance, is not subject to any of the insurance laws and regulations of the State of Arkansas, and does not profit from the Program. They further contend that, as noted in the Program document itself, the parties never intended for the Program to be insurance. Sowders does not dispute this argument; in fact, she fails to address the three-factor test in her brief. Rather, she attempts to distinguish the Waire case from the instant case, stating that the agreements in Waire (1) contained no absolute promise to indemnify, (2) did not purport to provide general tort liability, and (3) provided protection for parties that had governmental immunity. We find Sowders's argument unconvincing. Even though there are distinctions between the terms of the agreements in Waire and the instant case, the Waire case is of no help to Sowders because in Waire , just as in Cherry , to determine whether the agreements fit the definition of insurance, we followed the three-factor test. Here, the Program is not mandatory, and Sowders offers no evidence that a profit motive exists in the Program or that the Program is actuarially sound. In short, under the three-factor test, the Program does not meet the statutory definition of insurance. Moreover, because Sisters of Mercy is not in the business of entering into contracts of insurance, it does not meet the statutory definition of an insurer under the Arkansas Insurance Code. We also find persuasive the Eighth Circuit Court of Appeals' construction of the Program in the St. John's case. In that case, a nurse and St. John's Regional Health Center were sued for malpractice. St. John's, 980 F.2d at 1223. St. John's defended the action, but American Casualty, the nurse's insurer, refused to defend based on a clause in its policy declaring that it bore no obligation to defend the nurse if the nurse had other insurance. Id. In St. John's suit against American Casualty for indemnification, the issue was whether, under Missouri law, the Program administered by Sisters of Mercy constituted other insurance within the meaning of the American Casualty policy. Id. The Eighth Circuit concluded that the Program was not within the plain meaning of the term insurance. Id. at 1226. Rather, it found the Program to be self-insurance and noted that [s]elf-insurance is the retention of the risk of loss by the one upon whom it is . . . imposed by law or contract. Id. at 1225 (quoting Physicians Ins. Co. v. Grandview Hosp. & Med. Ctr., 44 Ohio App.3d 157, 158, 542 N.E.2d 706, 707 (1988)). The court also pointed out that the Program was structured to have each business unit eventually cover the liabilities it generates. 980 F.2d at 1225 n. 5. Instead of risk-spreading across the pool, which is generally understood to be insurance, the Program spreads risk over time. Id. Again, the Program at issue in the St. John's case is also at issue in the instant case and, while St. John's was analyzed under Missouri law, we agree with the federal court's conclusion that the Program is not within the plain meaning of the term insurance. Id. at 1224. Rather, it is a form of self-insurance and structured to have each member of the Program eventually cover its own liabilities. See id. at 1225 n. 5. We hold that the Program does not constitute insurance for the purposes of the direct-action statute. [2] The circuit court did not err in granting summary judgment in favor of Sisters of Mercy.