Case Title: Zurich American Insurance Co. v. Ironshore Specialty Insurance Co.

Citation: 137 Nev. Adv. Op. No. 66

Docket Number: 81428

State: nevada

Court: Nevada Supreme Court

Date: 2021-10-28T00:00:00Z

Document:
on ae

187 Nev., Advance Opinion bls
IN THE SUPREME COURT OF THE STATE OF NEVADA

ZURICH AMERICAN INSURANCE No. 81428
COMPANY; AND AMERICAN

GUARANTEE AND LIABILITY

INSURANCE COMPANY, : FILED
Appellants,

vs. oct 28 2021
IRONSHORE SPECIALTY INSURANCE

COMPANY,

Respondent. »,

co eslbaeede?

 

Certified questions under NRAP 5 concerning the allocation of
burdens of proof for the applicability of an exception to an exclusion in an
insurance policy. United States Court of Appeals for the Ninth Circuit;
Marsha S. Berzon and Sandra S. Ikuta, Circuit Judges, and Ivan L.R,
Lemelle, District Judge.

Questions answered.

‘Morales Fierro & Reeves and William C. Reeves, Las Vegas,
for Appellants.
Morison & Prough, LLP, and William Campbell Morison, Walnut Creek,

California,
for Respondent.

BEFORE THE SUPREME COURT, EN BANC.

-31027

 
om oe

OPINION

By the Court, HERNDON, J.:

Two federal district courts issued conflicting decisions
regarding whether, in Nevada, the insured or the insurer has the burden of
proving that an exception to an exclusion of coverage provision applies.
Those cases were appealed to the Ninth Circuit Court of Appeals, and that
court certified the following questions to this court:

Whether, under Nevada law, the burden of proving

the applicability of an exception to an exclusion of

coverage in an insurance policy falls on the insurer

or the insured? Whichever party bears such a

burden, may it rely on evidence extrinsic to the

complaint 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?

We conclude that the burden of proving the applicability of an
exception to an exclusion for coverage in an insurance policy falls on the
insured. We further conclude that the insured may rely on any extrinsic
evidence that was available to the insurer at the time the insured tendered
the defense to the insurer.

FACTS AND PROCEDURAL BACKGROUND

‘Throughout the 2000s, thousands of homes in Nevada were
built by subcontractors under the direction of several development
companies.! During that period, these subcontractors were insured by
appellants Zurich American Insurance Company and American Guarantee

"These facts are drawn from the Ninth Circuit's order certifying these
questions to this court. See Zurich Am. Ins. Co. v. Ironshore Specialty Ins.
Co., No. 18-16937 (Order Certifying Question to the Nevada Supreme
Court, July 2, 2020).

 

 
and Liability Insurance Company (collectively, Zurich). After the work on
the homes was completed, the subcontractors switched insurers, obtaining
insurance from respondent Ironshore Specialty Insurance Company
(ronshore). Ironshore’s policy insured the subcontractors against damages
attributed to bodily injury or property damage that occurred during the new
policy period. ‘The policy provides that if the insured becomes legally
obligated to pay damages because of bodily injury or property damage that
qualifies under the policy, Ironshore will pay those sums. It further
provides that Ironshore will have the right and duty to defend the insured
if the suit seeks damages to which the policy applies. ‘The policy applies
only if the bodily injury or property damage is caused by an occurrence
within the coverage territory and applicable policy period.

The Ironshore policy contains a “Continuous or Progressive
Injury or Damage Exclusion” that modifies the insurance coverage provided
under the policy. The exclusion provides that the policy does not apply to
any existing bodily injury or property damage, except for “sudden and
accidental” property damage:

