Zurich American Insurance Co. v. Ironshore Specialty Insurance

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ZURICH AMERICAN INSURANCE No. 18-16937
COMPANY; AMERICAN
GUARANTEE AND LIABILITY D.C. No.
INSURANCE COMPANY, 2:15-cv-00460-JAD-
Plaintiffs-Appellants, PAL
v. ORDER
CERTIFYING
IRONSHORE SPECIALTY QUESTION TO
INSURANCE COMPANY, THE NEVADA
Defendant-Appellee. SUPREME COURT
Filed July 2, 2020
Before: Marsha S. Berzon and Sandra S. Ikuta, Circuit
Judges, and Ivan L.R. Lemelle,* District Judge.
Order
*
The Honorable Ivan L.R. Lemelle, United States District Judge for
the Eastern District of Louisiana, sitting by designation.
2 ZURICH AM. INS. V. IRONSHORE SPECIALTY INS.
SUMMARY**
Certification to Nevada Supreme Court
The panel certified to the Nevada Supreme Court the
following questions:
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?
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
ZURICH AM. INS. V. IRONSHORE SPECIALTY INS. 3
ORDER
We ask the Nevada Supreme Court to resolve two open
questions of state law. First, we need guidance regarding
whether the insurer or the insured bears the burden of proving
the applicability of an exception to an exclusion of coverage
in an insurance policy. We also need guidance in
determining whether the party carrying such burden may rely
on extrinsic evidence, and if so, whether only extrinsic
evidence available at the time the insured tendered the
defense of the lawsuit to the insurer is relevant for proving an
exception to the exclusion. Accordingly, we certify the
following questions:
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?
Our phrasing of the questions should not restrict the
Court’s consideration of the issues involved. The Court may
rephrase the questions as it sees fit in order to address the
contentions of the parties. If the Court agrees to decide these
questions, we agree to accept its decision. We recognize that
the Court has a substantial caseload, and we submit these
questions only because of their significance to actions
brought to enforce an insurer’s duty to defend under Nevada
insurance law.
4 ZURICH AM. INS. V. IRONSHORE SPECIALTY INS.
I
This case is an insurance coverage dispute between
Ironshore Specialty Insurance Company (Ironshore), on the
one hand, and American Guarantee & Liability Insurance
Company and Zurich American Insurance Company
(collectively, “Zurich”), on the other. 1
Beginning in the early 2000s, about a dozen development
companies built thousands of homes using various
subcontractors. Eight subcontractors are relevant here.2 Each
of these subcontractors completed its work on the various
properties before 2009. During this period, each was insured
by Zurich for property damage that occurred during the
policy period.
Some time after completion of their work on these
housing developments, each of the eight subcontractors
obtained an insurance policy from Ironshore. The Ironshore
policy insured the subcontractors for bodily injury or property
damage that occurred during the policy period. The policy
period for each subcontractor began in 2009 and ended in
either 2010 or 2011.
1
We granted Zurich’s motion to substitute Zurich American
Insurance Company for Assurance Company of America and Northern
Insurance Company of New York.
2
The subcontractors are Cedco, Inc., Lukestar Corporation dba
Champion Masonry, Debard Plumbing, Inc., JP Construction Co., LLC,
Laird Whipple Construction, Inc., PR Construction Corp., Nevada
Concrete Services, Inc. aka Stewart & Sundell, and Universal Framing,
Inc.
ZURICH AM. INS. V. IRONSHORE SPECIALTY INS. 5
The insurance contract between Ironshore and the eight
subcontractors states, in relevant part:
We will pay those sums that the insured
becomes legally obligated to pay as damages
because of “bodily injury” or “property
damage” to which this insurance applies. We
will have the right and duty to defend the
insured against any “suit” seeking those
damages. However, we will have no duty to
defend the insured against any “suit” seeking
damages for “bodily injury” or “property
damage” to which this Insurance does not
apply. We may, at our discretion, investigate
any “occurrence” and settle any claim or
“suit” that may result. . . .
