The Insured has the Duty to Prove Coverage for Defense

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In Zurich American Insurance Company v. Ironshore Specialty Insurance Company, 137 Nev.Adv.Op. 66, No. 81428, Supreme Court of Nevada, En Banc (October 28, 2021) the Supreme Court was asked to answer inquiries from the Ninth Circuit because two federal district courts issued conflicting decisions.The Ninth Circuit certified the following questions to the Supreme Court of Nevada:

  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?

FACTS

Throughout the 2000s, thousands of homes in Nevada were built by subcontractors under the direction of several development companies. 

DISCUSSION

In Nevada, insurance policies are treated like other contracts, and thus, legal principles applicable to contracts generally are applicable to insurance policies. 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. Under an insurance policy, the insurer owes two contractual duties to the insured: the duty to defend and the duty to indemnify. Only the duty to defend is at issue.

Courts in many jurisdictions have concluded that the insured bears the burden of proving the sudden and accidental exception to an exclusion of coverage. The trend clearly appears to place the burden on insureds to prove that an exception to an exclusion applies to restore coverage. Some courts do not agree.

The certified questions were, therefore, answered as follows:

1.   the burden of proving the exception to an exclusion is on the insured, not the insurer; 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 defense to the insurer.

ZALMA OPINION

Accepting the rule followed by the majority of the courts in the U.S. and basic common sense, the Nevada Supreme Court applied the basic rule of law that it is the insured who is obligated to prove that coverage applies and can use extrinsic evidence to establish the coverage. So, in this who’s on first routine, the insured is on first to prove that an exception to an exclusion applies and if it succeeds the burden shifts to the insurer to prove the opposite.

© 2021 – Barry Zalma