This insurance does not apply to any “bodily injury”
or “property damage” . . . which first existed, or is
alleged to have first existed, prior to the inception
of this policy. “Property damage” from “your
work|,". .. or the work of any additional insured,
performed prior to policy inception will be deemed
to have first existed prior to the policy inception,
unless such “property damage” is sudden and
accidental and takes place within the policy period.
Between 2010 and 2013, homeowners who had purchased

homes within these development projects brought 14 construction defect

 

lawsuits against the developers in Nevada state court, alleging the

one

 

 
properties were damaged from construction defects. The developers then
sued the subcontractors as third-party defendants. The underlying
lawsuits made no specific allegations describing when or how the property
damage occurred. The subcontractors tendered defense to Zurich, who
agreed to defend them. Zurich sent tender letters to Ironshore requesting
indemnification and defense. Ironshore investigated the claims and
disclaimed coverage pursuant to the exclusion provision in its insurance
policy, claiming that the property damage had occurred due to faulty work
that predated the commencement of the policy. Zurich settled claims
against the subcontractors and then, in Nevada Zurich I, sued Ironshore in
federal court seeking contribution and indemnification for the defense and
settlement costs, as well as a declaration that Ironshore had owed a duty to
defend the subcontractors against the underlying lawsuits. Assurance Co.
of Am. v. Ironshore Specialty Ins. Co. (Nevada Zurich D, No. 2:15-cv-00460-
JAD-PAL, 2017 WL 3666298, at *1 (D. Nev. Aug. 24, 2017). Ironshore
moved for summary judgment, arguing that it had no duty to defend
because there was no potential for coverage under the terms of the policy.
Id.

‘The federal district court granted summary judgment in favor
of Ironshore.* Id. The court rejected the argument that the “sudden and

"Homeowners also sued a different subcontractor, RAMM Corp, in a
fifteenth lawsuit. Zurich expressly waived any argument with regard to the
district court's ruling in that suit, so it is not relevant to this case.

 

Because the district court granted summary judgment in favor of
Ironshore and held that it did not owe a duty to defend, the district court
did not address the narrower duty to indemnify. Thus, the appeal that
precipitated the certified questions posed to this court does not directly
implicate the duty to indemnify.

 

 
co ie

accidental” exception to the exclusion of the coverage applied, reasoning
that none of the complaints in the underlying lawsuits alleged that the
damage occurred suddenly, and that without any evidence to support such
an allegation, Zurich failed to carry its burden. Id. at *3. In issuing this
holding, the court implicitly concluded that the insured has the burden of
establishing that an exception to an exclusion applies. Id. The court also
assumed that Zurich could have introduced extrinsic evidence to satisfy its
burden, but it did not directly address the question. Id.

Around the same time, another federal district court, in
Assurance Co. of America v. Ironshore Specialty Insurance Co. (Nevada
Zurich I), No. 2:13-cv-2191-GMN-CWH, 2015 WL 4579983 (D. Nev.
July 29, 2015), reached a different conclusion in a substantially identical
case. The judge in that case concluded that Ironshore owed a duty to
defend because the underlying complaints “did not specify when the alleged
property damage occurred and did not contain sufficient allegations from
which to conclude that the damage was not sudden and accidental.” Id. at

‘This court has treated an insurance company seeking
indemnification from another potentially liable insurance company in the
same manner as the insured. See United Nat't Ins. Co. v. Frontier Ins. Co.,
120 Nev. 678, 681-83, 99 P.3d 1153, 1155-56 (2004) (treating the insured
and the participating insurer identically).

5A motion for reconsideration of this decision was denied, and the
Ninth Circuit deferred submission on it. Nevada Zurich II, No. 2:13-cv-
2191-GMN-CWH, 2016 WL 1169449 (D. Nev. Mar. 22, 2016), submission
deferred sub nom. Zurich Am. Ins. Co. v. Ironshore Specialty Ins. Co., No.
18-16857 (9th Cir. April 14, 2020). Of note, although the district court case
that was ultimately appealed to the Ninth Circuit in the instant case,
Nevada Zurich I, was filed later than Nevada Zurich II, the final judgment
in Nevada Zurich I was ultimately entered first. Thus, the Ninth Circuit
has assigned numerals accordingly. We use the same titles for the purpose
of clarity.