This insurance applies to “bodily injury” and
“property damage”only if:
(1) The “bodily injury” or
“property damage” is caused
by an “occurrence” that takes
place in the “coverage
territory”; [and]
(2) The “bodily injury” or
“property damage”occurs
during the policy period.3
3
The Ironshore policies define “occurrence” to mean “an accident,
including continuous or repeated exposure to substantially the same
general harmful conditions.” The policies also define “property damage”
to mean “[p]hysical injury to tangible property, including all resulting loss
6 ZURICH AM. INS. V. IRONSHORE SPECIALTY INS.
In addition to the coverage provision, Ironshore’s policy
also includes an exclusion provision, which states:
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 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[]; 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
of use of that property. All such loss of use shall be deemed to occur at
the time of the physical injury that caused it.”
ZURICH AM. INS. V. IRONSHORE SPECIALTY INS. 7
3. which is, or is alleged to be,
of the same general nature or
t y p e a s a c on d i t i o n ,
circumstance or construction
defect which resulted in
“bodily injury” or “property
damage” prior to the inception
date of this policy.
Between 2010 and 2013, homeowners who purchased
homes within these development projects brought
14 construction defect lawsuits against the developers in
Nevada state court (the “Underlying Lawsuits”).4 The
developers then sued each subcontractor as a third-party
defendant. The complaints in the Underlying Lawsuits
alleged that the defendants performed construction work on
specific properties, that the work was defective, and that the
properties were damaged as a result. The typical complaint
said the following:
Plaintiffs have discovered defects and
damages within the periods of the applicable
statutes of limitations that the subject property
has and is experiencing defective conditions,
in particular, there are damages stemming
from, among other items, defectively built
4
Although there was a 15th lawsuit in which homeowners sued a
different subcontractor, RAMM Corp., that lawsuit is not relevant to this
appeal because Zurich expressly waived any argument with respect to the
district court’s ruling related to that lawsuit.
8 ZURICH AM. INS. V. IRONSHORE SPECIALTY INS.
roofs, leaking windows, dirt coming through
windows, drywall cracking, hardboard
separating, hardboard staining, stucco
cracking, stucco staining, and other poor
workmanship.
...
Within the last year, Plaintiffs have
discovered that the subject property has and is
experiencing additional defective conditions,
in particular, there are damages stemming
from, among other items, defectively built
roofs, leaking windows, dirt coming through
windows, drywall cracking, hardboard
separating, hardboard staining stucco
cracking, stucco staining and other poor
workmanship.
Although each complaint alleged that the homeowner
suffered property damage, no complaint made specific
allegations describing when or how the property damage
occurred.
After being sued by the homeowners, the subcontractors
tendered the defense to Zurich. Zurich agreed to defend the
subcontractors against the Underlying Lawsuits. Zurich also
sent tender letters to Ironshore requesting defense and
indemnification on behalf of the subcontractors.
After receiving these tender letters, Ironshore investigated
the claims and disclaimed coverage pursuant to the exclusion
provision in its insurance policy. Specifically, Ironshore
relied on paragraph 1 of the exclusion, which provides that its
ZURICH AM. INS. V. IRONSHORE SPECIALTY INS. 9
insurance does not apply to property damage from work
performed by a subcontractor before the policy inception,
because such damage is deemed to have existed before the
inception of the policy.
Zurich settled each of the claims against the
subcontractors. Zurich then sued Ironshore, seeking
contribution and indemnification for the defense and
settlement costs, as well as a declaration that Ironshore owed
a duty to defend the subcontractors against the Underlying
Lawsuits. Ironshore moved for summary judgment, arguing
that it had no duty to defend because there was no potential
for coverage under the terms of its insurance policy.
