The Certified Question: On July 2, 2020, a Ninth Circuit court of Appeals panel certified the following three-part question to the Nevada Supreme 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?
The case out of which this certified question arises is Zurich American Insurance Co. v. Ironshore Specialty Insurance Company.1
The Facts: Between 2000 and 2009, a dozen or so development companies built thousands of homes using various subcontractors, eight of which now are involved in this insurance coverage dispute between Ironshore Specialty Insurance Co. (“Ironshore”) and Zurich American Insurance Co. (“Zurich”).
- During the nine years of building, each of the subcontractors were insured by Zurich for property damage that occurred during the policy period.
- After the completion of the nine years of building residential homes, each of the eight contractors obtained an insurance policy from Ironshore insuring them for bodily injury or property damage that occurred during the policy period which for each subcontractor began in 2009 and ended in either 2010 or 2011.
- Homeowners who purchased these homes between 2010 and 2013 brought 14 construction defect lawsuits in Nevada state court (“the Underlying Lawsuit”) against the developers.
- The developers then sued each of the eight subcontractors as a third-party defendant.
- All of the complaints alleged basically three facts: (1) Defendant developers performed construction work on the specific properties; (2) the construction work was defective, and (3) the properties were damaged as a result.
- None of the complaints made specific allegations describing how or when the property damage occurred. This latter fact is significant and will most likely be a major factor in determining the result of the certified question.
The Insurance Contract Between Ironshore and the Eight Contractors:
This policy provided payment that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which the insurance policy applies. There is no duty to defend any suit for “bodily injury” or “property damage” for which this insurance does not apply.
The policy defines when the insurance policy applies to “bodily injury: and “property damage” only if:
- The “bodily injury or “property damage” is caused by an “occurrence” that takes place in the coverage territory”; [and]
- The “bodily injury” or “property damage” occurs during the policy period.
The Ironshore Exclusion Provision provided:
This insurance does not apply to any “bodily injury” or “property damage”:
1. 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 an 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.
2. which was, or is alleged to have been, in the process of taking place prior to the inception date of this policy, even if the such “bodily injury” or “property damage” continued during this policy period; or 3. which is, or is alleged to be, of the same general nature or type as a condition, circumstance or construction defect which resulted in “bodily injury” or “property damage” prior to the inception date of this policy.
- Suits were filed and the subcontractors tendered the defense to Zurich.
- Zurich defended the subcontractors in the Underlying Lawsuits.
- Zurich also sent letters to Ironshore requesting defense and indemnification on behalf of the subcontractors.
- Ironshore investigated the claims and disclaimed coverage pursuant to its exclusion provision. Ironshore relied on the language that the insurance does not apply to property damage from work performed by a subcontractor before the policy inception, because such damage is deemed to have existed before the inception of the policy.
- Zurich settled each of the claims against the subcontractors and then sued Ironshore seeking contribution and a declaration that Ironshore owed a duty to defend the subcontractors in the Underlying Lawsuit.
- Ironshore moved for summary judgment arguing there was no duty to defend because there was no potential for coverage under the terms of the policy.
- The court granted Ironshore a summary judgment reasoning that coverage was barred because the insured subcontractors worked on a home before the policy start date, even if the damage from that work actually occurred after the policy went into effect. Thus, the court concluded that Ironshore had no duty to defend since it was uncontested that all the construction work was done before the policies took effect.
Holding: The court rejected the argument that the “Sudden and Accidental” exception of the exclusion applied because none of the complaints in the Underlying Lawsuit alleged that the damage occurred suddenly. The court implicitly concluded that the insured—Zurich—had the burden of proving the applicability of the sudden and accidental exception to the exclusion.
Another Opinion with the Same Parties and Similar Facts: In a different district court, another case, Assurance Co. of Am. v. Ironshore Specialty Ins. Co., 2015 WL 4579983 (D. Nev. July 29, 2015), submission deferred sub nom. Zurich Am. Ins. Co. v. Ironshore Specialty Ins. Co., No. 18-16857 (9th Cir. April 14, 2020) (“Nevada Zurich II “) with the same parties and nearly identical facts reached a different result and found that the same Ironshore policy and the same exception to the exclusion language resulted in the court finding that Ironshore did owe a duty to defend because the complaints in the Underlying Lawsuit “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. The court found that Ironshore had the burden which it failed to carry of showing that the exception to the exclusion did not apply. Thus, the court in this similar case, implicitly concluded that the insurer—Ironshore—had the burden of proving the non-applicability of the exception to the exclusion.
Two Different Results: One court found the insured Zurich (plaintiff) had the burden of proving the applicability of the sudden and accidental exception to the exclusion and the other court found that the insurer Ironshore (defendant) had the burden of proving the non-applicability of the exception to the exclusion.
Facts to Ponder: As mentioned above, the complaints were silent with regard to whether the property damage was “sudden and accidental” (the exception to the exclusion). In other words, the complaints neither established nor disproved that the property damage was “sudden and accidental.” Thus, the party with the burden of proof with respect to the exception to the exclusion will be unable to carry its burden. On the other hand, if Nevada does not adopt the rule that the parties may consider only the four corners of the complaint and allows extrinsic evidence, then the outcome will depend on whether Zurich or Ironshore can show there is a genuine issue of material fact as to the applicability or non-applicability of the exception to the exclusion, depending on which party bears the burden and what evidence can be adduced.
The Ninth Circuit in the two cases stayed both appeals taken by Zurich and Ironshore until the Nevada Supreme Court answers this certified question. Stay tuned.
1 Zurich American Ins. Co. v. Ironshore Specialty Ins. Co., No. 18-16937 (9th Cir. July 2, 2020).