 

 
one

*5, The Nevada Zurich IT court concluded that Ironshore failed to satisfy
its burden of proving that the exception to the exclusion did not apply,
implicitly concluding that the insurer had the burden of proving the
nonapplicability of the exception to the exclusion. Id. at *10. The Nevada
Zurich I court also assumed that extrinsic evidence was admissible but did
not address the issue directly.

In light of the outcome in Nevada Zurich II, Zurich in Nevada
Zurich I filed a Federal Rule of Civil Procedure 60(b) motion seeking relief
from the judgment in the original case. The motion was denied, and Zurich
timely appealed. The Ninth Circuit certified these questions to this court
and stayed Zurich's appeal pending this court's resolution of the certified
questions. ‘The Ninth Circuit also stayed Ironshore’s appeal of Nevada
Zurich Il in a concurrently filed order. Zurich Am. Ins. Co. v. Ironshore
‘Specialty Ins. Co., No. 18-16857 (Order, 9th Cir. July 2, 2020). We accepted
the certified questions because we agree that they present issues of first,
impression in this state.

DISCUSSION

Standard of review

‘We only accept certification of “questions of law.” NRAP 5. We
decide those questions of law de novo, see, e,g., Nev. Dep't of Corr. v. York
Claims Servs., Inc., 131 Nev. 199, 203, 348 P.3d 1010, 1013 (2015), in
accordance with the purpose of a certified question, which is to clarify our
state’s law when “there is no controlling precedent,” see NRAP 5(a). “[T]his
court's review is limited to the facts provided by the certifying court, and we
must answer the questions of law posed to us based on those facts.” In re
Fontainebleau Las Vegas Holdings, 127 Nev. 941, 953, 267 P.3d 786, 793
(2011).

 

 
The insured has the burden to prove the duty to defend

“In Nevada, insurance policies [are] treated like other contracts,
and thus, legal principles applicable to contracts generally are applicable to
insurance policies.” Century Sur. Co. v. Andrew, 134 Nev. 819, 821, 432
P.3d 180, 183 (2018). When reading a provision of an insurance policy, the
court's interpretation “must include reference to the entire policy{, which
will] be read as a whole in order to give reasonable and harmonious meaning
to the entire policy.” Siggethow v. Phoenix Ins. Co., 109 Nev. 42, 44, 846
P.2d 303, 304 (1993). Under an insurance policy, the insurer owes two
contractual duties to the insured: the duty to defend and the duty to
indemnify. Andrew, 134 Nev. at 822, 432 P.3d at 183. Only the duty to
defend is at issue in this case. See supra note 3.

‘The insurer “bears a duty to defend its insured whenever it
ascertains facts which give rise to the potential of liability under the policy.”
United Nat'l Ins. Co. v. Frontier Ins. Co., 120 Nev. 678, 687, 99 P.3d 1153,
1158 (2004) (quoting Gray v. Zurich Ins. Co., 419 P.2d 168, 177 (Cal. 1966).
Conversely, “[t]here is no duty to defend where there is no potential for
coverage.” United Nat'l, 120 Nev. at 686, 99 P.3d at 1158 (internal
quotations omitted). “If there is any doubt about whether the duty to defend
arises, this doubt must be resolved in favor of the insured.” Id. at 687, 99
P.3d at 1158. “However, the duty to defend is not absolute. A potential for
coverage only exists when there is arguable or possible coverage.” Id.
(internal citations and quotations omitted). This court has yet to speak
directly to the issue of whether the insurer or the insured has the burden of
proving that the exception to an exclusion of coverage applies when
determining the duty to defend.

 

 
sie a

Current trends place the burden of proof on the insured
“Courts in many jurisdictions have concluded that the insured

bears the burden of proving the sudden and accidental exception” to an
exclusion of coverage. Barry R. Ostrager & Thomas R. Newman, Handbook
on Insurance Coverage Disputes § 23.02(d] (20th ed. 2020); see also Plitt,
Maldonado, Rogers, & Plitt, Couch on Insurance § 254:13 (3d ed. 2021) (“The
to place the burden on insureds to prove that an

 

trend clearly appears .
exception to an exclusion applies to restore coverage.”) (collecting cases).
We refer to this approach as the majority rule. The minority rule, which
places the burden on the insurer, has been outright rejected by state courts
that have ruled subsequent to certain federal decisions predicting the state
would adopt the minority rule; these states held that the federal decisions
were incorrect in their predictions that they would adopt the minority
approach and adopted the majority approach instead.