The district court (Judge Jennifer Dorsey) granted
summary judgment in favor of Ironshore. The court stated
that Ironshore’s exclusion provision “bars coverage if the
insured worked on a home before the policy-start date, even
if the damage from that work actually occurred after the
policy went into effect.” And because there was “no dispute
that all of the construction work was done” before the policies
took effect, the court concluded that Ironshore had no duty to
defend.5 The court rejected the argument that the “sudden
and accidental” exception to the exclusion of coverage
applied. The court reasoned that none of the complaints in
the Underlying Lawsuits alleged that the damage occurred
5
Because the district court ruled that Ironshore did not owe a duty to
defend, the court did not address the narrower duty to indemnify. See
Allstate Ins. Co. v. Miller, 212 P.3d 318, 324 (Nev. 2009). Therefore, this
appeal does not directly implicate the duty to indemnify.
10 ZURICH AM. INS. V. IRONSHORE SPECIALTY INS.
suddenly, and, absent any evidence to support such an
allegation, Zurich failed to carry its burden. (The court
assumed that Zurich could have introduced extrinsic
evidence, but did not directly address the question.).
Accordingly, the court granted Ironshore’s motion for
summary judgment. In effect, Judge Dorsey implicitly
concluded that the insured (or in this case, Zurich) had the
burden of establishing the applicability of the sudden and
accidental exception to the exclusion.
Shortly before the district court issued its decision, a
different Nevada district court (Judge Gloria Navarro)
reached a different conclusion in a substantially identical
case. See Assurance Co. of Am. v. Ironshore Specialty Ins.
Co., No. 2:13-cv-2191, 2015 WL 4579983 (D. Nev. July, 29,
2015), submission deferred sub nom. Zurich Am. Ins. Co. v.
Ironshore Specialty Ins. Co., No. 18-16857 (9th Cir. April 14,
2020) (referred to as “Nevada Zurich II”). After considering
substantially identical facts and the same Ironshore insurance
policy, Judge Navarro concluded that Ironshore owed a duty
to defend because the underlying complaints in that case “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.”6 Nevada
6
After a bench trial, Judge Navarro also held that Ironshore failed to
“meet its burden of proving the absence of actual coverage,” i.e., duty to
indemnify, because it failed to demonstrate that the exclusion provision
bars coverage. Nevada Zurich II, 2017 WL 4570303, at *6 (D. Nev. Oct.
12, 2017). As previously mentioned, supra note 5, Judge Dorsey did not
rule on the duty-to-indemnify issue, so that issue is not directly raised in
the appeal underlying this certified question. Nevertheless, because the
duty to indemnify is narrower than the duty to defend, see Miller,
212 P.3d at 324, we understand that the Nevada Supreme Court’s answer
to the burden-of-proof question raised in this certification order would
ZURICH AM. INS. V. IRONSHORE SPECIALTY INS. 11
Zurich II, 2015 WL 4579983, at *5. Absent evidence that the
alleged property damage was not sudden and accidental, the
court concluded that Ironshore failed to carry its burden of
showing that the exception to the exclusion did not apply. Id.
Again, Judge Navarro assumed extrinsic evidence was
admissible, but did not address the issue directly. In effect,
Judge Navarro implicitly concluded that the insurer (or in this
case, Ironshore) had the burden of proving the
nonapplicability of the exception to the exclusion.
In light of Nevada Zurich II, Zurich filed a motion under
Rule 60(b) of the Federal Rules of Civil Procedure seeking
relief from the judgment in the case underlying this
certification order. Judge Dorsey denied the motion, stating
that she was not persuaded by Judge Navarro’s reasoning. 7
Zurich timely appealed. We stay Zurich’s appeal of the
grant of summary judgment in favor of Ironshore pending the
Nevada Supreme Court’s resolution of the questions we
certify here. In a concurrently filed order, we also stay
Ironshore’s appeal of Nevada Zurich II. See Order, Zurich
Am. Ins. Co. v. Ironshore Specialty Ins. Co., 18-16857 (9th
Cir. July 2, 2020).
likewise answer a similar question regarding who bears the burden of
proving the duty to indemnify.
