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Who has the burden of proving an exception to exclude coverage in an insurance policy? | Property Insurance Coverage Right Blog



The Certified Question: On July 2, 2020, a ninth District Court of Appeals confirmed the following three-part question to the Supreme Court of Nevada:

  1. Whether, under Nevada law, the burden of proving the applicability of an exception to exclude coverage in an insurance falls on the insurer or the insured?
  2. Any party who bears such a burden, it may rely on evidence that is extrinsic in the complaint to bear its burden, and in that case [3] it is limited to existing evidence available at the time when the insured offered the insurer's defense of the lawsuit?

The case in which this certified question arises is Zurich American Insurance Co. against Ironshore Special Insurance Company . 1

Facts: Between 2000 and 2009, a dozen development companies built thousands of houses with various subcontractors, eight of whom are now involved in this insurance coverage dispute between n Ironshore Specialty Insurance Co. (“Ironshore”) and Zurich American Insurance Co. ("Zurich").

  • During the nine years built, all subcontractors were insured by Zurich for property damage that occurred during the insurance period
  • At the end of the nine years of building residential buildings, each of the eight contractors received an insurance from Ironshore which insured them for bodily injury or property damage that occurred during the insurance period that for each subcontractor began in 2009 and ended in either 2010 or 2011.
  • Homeowners who purchased these homes between 2010 and 2013 brought 14 building defects in the state of Nevada ("Underlying lawsuit") against the developers.
  • The developers then sued each of the eight subcontractors as a third party.
  • All complaints were alleged in principle three facts: (1) Defendant's developers carried out construction work on the specific properties; (2) the construction work was deficient 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 is likely to be an important factor in determining the outcome of the certified question.

The insurance contract between Ironshore and the eight contractors:

This insurance provided payment which the insured is legally obliged to pay as damages due to "bodily injury" or "property damage" to which the insurance policy applies. There is no obligation to defend any suit for "bodily injury" or "property damage" to which this insurance does not apply.

The policy defines when the insurance policy applies to "bodily injury:" and "property damage" only if:

  1. "Body injury or" property damage "is caused by an" event "that takes place in the coverage area"; [and]
  2. "Body damage" or "property damage" occurs during the insurance period.

The Ironshore Exclusion Provision provided:

This insurance does not apply to any "Body Damage" or "Property Damage":

1. which first existed, or is alleged to have first existed, before this policy was initiated. "Damage to property" from "your work" or the work of an additional insured, performed before the start of the insurance will be considered to have existed before the beginning of the insurance, unless such "damage to property" is sudden and unintentional [19659021] and takes place within the policy period .

2nd which was, or is alleged to have been, in the process of taking place before the commencement date of this policy, even if such "bodily injury" or "property damage" continued during this insurance period; or 3. which is, or is alleged to be, of the same general nature or type as a condition, circumstance or design defect which resulted in "bodily injury" or "property damage" prior to the introduction of this policy. [19659023] Suits were handed in and the subcontractors offered the defense to Zurich.

  • Zurich defended the subcontractors in the underlying trials.
  • Zurich also sent letters to Ironshore requesting defense and compensation on behalf of the subcontractors.
  • Ironshore investigated claims and rejected coverage under its exclusion clause. Ironshore relied on the language that the insurance does not apply to property damage from work performed by a subcontractor before the start of the insurance, as such damage is considered to have existed before the beginning of the policy.
  • Zurich settled each of the claims against the subcontractors and then sued Ironshore, seeking a grant and a declaration that Ironshor e had an obligation to defend the subcontractors in the underlying lawsuit.
  • Ironshore moved for a brief judgment, arguing that there was no obligation to defend because there was no potential for coverage under the terms of the policy.
  • The court granted Ironshore a summary judgment on the grounds that the coverage was excluded because the insured subcontractors worked at a home before the start date of the insurance, even if the damage from that work actually occurred after the insurance took effect. Thus the court concluded that Ironshore had no obligation to defend as it was undisputed that all construction work was carried out before the policy came into force.
  • Holding: The court rejected the argument that "sudden and unintentional" exemption from the exclusion was applied because none of the complaints in the underlying trial claimed that the damage occurred suddenly. The Court implicitly concluded that the insured – Zurich – had the burden of proving the application of the sudden and unintentional exception to the exclusion.

    Another Opinion with the Same Parties and Similar Facts : In Another District Court, Another Case, Assurance Co., Am. v. Ironshore Special Ins. Co., 2015 WL 4579983 (D. Nev. July 29, 2015), filed adjourned sub nom. Zurich Am. Ins. Co. v. Ironshore Special Ins. Co. No. 18-16857 (9 Cir. 14 April 2020) ("Nevada Zurich II") with the same parties and almost identical facts reached a different result and found that the same Ironshore policy and the same exception to the language of exclusion resulted in the Court f stated that Ironshore was liable to defend because the complaints in the underlying trial "did not state when the alleged property damage occurred and did not contain sufficient allegations to conclude that damages were not sudden and unintentional. The court found that Ironshore had it burden which it failed to bear in order to show that the exemption from the exclusion did not apply, thus in this similar case the court implicitly concluded that the insurer – Ironshore – had the burden of proving that the exemption could not be applied to the exemption. result : A court found insured Zurich (complainant) had the burden of proving the sudden and unintentional exception t is applicable to the exemption and the other court found that the insurer Ironshore (defendant) had the burden of proving that the exemption does not apply to the exemption. [19659015] Facts to Ponder: As mentioned above, the complaints were silent as to whether the damage to property was "sudden and unintentional" (except for exclusion). In other words, the complaints neither established nor disproved that the property damage was "sudden and unintentional." Thus, the party bearing the burden of proof with regard to the exemption from the exclusion will not be able to bear its burden. On the other hand, if Nevada does not adopt the rule that the parties can only consider the four corners of the complaint and allow extrinsic evidence, the outcome will depend on whether Zurich or Ironshore can show that there is a genuine question of substantive fact as to the application 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 remained both appeals from Zurich and Ironshore until the Nevada Supreme Court answered this certified question. Keep your Eyes open.
    ____________________________________
    1 Zurich American Ins. Co. v. Ironshore Special Ins. Co. No. 18-16937 (9th Circle July 2, 2020).


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