Bethany L. Barrese | Saxe Doernberger & Vita
The recent Nevada Supreme Court ruling in Zurich American Insurance Company v. Ironshore Specialty Insurance Company benefits insureds seeking to establish an insurer’s duty to defend. As a matter of first impression, the court clarified that insureds have the burden to prove that an exception to a policy exclusion applies in order to trigger the insured’s duty to defend. However, while the policyholder may use extrinsic evidence to establish the insurer’s duty to defend, the insurer may not use extrinsic evidence to deny that duty.
The facts of the underlying claim are set in the 2000s when the insured subcontractors worked to build thousands of homes in Nevada. The subcontractors were insured by Zurich American Insurance Company (“Zurich”) during that period. After the homes were complete, the subcontractors switched from Zurich to Ironshore Specialty Insurance Company (“Ironshore”). Between 2010 and 2013, homeowners brought claims against the subcontractors alleging that the properties were damaged due to construction defects. The subcontractors tendered the claims to Zurich as the insurer at the time of construction. Zurich then sought defense and indemnification from Ironshore. Ironshore denied coverage under a “continuing and progressive” policy exclusion, claiming that the property damage occurred due to faulty work that predated the Ironshore policy. Notably, an exception to the exclusion applied if “sudden and accidental” property damage occurred within the Ironshore policy period. Given that the underlying lawsuits did not include specific allegations describing when or how the property damage occurred, Ironshore and Zurich disagreed on whether the exception to the exclusion was triggered.
Zurich sued Ironshore in a series of cases, and the courts issued conflicting decisions as to whether Ironshore had the burden of proving that the exception to the exclusion applied. One federal court granted summary judgment in favor of Ironshore, implicitly concluding that the insured had the burden of proving that the exception to the exclusion applied.The second federal court concluded that Ironshore had a duty to defend because Ironshore, as the insurer, failed to prove that the exception to the exclusion did not apply. With conflicting outcomes, Ironshore and Zurich each appealed. The Ninth Circuit certified the following questions to the Nevada Supreme Court:
- Whether, under Nevada law, the burden of proving the applicability of an exception to an exclusion in an insurance policy falls on the insurer or the insured?
- Whichever party bears such a burden, may it rely on evidence extrinsic to carry its burden, and if so, is it limited to extrinsic evidence available at the time the insured tendered the defense of the lawsuit to the insurer?
In response to the first question, the Nevada Supreme Court followed the majority approach adopted by most states, holding that the insured has the burden to prove that an exception to an exclusion applies. Under Nevada law, the insured already carries the burden of establishing the possibility of coverage in general. The burden of proof shifts to an insurer who wishes to preclude that coverage under an exclusion. The court reasoned that an exception to the exclusion would revive coverage where there would otherwise be none; therefore, the burden shifts back to the insured to re-establish coverage under an exception to an exclusion.
In response to the second question, the Nevada Supreme Court reasoned that the duty to defend must be determined at the outset of litigation based upon the allegations in the complaint and any other facts available to the insurer; therefore, the insured may use extrinsic facts to prove the potential for coverage and establish the insurer’s duty to defend. The Court’s decision to allow extrinsic evidence to establish coverage but not to negate coverage is a welcome outcome for policyholders. The duty to defend is usually determined by the allegations in a complaint, regardless of their truthfulness or accuracy. It is advantageous for policyholders to be permitted to provide evidence outside the complaint to support a finding that a duty to defend is owed, especially where the allegations in the complaint are insufficient to trigger coverage on their own. Furthermore, while some jurisdictions permit an insurer to introduce extrinsic evidence to negate the duty to defend, the Nevada Supreme Court was careful to clarify that extrinsic evidence can only be used to establish a duty to defend, not deny it.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.