Endorsement-as-Exclusion Rejected: Insured Retains Burden to Prove Coverage Absent Insurer Concession

Introduction

In STATE OF ZERO LLC v. FARMERS INS. EXCH. (Nev. Feb. 12, 2026), the Supreme Court of Nevada affirmed a defense verdict in an insurance coverage/bad-faith case arising from a building flood where water came “up and out of the toilets.” The insureds—State of Zero LLC and Capitol Velocity, LLC—contended the loss fell under the policy’s primary “Water Damage” grant (damage caused by “breaking apart or cracking” of a covered water/steam system), while Farmers Insurance Exchange maintained the event did not meet that coverage grant and, at most, implicated a separate sewer-backup endorsement capped at $5,000.

The appeal centered on two issues: (1) whether the jury should have been instructed that Farmers bore the burden to prove the sewer-backup endorsement applied (as if it were an “exclusion”), and (2) whether statements in closing argument constituted attorney misconduct requiring a new trial.

Summary of the Opinion

The Court held that the district court correctly instructed the jury that the insureds bore the burden of proving the claimed loss was covered under the policy. The sewer-backup endorsement was not treated as an “exclusion” shifting the burden to the insurer because Farmers did not concede that the primary water-damage coverage applied and then seek to limit it via the endorsement. The Court also rejected the request for a new trial based on alleged attorney misconduct, concluding either there was no misconduct (as to the burden argument) or any potential misconduct was cured by the court’s sustained objections and clear admonishment.

Analysis

Precedents Cited

  • MEI-GSR Holdings, LLC v. Peppermill Casinos, Inc., 134 Nev. 235, 237, 416 P.3d 249, 253 (2018)
    Role in this opinion: Supplied the appellate standard of review for refusal of jury instructions—abuse of discretion. This frame mattered because the insureds needed to show not just that an instruction could have been given, but that refusing it was unreasonable under the governing law and trial posture.
  • Nat'l Auto. & Cas. Ins. Co. v. Havas, 75 Nev. 301, 303, 339 P.2d 767, 768 (1959)
    Role in this opinion: Provided Nevada’s foundational burden-allocation rule in coverage disputes: the insured must show “a loss apparently within the terms of the policy,” while the insurer bears the burden to prove an excepted cause (i.e., an exclusion/exception to coverage). The Court used Havas to reject an instruction that would, in practical effect, force the insurer to prove which coverage part applied before the insured established entitlement to coverage under the main grant.
  • Progressive N. Ins. Co. v. Hall, 709 N.W.2d 46, 52 (Wis. 2006)
    Role in this opinion: Offered a functional definition of an “exclusion”—a provision that “eliminates coverage” that otherwise would exist. Nevada relied on this concept to distinguish (a) an insurer invoking an exclusion to cut back otherwise-triggered coverage from (b) an insurer disputing that the coverage grant is triggered at all.
  • Zurich Arn. Ins. Co., 137 Nev. at 657, 497 P.3d at 630
    Role in this opinion: Cited for the proposition that an instruction must fit the facts and theories actually tried. The Court used it to emphasize that because the endorsement was not litigated as an exclusionary limitation on conceded coverage, an “insurer bears burden of exclusions” instruction was inapplicable.
  • Cutler v. Pittsburg Silver Peak Gold Mining Co., 34 Nev. 45, 57, 116 P. 418, 423 (1911)
    Role in this opinion: Longstanding Nevada principle that instructions “framed without reference to the issues or evidence” should not be given. This supported labeling the proposed instruction “legally erroneous” under the case posture.
  • Skender v. Brunsonbuilt Constr. & Dev. Co., LLC, 122 Nev. 1430, 1435, 148 P.3d 710, 714 (2006)
    Role in this opinion: Reinforced the district court’s “broad discretion” in settling jury instructions, undercutting the insureds’ effort to convert a disputed trial theory into reversible instructional error.
  • Grosjean v. Imperial Palace, Inc., 125 Nev. 349, 364-65, 212 P.3d 1068, 1078-79 (2009)
    Role in this opinion: Provided (1) de novo review for whether comments constitute misconduct and (2) the governing cure/prejudice standard—objected-to and sustained misconduct warrants a new trial only if it is “so extreme” that admonishment cannot remove its effect.
  • Lioce v. Cohen, 124 Nev. 1, 19, 27, 174 P.3d 970, 981, 987 (2008)
    Role in this opinion: Explained that repeated/persistent misconduct may be incurable, but also served as a comparator: the Court contrasted this case with Lioce (jury nullification advocacy) to show the challenged comments here were not “sufficiently extreme.”
  • Capanna v. Orth, 134 Nev. 888, 891, 432 P.3d 726, 731 (2018)
    Role in this opinion: Directed courts to assess alleged misconduct in the “context” of the argument as a whole, supporting the conclusion that the remarks were tied to disputing the water-damage coverage trigger, not an improper attempt to rewrite burdens.
  • Bongiovi v. Sullivan, 122 Nev. 556, 569 n.5, 138 P.3d 433, 443 n.5 (2006); NRAP 28(a)(8)
    Role in this opinion: Enforced waiver: an argument raised for the first time in a reply brief (here, a law-of-the-case claim about an objection during closing) is not considered.

