On Oct. 28, 2021, the Nevada Supreme Court in Zurich American Insurance Company v.. Ironshore Specialty Insurance Company, 137 Nev. Adv. Op. 66, held that an insured can rely on extrinsic facts to show that an insurer has a duty to defend the insured, as long as the facts were available to the insurer at the time the insured tendered the claim. The court also held that an insured has the burden of proving that an exception to an exclusion in an insurance policy applies to create a duty to defend.
In Zurich, Ironshore refused to defend to its insured against multiple property damage claims arising out of construction defects, claiming that its policies’ continuing and progressive damage exclusions barred coverage. The underlying lawsuits made no specific allegations describing when or how the property damage occurred. Ironshore claimed that the property damage had occurred due to faulty work that predated the commencement of its policies. Two different federal trial courts came to conflicting conclusions in the underlying cases. One held that Ironshore had a duty to defend because Ironshore failed to show that an exception to the exclusion did not apply. The second granted summary judgment in favor of Ironshore holding that the insured failed to meet its burden of proving that an exception to the exclusion applied.
As a result of the conflicting rulings, the following questions were certified to the Nevada Supreme Court:
(1) 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?
(2) 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 Nevada Supreme Court held that (1) the burden of proving an exception to an exclusion is on the insured; 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 its defense to the insurer.
The court was careful to emphasize that, in the context of the duty to defend, the extent of the insured's burden is only to prove that there is a potential for coverage based on the exception to the exclusion—not that the exception does in fact apply, which would only be required if the insured were seeking to prove that the insurer had a duty to indemnify. The court emphasized that “it is not this court's intention to erode the duty to defend by heightening the insured's burden of proof” and reiterated 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.”
In Nevada, it is already well-settled law that the burden is on the insured to prove that a claim falls within the scope of coverage, and on the insurer to prove that an exclusion applies. Thus, the court’s ruling that the insured has the burden of proving that an exception to an exclusion applies, which would revive coverage, is not a surprise; this is the majority approach.
This decision will help insureds by clarifying that in Nevada, an insured can rely on extrinsic evidence available to the insurer to establish an insurer’s duty to defend. This decision makes it impossible for insurers to continue to ignore extrinsic evidence that establishes a potential for coverage and the duty to defend.