Many courts that adopted the majority approach have reasoned
that because the insured generally bears the initial burden of establishing
‘a possibility of coverage, and the exception grants coverage where there
otherwise would be none, the insured therefore bears the burden. For

 

example, the Court of Appeals of Oregon stated that insurance policy
provisions can generally be sorted into two categories, “provisions that

"See, e.g., New Castle County v. Hartford Accident & Indem. Co., 933
F.2d 1162, 1182 (3d Cir. 1991) (predicting that the Delaware high court
would impose burden on insurer), and E.J. du Pont de Nemours & Co. v.
Allstate Ins. Co., 693 A.2d 1059, 1061 (Del. 1997) (adopting the majority
rule); see also New York v. Blank, 27 F.3d 783, 788-89 (2d Cir. 1994)
(predicting that the New York high court would impose burden on insurer),
and Ment Bros. Iron Works Co. v. Interstate Fire & Cas. Co., 702 F.3d 118,
122 (2d Cir. 2012) (recognizing abrogation of Blank by Northville Indus. Co.
v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 679 N.E.2d 1044, 1048 (N.Y.
1997) (adopting approach that burden is on insured to establish exception
to exclusion applies)).

 

 
grant coverage and provisions that limit or exclude coverage. The exception
at issue, which provides coverage that otherwise would not exist

 

logically falls in the ‘coverage’ category—a category in which, under the
common law, an insured has the burden of proof.” Employers Ins. of
Wausau, a Mut. Co. v. Tektronix, Inc., 156 P.3d 105, 120 (Or. Ct. App. 2007),
pet. for review denied, 169 P.3d 1268 (Or. 2007). See also E.I. du Pont de
Nemours v. Admiral Ins. Co., 711 A.2d 45, 53 (Del. 1995) (noting that the
usual justification for putting the “burden on the insureds is the exception
to the exclusion creates coverage where it would not otherwise exist.
Because the burden is on the insureds to prove the claim falls within the
scope of coverage, the insureds must prove coverage is revived through
applying the exclusion’s exception”); Northville Indus. Co. v. Nat'l Union
Fire Ins. Co. of Pittsburgh, Pa., 679 N.E.2d 1044, 1049 (N.Y. 1997)
Ctsthit
general duty to establish coverage where it would otherwise not exist”).

In Aydin Corp. v. First State Insurance Co., the Supreme Court
of California considered a “sudden and accidental” exception in a duty to
indemnify case. 959 P.2d 1213, 1217-18 (Cal. 1998). In contemplating
whether the insured or the insurer bore the burden of proving the

ing the burden to establish the exception conforms with an insured’s

 

applicability of the exception, the California Supreme Court noted that it
was “guided by the familiar principle that the provision of an insurance
policy, like the provisions of any other contract, must be construed in the
context of the policy as a whole.” Id. at 1217. It concluded that “[rlead in
the context of” the broad exclusionary language in the policy, “the ‘sudden
and accidental’ exception serves to ‘reinstate coverage’ where it would
otherwise not exist.” Id. Accordingly, it determined that because the
insured bears the initial burden of establishing coverage under an
insurance policy, it follows that the insured must also prove that the

 

 
exception affords coverage after an exclusion is triggered. Id. at 1218 (citing
St. Paul Fire & Marine Ins. v. Warwick Dyeing, 26 F.3d 1195, 1200 (1st Cir.
1994))7

