Insurance Coverage & Bad Faith Newsletter - Summer 2020

Zurich American Insurance Company v. Ironshore Specialty Insurance Company

(U.S. Court of Appeals Certifies Questions to the Nevada Supreme Court Regarding the Duty to Defend and Burden of Proving Exception to Exclusion)

(August 2020) - In Zurich American Ins. Co. v. Ironshore Specialty Ins. Co., __F.3d__(July 2, 2020), the United States Ninth Circuit Court of Appeals certified the following questions to the Nevada Supreme Court in connection with a contribution action for defense costs filed by Zurich American Insurance Company and American Guarantee & Liability Insurance Company (“Zurich”) against Ironshore Specialty Insurance Company (“Ironshore”) with respect to the defense and settlement of 14 construction defect lawsuits on behalf of eight subcontractors (“lawsuits”) insured by both companies:

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 insurers’ dispute arose out of Ironshore’s declination of coverage of the lawsuits based on the following exclusion in its policies:

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 its 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 []; or
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.

Ironshore contended that since the contractors performed work on the projects at issue in the lawsuits before the inception of the Ironshore policies, subpart 1 in the above exclusion applied to bar coverage of the subcontractors for the lawsuits. Ironshore also contended that the subcontractors and Zurich had the burden of proving the exception to the exclusion for “sudden and accidental” damage, and since they could not meet the burden of proving that the exception applied based on the allegations in the underlying complaints, the exclusion applied to bar coverage of the lawsuits.

The district court in the Zurich action agreed with Ironshore and granted judgment in its favor. In another action filed by Zurich against Ironshore, another district court agreed with Zurich and held that Ironshore had the burden of proving that the exception did not apply. Based on these different rulings, the Ninth Circuit has certified the question to the Nevada Supreme Court of who has the burden to prove an exception to an exclusion, and whether a party may rely on extrinsic evidence to prove the exception to an exclusion.

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