                     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.

                              _______________




     *
     The HONORABLE LEVIN H. CAMPBELL, Senior United States Circuit
Judge for the First Circuit, sitting by designation.
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.1      Henry, not being a pilot,




     1
     Arkansas Air had made similar loans of aircrafts in the past.
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.

                                        -2-
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




                                          -3-
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




                                      -4-
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.2   American Eagle argues that a new trial is warranted
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.




       2
        Although the jury instructions explained the nature and
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.

                                    -5-
     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




                                     -6-
guided by our earlier decision in Reliance, 112 F.2d at 237-38.3    There,
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




       3
       The Third Circuit has held that in a federal declaratory
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-
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 404.4   We see


     4
      Professor Moore has been cited for the proposition that the
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

                                     -8-
no reason to deviate from Arkansas burden




determined.    This dispute concerns        only   American   Eagle   and
Thompson, the party seeking coverage.

                                  -9-
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.




                                   -10-
           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.5              Federal law


     5
      Hearsay, as defined in Fed. R. Evid. 801(c), is any out-of-
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

                                      -11-
governs the determination of whether




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.

                                 -12-
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




                                    -13-
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




                                     -14-
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.7         In view of the fact that
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




      6
      The district court gave the jurors an appropriate limiting
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.
          7
          American Eagle argues that the statements of both
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-
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).8        The
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.




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

           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).

                                   -16-
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.




                                   -17-
