American Mutual Liability Insurance v. Rockwood Insurance

Citations: 271 Ark. 167; 608 S.W.2d 24; 1980 Ark. App. LEXIS 1485Docket: CA 80-193

Court: Court of Appeals of Arkansas; November 19, 1980; Arkansas; State Appellate Court

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Larry Slaughter operates Ark-La Wood Company, with three pulpwood yards in Arkansas. Before 1975, all employees, including workers from a single logging crew and independent contractors, were covered under one workers' compensation insurance policy. Independent contractors, who supplied pulpwood to the yards, operated independently with their own equipment and personnel. Arkansas law holds the prime contractor liable for workers' compensation for subcontractor employees if the subcontractor lacks insurance.

Due to a high number of injuries, Slaughter's insurance premium was elevated. To mitigate costs, Slaughter, following advice from his insurance agent, established separate insurance policies for each yard in 1976. This restructured coverage allowed for lower rates for independent contractors, as they had no prior claims. Four policies were issued: one for Slaughter's wage employees and three separate ones for the independent contractors at each yard, which benefited from a standard premium rate.

After Bituminous Insurance ceased operations in Arkansas, new policies were secured from Rockwood Insurance Company. Following the first policy year, Rockwood renewed coverage for Slaughter and Chester Anderson, but rejected Jerry Owens and Lennox Norris due to high claims. Subsequently, Norris was assigned to American Mutual Liberty Insurance Company, while Owens was re-accepted by Rockwood through a random assignment by the Arkansas Compensation Rating Bureau.

Rockwood was required to accept Owens, while American Mutual insured Norris. A routine audit revealed that Larry Slaughter owned all three yards managed by Anderson, Norris, and Owens, raising a disputed question regarding his control over wood procurement and haulers. Rockwood sought reformation of its insurance policies to include Slaughter, claiming a lack of disclosure about the business relationships among the parties. The reformation aimed to adjust the policies to include Slaughter's experience modifier, with Rockwood asserting it was owed $9,212.05.

American Mutual was included for a declaration of liability for workers' compensation benefits under its policy for Norris, which covered independent haulers to Norris's Junction City woodyard. American Mutual denied liability, citing fraud, and sought to cancel its policy. Following a trial, the chancellor ruled that: (1) each defendant had risk exposures requiring their own insurance policies, (2) American Mutual could not rescind its policy for Norris, (3) Rockwood could not reform its policies to include Slaughter's experience modifier, and (4) Slaughter was awarded $35,711.09 from Rockwood. 

Both American Mutual and Rockwood filed appeals, with Slaughter and others cross-appealing to ensure Rockwood would cover any liability as Slaughter's statutory employer under Arkansas law. American Mutual contested the chancellor's finding that Norris constituted a separate risk, arguing he must be classified as an employer under the Arkansas Workers’ Compensation Act. Evidence indicated that Slaughter’s woodyard operated under a contract with Georgia Pacific, wherein Slaughter managed wood delivery. The managers (Norris, Anderson, and Owens) acted as both employees and contractors, responsible for quotas, safety programs, and workers’ compensation insurance for haulers and their employees.

Section 6 of Ark. Stat. Ann. 81-1306 establishes that if a subcontractor does not obtain workers’ compensation insurance, the prime contractor is liable for the subcontractor's employees' compensation. Norris is identified as the prime contractor for Slaughter and subcontracted the cutting and hauling of wood to haulers, making the haulers' employees eligible for benefits under Section 6. The term "statutory employee" applies here, allowing these employees to claim benefits independent of the typical employer-employee relationship. The court will not overturn factual findings by the chancellor unless they are clearly against the evidence weight. The chancellor found that Lennox Norris represented a separate risk, a decision not deemed erroneous.

American Mutual claims entitlement to rescind the insurance contract with Norris, but the court disagrees, noting that American Mutual was aware of the relationship between Slaughter and Norris as early as May 15, 1978. They accepted premiums with knowledge of this relationship, which constitutes waiver of any right to contest the policy's validity. Despite the knowledge from a report by Mr. C. P. McConnell, American Mutual continued processing claims, undermining its claim for rescission. Consequently, the request for rescission was correctly denied by the chancery court.

The court affirms the case on direct appeal, rendering the cross-appeal of Slaughter, Anderson, Owens, and Norris moot. Rockwood’s attempt to reform five insurance policies to raise premiums was denied, as they failed to provide clear and convincing evidence of a mistake of fact due to fraud or inequitable conduct, aligning with the chancellor's ruling.

Rockwood's only interaction with the appellees was through Lawrence H. Derby, who contacted Emma Armstrong, Rockwood's general agent in Arkansas. If Rockwood experienced any misleading or fraudulent actions, it would be attributed to Derby, who submitted all applications and experience data and was required to personally guarantee the premiums in writing. Armstrong had never met the appellees—Anderson, Owens, or Norris—and admitted she did not inquire about their backgrounds or check their credentials. Her testimony aligned with Derby's, who claimed to have provided Armstrong with complete information regarding the risks involved. The chancellor found that the evidence indicated full disclosure of the relationships among the parties involved, and the record lacked clear evidence of fraud or mistake. Rockwood also acknowledged that the policies issued to Anderson, Owens, and Norris did not include any provisions for an experience modifier and confirmed that the premiums were fixed at the time of issuance. Therefore, the chancellor's conclusion that Rockwood is entitled only to the agreed premiums was upheld. The decision was affirmed on both direct and cross-appeals, with Judge Penix not participating and Special Judge Warren Wood involved in the ruling.