7
Zurich did not argue to Judge Dorsey, nor does it argue on appeal,
that Judge Navarro’s ruling had a preclusive effect. Accordingly, any
such argument is forfeited. See United States v. Depue, 912 F.3d 1227,
1232–33 (9th Cir. 2019) (en banc).
12 ZURICH AM. INS. V. IRONSHORE SPECIALTY INS.
II
On appeal, the key question underlying the parties’
dispute relates to who bears the burden of proof in
establishing the duty to defend under an insurance policy, and
what evidence may be used to carry that burden.8 Because
Zurich is seeking contribution from a nonparticipating co-
insurer, Zurich bears the same burden of proof as an insured.
See United Nat’l Ins. Co. v. Frontier Ins. Co., 99 P.3d 1153,
1155–56 (Nev. 2004) (treating the insured and the
participating insurer identically).
The complaints in the Underlying Lawsuits do not include
any allegations as to when or how the alleged property
damage occurred. So, if the insured has the burden of
proving the applicability of the “sudden and accidental”
exception to the exclusion of coverage, then Ironshore would
prevail, because the complaints in the Underlying Lawsuits
do not indicate that the alleged property damage were sudden
and accidental. But if the insurer has the burden of proving
that the exception to the exclusion does not apply, then
Zurich would prevail under the same logic. This result would
be different only if the parties could introduce extrinsic
evidence regarding whether the property damage was sudden
and accidental.
8
Zurich also argues that the exclusion provision in Ironshore’s
insurance policy “is inherently in conflict with the insuring agreement and
therefore, creates an ambiguity which should be construed against
[Ironshore].” We hereby reject this argument and hold that Ironshore’s
policy unambiguously excludes property damage caused by work that was
completed before the policy’s inception, subject only to the exception
from the exclusion.
ZURICH AM. INS. V. IRONSHORE SPECIALTY INS. 13
A
Nevada law does not clearly resolve either the burden-of-
proof question or the extrinsic-evidence question. With
respect to the burden of proof, under Nevada law, the insured
bears the burden of proof initially and must demonstrate that
the claim is “within the terms of the policy.” Nat’l Auto. &
Cas. Ins. Co. v. Havas, 339 P.2d 767, 768 (Nev. 1959). If the
insured carries its burden, then the burden shifts to the insurer
to show that an exclusion applies. Id. But Nevada law is
silent as to whether the insured’s burden to show coverage
includes showing the applicability of an exception to an
exclusion. There are reasonable arguments on both sides.
The argument that the insurer (here, Ironshore) bears the
burden of proving the non-applicability of an exception to an
exclusion of coverage is as follows. The duty to defend is
based on allegations in the complaint. United Nat’l, 99 P.3d
at 1158. The insurer must defend unless there is no potential
coverage under the insurance policy. Id. Where (as here) the
complaint is silent on whether the property damage was
sudden and accidental, there is a potential that the damage
were sudden and accidental. Therefore, it is up to the insurer
to disprove such potential.
The counterargument that the insured (Zurich) bears the
burden of proving that the exception to the exclusion applies
is as follows. Insurance policies are treated like contracts
under Nevada law, so ordinary contract principles apply.
Century Sur. Co. v. Andrew, 432 P.3d 180, 183 (Nev. 2018).
Under such contract principles, the plaintiff has the initial
obligation to prove breach, such as that the conditions
precedent were fulfilled but the defendant failed to perform.
Clark Cty. Sch. Dist. v. Richardson Const., Inc., 168 P.3d 87,
14 ZURICH AM. INS. V. IRONSHORE SPECIALTY INS.
95 n.21 (Nev. 2007). The burden then shifts to the defendant,
which has the obligation to raise an affirmative defense. Id.
If the defendant can establish the applicability of an
affirmative defense, then the burden shifts back to the
plaintiff to prove its case. See Nevada Ass’n Servs., Inc. v.
