People buy insurance for their homes, their personal property, and their businesses, often assuming that they are “fully covered” in the event of a loss. But coverage under an insurance policy is defined, often narrowly, and an uncovered loss can be an expensive surprise for a policyholder. Even more surprising, Arkansas law places the burden on a policyholder to read and understand his or her own coverage, and except in rare instances, an insurance agent has no duty to educate the policyholder on the extent of coverage.
With those considerations in mind, what follows is an overview of the framework that Arkansas courts have followed when deciding whether a particular loss arising under an insurance policy is covered, as well as a discussion of how policy disputes can be resolved with the help of an Arkansas insurance coverage attorney. It is intended to be a primer on how a court reads a policy, the step-by-step analysis it uses to find coverage, who decides the question and when, the difference between the two central promises an insurer makes, and what the law provides when a claim is wrongly denied.
How do Arkansas courts read an insurance policy?
An insurance policy is a contract, and Arkansas courts start where they start with any contract: with the words. If the language is unambiguous, the court gives it its plain, ordinary, and popular meaning and enforces it as written, without resort to the rules of construction. A clear policy is not rewritten to reach a fairer result.
The tilt toward the insured appears only when the language is genuinely ambiguous, meaning it is fairly susceptible to more than one reasonable interpretation. Then two settled rules take over. First, the ambiguity is construed liberally in favor of the insured and strictly against the insurer that drafted the policy; if a reasonable construction of the ambiguous clause would justify recovery, the court has a duty to adopt it. Second, exclusions from coverage are read in the insured’s favor, and the intent to exclude must be expressed in clear and unambiguous language. Where the policy defines a term, however, the court is bound by that definition, so a carefully drafted definition can control even a strained-sounding result. The practical lesson is that ambiguity is to the policyholder’s advantage in a coverage dispute, and precise drafting is the insurer’s.
What is the framework for deciding whether a claim is covered?
Arkansas courts use a three-step analysis, taken in order. First, the court examines the facts of the claim against the policy’s insuring agreement to see whether there is an initial grant of coverage. If the policy plainly was not meant to cover the claim, the analysis ends there. Second, if the claim does trigger the insuring agreement, the court turns to the exclusions to see whether any of them takes the coverage away. Third, because exclusions sometimes have exceptions, the court asks whether an exception reinstates the coverage the exclusion removed.
Most of the dispute lives in step one and step two. A common step-one battleground is the word occurrence, which liability policies typically require and often define as an accident. Where the policy leaves accident undefined, Arkansas courts supply the ordinary meaning: an event that takes place without the insured’s foresight or expectation, proceeding from an unknown cause or producing an unusual and unexpected effect of a known one. That definition is why the line between negligent and intended conduct so often decides whether a liability claim is covered at all.
Who decides coverage, and when is it a question of law?
Often the judge decides, not a jury. When a coverage dispute can be resolved by looking solely to the language of the policy, without weighing disputed evidence from outside the contract, Arkansas treats the question as one of law. The trial court acts as a gatekeeper: it determines first whether the dispute can be settled on the contract alone, and if it can, it decides the meaning as a matter of law. That is why coverage disputes are frequently resolved on summary judgment and are so often brought as declaratory-judgment actions, in which a court is asked to declare the parties’ rights under the policy before the underlying case runs its course.
For a policyholder or an attorney, the practical significance is timing. A coverage question that turns on policy language can be decided early and relatively inexpensively, rather than after a full trial on the merits of the underlying claim.
What is the difference between the duty to defend and the duty to indemnify?
An insurer on a liability policy typically makes two different promises, and they are not the same. The duty to indemnify is the promise to pay a covered judgment or settlement. The duty to defend is the promise to provide and pay for a lawyer to defend the insured against the suit. Arkansas courts have long held that the duty to defend is the broader of the two.
The reason is the standard that triggers it. The duty to defend is measured by the allegations of the complaint against the insured, and it arises whenever there is a possibility that the injury or damage alleged may fall within the policy’s coverage. Only where there is no possibility that the alleged damage falls within coverage is there no duty to defend. An insurer may therefore owe a defense even in a case it will ultimately not have to pay, because the pleaded allegations raised the possibility of coverage even if the proof later negates it.
One feature of modern liability policies makes this distinction more than academic. Some policies are written so that the cost of defense erodes the limits of coverage, meaning every dollar spent on defense lawyers is a dollar less available to pay a judgment. When that is so, the question of which coverage part owes the defense, and at what limit, can matter as much to the insured as the ultimate question of indemnity. It is worth identifying early whether a policy’s limits are eroding and which coverage responds.
What happens when an insurer wrongly denies a claim?
Arkansas gives a policyholder two overlapping remedies, and they can be pursued together. The first is statutory. Under Ark. Code Ann. § 23-79-208, when an insurer fails to pay a claim for which it is liable after demand, it is liable not only for the amount of the loss but also for a penalty of twelve percent of the loss plus reasonable attorney’s fees for collecting it. As Professor Brill explains, the statute rests on a strict-liability theory rather than on fault, but because it is highly penal it is strictly construed. Two limits matter in practice: the penalty and fees are available only where the insured recovers an amount within twenty percent of what was demanded or sought, and the insurer is allowed a reasonable time to investigate before the penalty attaches. Within its scope, the statute is the primary route to attorney’s fees in a suit to recover an insured loss.
The second remedy is the common-law tort of bad faith, and it is deliberately hard to establish. A first-party bad-faith claim requires affirmative misconduct by the insurer that is dishonest, oppressive, or malicious, carried out without a good-faith defense. A mere denial of a claim where a legitimate coverage controversy exists is not bad faith. Neither is negligence, nor confusion, nor slow and frustrating claim handling. Because the misconduct that satisfies the standard is by its nature egregious, a bad-faith claim, where it is proven, can support punitive damages in addition to compensatory damages. And the two remedies are cumulative: an insured may recover statutory damages on the contract claim and, where the evidence supports it, compensatory and punitive damages on the tort claim.
Where the principles meet the facts
These principles are settled, but a coverage question is only ever answered by reading a particular policy against particular facts. The insuring agreement, the exclusions, the definitions, and the way defense costs interact with the policy limits vary from one policy to the next, and small differences in wording can change outcomes. The most useful step, whether a claim has been denied or a dispute is only looming, is an early read of the actual policy language against the allegations and, if necessary, to seek a declaration of the parties’ rights. On questions that turn on policy language, the advice of a qualified attorney is always advisable.
The articles on this site are published by Dobson & Vines, PLLC for general informational purposes only, carry no guarantees of accuracy, and are not legal advice. Reading them, or contacting the firm, does not create an attorney-client relationship. The law changes over time and turns on the specific facts of each matter; do not act on anything here without advice from a qualified attorney.