Supreme Court of Arkansas Holds Direct Action Statute Inapplicable to Charitable Hospital System's Pooled Risk Program
In Sowders v. St. Joseph's Mercy Health Center, ___ Ark. ___, ___ S.W.3d ___, 2007 Wl 114267 (Jan. 18, 2007), the Arkansas Supreme Court held that Arkansas' direct action statute, Ark. Code Ann. 23-79-210, did not apply to a pooled risk program for a group of charitable hospitals. In so holding, the court applied its previously-formulated three-factor test to conclude that the program was not "insurance" within the meaning of the statute because (1) the pooled risk program was not mandatory, (2) there was no evidence offered that a profit motive existed with regard to the program and (3) there was no evidence that the program was actuarially sound. As further justification for its decision, the court held that the program did not meet the definition of an "insurer" under the Arkansas Insurance Code because it was "not in the business of entering into contracts of insurance."
The facts of the case were that Sowders was injured after undergoing an outpatient procedure at St. Joseph's hospital, which is a charitable hospital. Precluded by the doctrine of charitable immunity from suing or obtaining a judgment against St. Joseph's, Sowders sued Sisters of Mercy, the administrator of the pooled risk program, under the direct action statute, Ark. Code Ann. 23-79-210.The pooled risk program in question was styled a "Comprehensive Liability Program." Its stated purpose was "to provide the corporations controlled by the Sisters of Mercy Health System...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...." Each participating hospital was required to make periodic payments, termed "assessments", to the fund, the "assessment" being based upon that particular hospital's past history of claims and its future risk projections. Only hospitals which were members of the Saint Louis Province of the Sisters of Mercy system were allowed to participate in the program.
In concluding that the direct action statute was not available to Sowders to maintain an action against the program, the court looked to its prior case law applying a three-factor test as to what constitutes "insurance" within the meaning of the statute: (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. The court looked to the evidence and concluded that the plan was not mandatory, and that there was no evidence from which it could conclude that it was either offered with a profit motive or was actuarially sound. The court further looked to the definition of "insurer" in the Arkansas Insurance Code and held that the program did not meet the definition because it was not "in the business of entering into contracts of insurance."
As additional support for its opinion, the court cited a case from the United States Court of Appeals for the Eighth Circuit which held that the Sisters of Mercy program was not "other insurance" within the meaning of a liability insurance policy. In St. John's Reg'l Health Ctr. v. Am. Cas. Co., 980 F.2d 1222 (8th Cir. 1993), the court had held that the program was more akin to self-insurance because instead of spreading risk across the pool, which is typically understood to be insurance, the program was designed to have each participating hospital eventually cover the liabilities it generates.
In reaching its decision, the court also upheld the constitutionality of the charitable immunity doctrine, rejecting Sowders' argument that the doctrine would leave her without a remedy for her injuries if the direct action statute was determined not to apply. In rejecting this argument, the court noted that the charitable immunity doctrine does not shield employees of the charity from suit, so Sowders could have sued the employees who caused her injuries. The court further noted that the terms of the Sisters of Mercy program would have provided indemnification to those employees had they been sued. Finally, the court refused to entertain Sowders' argument that the charitable immunity doctrine should be judicially abandoned as violative of public policy, concluding that the argument had not been raised below. Nevertheless, the court reiterated its request for the legislature to take up the issue of whether the doctrine should be abolished.
Justice Brown, in dissenting from the majority opinion, argued that the court had failed to liberally construe the direct action statute, as was required by the court's precedent. Justice Brown also argued against the majority's conclusion that suing the individual employees was an adequate remedy, because doing so would not have allowed Sowders to obtain a remedy for any "institutional negligence" which was not the result of the employees' conduct but instead of the hospital.