Eighth Jud. Dist. Ct., 338 P.3d 1250, 1254 (Nev. 2014)
(“Once a defendant shows that a voluntary payment was
made [an affirmative defense], the burden shifts to the
plaintiff to demonstrate that an exception to the voluntary
payment doctrine applies.”).
As the plaintiff, the insured must establish that the insurer
has a duty to defend and breached the contract by failing to
do so. There is no duty to defend if there is no potential for
coverage, United Nat’l, 99 P.3d at 1158, so the insured must
show a potential for coverage. If, after “comparing the
allegations of the complaint with the terms of the policy,” the
insured has shown that “there is arguable or possible
coverage,” id., then the burden shifts to the insurer to prove
an affirmative defense, i.e., that the alleged loss is excluded
from coverage, see Havas, 339 P.2d at 768. Under California
law, if the insurer proves the applicability of an exclusion, the
burden shifts back to the plaintiff to prove that an exception
to the exclusion applies, such that the insurer owed a duty to
defend. See Aydin Corp. v. First State Ins. Co., 18 Cal. 4th
1183, 1188, 1194 (1998);9 see also Aeroquip Corp. v. Aetna
Cas. & Sur. Co., 26 F.3d 893, 895 (9th Cir. 1994) (predicting
9
Although Aydin involved the duty to indemnify, which under
California law (just as under Nevada law) is narrower than the duty to
defend, see Certain Underwriters at Lloyd’s of London v. Super. Ct.,
24 Cal. 4th 945, 961 (2001), California courts have applied Aydin in the
broader duty-to-defend context, see McMillin Cos. v. Am. Safety Indem.
Co., 233 Cal. App. 4th 518, 533 n.23 (2015); Croskey et al., California
Practice Guide: Insurance Litigation ¶ 7:571.6 (The Rutter Group 2019).
ZURICH AM. INS. V. IRONSHORE SPECIALTY INS. 15
that California, like the majority of other states, would place
the burden of proving the applicability of an exception to an
exclusion on the insured, because such an “allocation aligns
the burden with the benefit and is consistent with the general
principle under California law that while the burden is on the
insurer to prove a claim covered falls within an exclusion, the
burden is on the insured initially to prove that an event is a
claim within the scope of the basic coverage.” (quotation
omitted)). Although the Nevada Supreme Court has not
spoken on this issue, given that Nevada’s duty to defend
appears to be identical to California’s, and Nevada courts
often look to California for guidance,10 it is reasonable to
conclude that the Nevada Supreme court would adopt the
California approach.
B
The allocation of the burden of proof will decide this case
as a matter of law if Nevada adheres to the four corners rule.
The Nevada Supreme Court has not decided whether parties
may use evidence extrinsic to the complaint to carry their
burden, and if so, whether they can adduce only evidence
available at the time of the tender, or may also rely on
evidence developed later.
Nevada’s seminal insurance-coverage case, United
National, does not resolve whether extrinsic evidence is
10
Nevada’s seminal case on the duty to defend is United National,
wherein the Nevada Supreme Court cited to California case law several
times. See 99 P.3d at 1158 n.21, n.23, & n.25 (citing Horace Mann Ins.
Co. v. Barbara B., 4 Cal. 4th 1076 (1993); Gray v. Zurich Ins. Co., 65 Cal.
2d 263 (1966); Aetna Cas. & Sur. Co. v. Centennial Ins. Co., 838 F.2d 346
(9th Cir. 1988) (applying California law)).
16 ZURICH AM. INS. V. IRONSHORE SPECIALTY INS.
admissible to establish whether there is coverage. First,
United National explains that the process for determining
whether an insurer owes a duty to defend involves comparing
only “the allegations of the complaint with the terms of the
policy,” 99 P.3d at 1158, which suggests the party that bears
the burden of proof with respect to the duty to defend may not
rely on extrinsic evidence. But in explaining the difference
between the duty to defend and the duty to indemnify, United
National noted that “an insurer bears a duty to defend its
insured whenever it ascertains facts which give rise to the
potential of liability under the policy.” Id. (alteration and
omission adopted) (quoting Gray, 65 Cal. 2d at 276–77). It
also suggested that an insurer could not evade “its obligation
to provide a defense for an insured without at least
investigating the facts behind a complaint.” Id. This
language suggests that an insurer may (or must) consider
extrinsic evidence available at the time the insured tendered
the lawsuit to the insurer.