Nevada law provides that an insurance policy should be read
according to general contract principles. Andrew, 134 Nev. at 821, 432 P.3d
at 183. Furthermore, Nevada law requires that the insured establish
coverage under an insurance policy, whether claiming a duty to indemnify
or a duty to defend. Nat'l Auto. & Cas. Ins. Co. v. Havas, 75 Nev. 301, 303,
339 P.2d 767, 768 (1959) (recognizing that the insured has the initial burden
of proving that there is “a loss apparently within the terms of the policy”);
see also Turk v. TIG Ins. Co., 616 F. Supp. 24 1044, 1050 (D. Nev. 2009)
(recognizing that the insured bore “the initial burden of establishing the
potential for coverage under the [insurance policies"). We hold that the

 

majority rule, which places the burden on the insured to, in essence, re-

*This court recognizes that Aydin expressly refused to address the
allocation of burdens in duty-to-defend cases. 959 P.2d at 1219 n.6. That
said, Aydin’s reasoning has been applied to subsequent duty-to-defend
cases. See McMillin Cos. v. Am. Safety Indem. Co., 183 Cal. Rptr. 3d 26, 39
1.23 (Ct. App. 2015); Saarman Constr., Ltd. v. Ironshore Specialty Ins. Co.,
230 F. Supp. 3d 1068, 1075-76 (N.D. Cal. 2017). We believe that Aydin’s
reasoning is convincing, yet only to the extent that it explains why the
burden of proof should be on the insured when dealing with an exception to
a policy exclusion; we do not derive guidance from Aydin as to the weight of
such a burden. Thus, while we hold that the insured carries the burden of
proof, we emphasize again that the extent of the insured’s burden is only to
prove that there is a potential for coverage according to the exception to the
exclusion under the policy; not that the exception does apply, which would
only be required if the insured was seeking to prove that the duty to
indemnify was owed.

10

 

 
one

establish coverage where it would not otherwise exist, accords with these
principles.

‘The majority approach also is in accordance with basic tenets of
evidence law in Nevada. In Rivera v. Philip Morris, Inc., this court noted
that the term “burden of proof” describes both the “burden of production”
and the “burden of persuasion.” 125 Nev. 185, 190-91, 209 P.3d 271, 274-
75 (2009). “The party that carries the burden of production must esta!
a prima facie case.” Id. at 190-91, 209 P.3d at 274. “The burden of
persuasion rests with one party throughout the case and determines which
party must produce sufficient evidence to convince a judge that a fact has
been established.” Id. at 191, 209 P.3d at 275 (internal quotations omitted).
In Nevada, the burdens of production and persuasion rest with the insured,

 

who has the initial burden of proving that the claim falls within policy
coverage. Nat'l Auto., 75 Nev. at 303, 339 P.2d at 768; Turk, 616 F. Supp.
2d at 1050. The assignment of the burden of proof to the insured to prove
that the claim potentially falls within the exception to the exclusion, which
in effect re-establishes coverage, is in alignment with these principles as
well

Therefore, this court adopts the majority rule regarding
burdens of proof for exceptions to an exclusion and concludes that the
burden is on the insured, not the insurer, to prove the potential that an

exception to an exclusion applies when determining whether the insurer

"While Zurich contends this court must adopt the minority rule
because a Florida federal court, applying Nevada law and considering
similar facts in regard to the same insurance policy language, applied the
minority rule, we conclude that case is not persuasive. See KB Home
Jacksonville LLC v. Liberty Mut. Fire Ins. Co., No. 3:18-cv-371-J-34MCR,
2019 WL 4228602, at *9 (M.D. Fla. Sept. 5, 2019), appeal dismissed, No. 19-
13987-GG, 2020 WL 6053276 (11th Cir. June 11, 2020).

u

 

 
owes a duty to defend. This court recognizes that although the majority of
states have adopted this approach, some of them have adopted it specifically
in the context of determining the duty to indemnify, see, eg., Aydin, 959
P.2d at 1217-18, which is narrower than the duty to defend. United Nat'l,
120 Nev, at 686, 99 P.3d at 1158. Indeed, the duty to defend arises when
there is a potential for coverage, id. at 687, 99 P.3d at 1158, whereas the
duty to indemnify arises when the insured’s activity and the resulting
damage actually fall within the policy’s coverage, id. at 686, 99 P.3d at 1158.
We recognize that the burden is on the insured to prove the duty to
indemnify, as well as the duty to defend, but emphasize that it is not this
court's intention to erode the duty to defend by heightening the insured’s
burden of proof. This court reiterates that the weight of proof needed to
fulfill the burden of proving a duty to defend is lighter than the duty to
indemnify—only the potential for coverage must be proven.

