Zurich Am. Ins. Co. v. Ironshore Specialty Ins. Co.

• Decision Date: 28 October 2021
• Docket Number: No. 81428,81428
• Citation: 497 P.3d 625
• Parties: ZURICH AMERICAN INSURANCE COMPANY; and American Guarantee and Liability Insurance Company, Appellants, v. IRONSHORE SPECIALTY INSURANCE COMPANY, Respondent.
• Court: Nevada Supreme Court

497 P.3d 625

ZURICH AMERICAN INSURANCE COMPANY; and American Guarantee and Liability Insurance Company, Appellants,

v.IRONSHORE SPECIALTY INSURANCE COMPANY, Respondent.

No. 81428

Supreme Court of Nevada.

FILED OCTOBER 28, 2021

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.

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.¹ During that period, these subcontractors were insured by appellants Zurich American Insurance Company and American Guarantee 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 (Ironshore). 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 properties were damaged from construction defects.² 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 I), 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.³ Id. The court rejected the argument that the "sudden and 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.⁴ 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 II), No. 2:13-cv-2191-GMN-CWH, 2015 WL 4579983 (D. Nev. July 29, 2015), reached a different conclusion in a substantially identical case.⁵ 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 *5. The Nevada Zurich II 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 II 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 1 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 II in a concurrently filed order. Zurich Am. Ins. Co. v. Ironshore Specialty Ins. Co., 962 F.3d 1189 (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." Siggelkow 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., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, 177 (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.

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,...