More recently, the Nevada Supreme Court clarified that
“facts outside of the complaint cannot justify an insurer’s
refusal to defend its insured.” Andrew, 432 P.3d at 184 n.4.
We interpret Andrew as prohibiting an insurer’s reliance on
extrinsic evidence available at the time of tender to defeat the
duty to defend. But Andrew did not address whether extrinsic
evidence may trigger the duty to defend when the complaint
alone would not trigger such a duty. And the Nevada
Supreme Court has not spoken on whether, if extrinsic
evidence may be used, the parties may rely on evidence
developed after the time of the tender to establish that the
exception to the exclusion was or was not applicable. In
other words, in a lawsuit such as this one, it is unclear
whether the party carrying the burden of proving an exception
to the exclusion may adduce new evidence to prove that the
ZURICH AM. INS. V. IRONSHORE SPECIALTY INS. 17
property damage at issue was (or was not) sudden and
accidental.
If Nevada adopts the rule that the parties may consider
only the four corners of the complaint, then this case can be
decided as a matter of law, because there is no dispute that
the complaints in the Underlying Lawsuits are silent as to
when or how the property damage occurred. Put differently,
the complaints neither establish nor disprove that the property
damage was “sudden and accidental,” so the party that bears
the burden of proof with respect to the exception to the
exclusion will be unable to carry its burden. On the other
hand, if Nevada permits the use of extrinsic evidence, then
the outcome will depend on whether Zurich or Ironshore can
show there is a genuine issue of material fact as to the
applicability or non-applicability of the exception to the
exclusion, depending on which party bears the burden and
what evidence can be adduced. The Nevada Supreme Court’s
answer to these questions will be dispositive of these issues
in the earlier action, and we will follow its decision in this
case.
III
The Clerk of Court is hereby directed to transmit
forthwith to the Nevada Supreme Court, under official seal of
the Ninth Circuit, a copy of this order and request for
certification and all relevant briefs and excerpts of record.
Submission of this case remains deferred, and the case will be
submitted following receipt of the Nevada Supreme Court’s
opinion on the certified questions or notification that it
declines to answer the certified questions. The Clerk shall
administratively close this docket pending a ruling by the
Nevada Supreme Court regarding the certified questions. The
18 ZURICH AM. INS. V. IRONSHORE SPECIALTY INS.
panel shall retain jurisdiction over further proceedings in this
court. The parties shall notify the Clerk of this court within
one week after the Nevada Supreme Court accepts or rejects
certification. In the event the Nevada Supreme Court grants
certification, the parties shall notify the Clerk within one
week after the Court renders its opinion.
QUESTIONS CERTIFIED; PROCEEDINGS
STAYED.
Marsha Berzon
Circuit Judge
Sandra Ikuta
Circuit Judge
Ivan L.R. Lemelle
District Judge for the Eastern District of Louisiana
ZURICH AM. INS. V. IRONSHORE SPECIALTY INS. 19
Supplemental Material
Pursuant to Rule 5 of the Nevada Rules of Appellate
Procedure, we include here the designation of the parties who
would be the appellants and appellee in the Nevada Supreme
Court, as well as the names and addresses of counsel.
For Appellants Zurich American Insurance Company and
American Guarantee & Liability Insurance Company:
William Reeves
Morales Fierro & Reeves
600 S. Tonopah Drive
Suite 300
Las Vegas, NV 89106
For Appellee Ironshore Specialty Insurance Company:
William C. Morison
Morison & Prough, LLP
2540 Camino Diablo
Suite 100
Walnut Creek, CA 94597