The insured may use extrinsic facts available to the insurer at the time of
tender to prove the insurer had a duty to defend

An insurer “bears a duty to defend its insured whenever it
ascertains facts which give rise to the potential of liability under the policy.”
United Nat'l, 120 Nev. at 687, 99 P.3d at 1158 (quoting Gray, 419 P.2d at
17D. Thus, under Nevada law, an insured may present such extrinsic facts
to the insurer, and rely upon them, in order to argue that the insurer owes
a duty to defend as within an exception to an exclusion. Id.

‘That said, Nevada law is silent as to what particular extrinsic
facts an insured may use to fulfill its burden. Neighboring California has
held that “laln insurer's duty to defend must be analyzed and determined
on the basis of any potential liability arising from facts available to the
insurer from the complaint or other sources available to it at the time of the
tender of defense.” Waller v. Truck Ins. Exch., Inc., 900 P.2d 619, 632 (Cal.

12

 

 
on

1995) (quoting CNA Cas. of Cal. v. Seaboard Sur. Co., 222 Cal. Rptr. 276,
278-79 (Ct. App. 1986)). We have already recognized that “as a general rule,
fan insurer’s duty to defend is triggered whenever the potential for
indemnification arises, and it continues until this potential for
indemnification ceases.” Benchmark Ins. Co. v. Sparks, 127 Nev. 407, 412,
254 P.3d 617, 621 (2011). ‘There is a potential for indemnification, and
therefore a duty to defend is owed, whenever “the allegations in the third
party's complaint show that there is arguable or possible coverage,” or when,
the insurer “ascertains facts which give rise to the potential of liability
under the poliey.”® Nautilus Ins. Co. v. Access Med., LLC, 137 Nev., Adv.
Op. 10, 482 P.3d 683, 687-88 (2021) (internal quotations omitted). Since
the duty to defend must be determined at the outset of litigation based upon
the complaint and any other facts available to the insurer, we hold that the
insured may use extrinsic facts that were available to the insurer at the

"In United National, we wrote that an insurer has a duty to defend
“whenever it ascertains facts which give rise to the potential of liability
under the policy.” 120 Nev. at 687, 99 P.3d at 1158 (citing Gray, 419 P.2d
at 177). We also wrote that “(dletermining whether an insurer owes a duty
to defend is achieved by comparing the allegations of the complaint with the
terms of the policy.” Id. (citing Hecla Min. Co. v. N.H. Ins. Co., 811 P.2d
1083, 1089-90 (Colo. 1991)). We note that Hecla Mining was stating that
the insurer should not be allowed to “evad[e] coverage by filing a declaratory
judgment action when the complaint against the insured is framed in terms
of liability coverage contemplated by the insurance policy.” 811 P.2d at
1090. Thus, we take this opportunity to clarify that the insured, but not the
insurer, is allowed to introduce extrinsic evidence at the duty-to-defend
stage. See Andrew, 134 Nev. at 822 n.4, 432 P.3d at 184 n.4 (“IAls a general
Tule, facts outside of the complaint cannot justify an insurer's refusal to
defend its insured.”); Woo v. Fireman's Fund Ins. Co., 164 P.3d 454, 459
(Wash. 2007) (“The insurer may not rely on facts extrinsic to the complaint
to deny the duty to defend—it may do so only to trigger the duty.”).

13

 

 
time it tendered its defense to prove there was a potential for coverage
under the policy and, therefore, a duty to defend.
CONCLUSION

We answer the certified questions as follows: (1) the burden of
proving the exception to an exclusion is on the insured, not the insurer; and
(2) in fulfilling its burden to prove the exception to an exclusion applies, the
insured may utilize any extrinsic facts that were available to the insurer at
the time the insured tendered defense to the insurer.

A— 4

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