Legal Reasoning

  1. Coverage first, exclusions second (and only if truly “exclusions”).
    The Court anchored its analysis in Nat'l Auto. & Cas. Ins. Co. v. Havas: the insured must initially prove a loss “apparently within the terms of the policy.” Only after that showing does the burden shift to the insurer to prove an exclusion/exception.
  2. Why the endorsement did not shift the burden here.
    The insureds attempted to characterize the sewer-backup endorsement (with its $5,000 cap) as an exclusion that Farmers had to prove. The Court rejected this because Farmers did not try to limit conceded coverage; it disputed that the primary water-damage grant was triggered at all (arguing the flooding did not result from a “break or crack” in a covered system and presenting an alternative causation theory).
    Drawing on Progressive N. Ins. Co. v. Hall, the Court treated an “exclusion” as a carve-out that removes coverage that otherwise exists. The Court reasoned that the endorsement could only function as an exclusion if Farmers conceded coverage under the water-damage provision but invoked the endorsement to cap that coverage. Because that concession never occurred, the case remained a dispute over the coverage grant’s trigger, keeping the burden on the insureds.
  3. Instructional fit and trial theory control.
    Under Zurich Arn. Ins. Co. and Cutler v. Pittsburg Silver Peak Gold Mining Co., instructions must match the issues and evidence actually tried. An exclusions-burden instruction would have misframed the case by implying the insurer had to prove the endorsement applied before the insureds proved the primary coverage trigger.
  4. Closing argument: distinguishing “arguing plaintiff’s burden” from “improper burden-shifting.”
    Farmers’ counsel stated twice that the insureds failed to show the flood water “was not sewage backup,” which prompted sustained objections and an admonishment that the insureds need not disprove Farmers’ theory. The Court found:
    • No misconduct in emphasizing that insureds generally bore the burden to prove coverage (because that was legally correct on this record).
    • Any potential misconduct in implying a requirement to “disprove” Farmers’ theory was cured by the district court’s unequivocal admonishment, consistent with Grosjean v. Imperial Palace, Inc..
    • The conduct was not extreme or persistent enough to warrant a new trial, unlike the scenario discussed in Lioce v. Cohen.
  5. Reply-brief waiver.
    The Court declined to entertain a law-of-the-case argument raised only in the reply brief under Bongiovi v. Sullivan and NRAP 28(a)(8).

Impact

The decision clarifies (and will likely be cited for) a practical boundary in Nevada insurance trials: a coverage endorsement with its own limit does not automatically operate like an “exclusion” for burden-of-proof purposes. Unless the insurer concedes the principal coverage grant is triggered and then invokes the endorsement to reduce or cap that otherwise-applicable coverage, the dispute remains a coverage-trigger question with the burden on the insured.

Likely downstream effects include:

  • Jury-instruction strategy: insureds will need to tailor requested instructions to the insurer’s actual pleaded defenses and trial positions, not merely to how an endorsement might be characterized in the abstract.
  • Trial framing of endorsements: insurers disputing a coverage trigger can avoid an “exclusion burden” instruction by clearly maintaining non-trigger and not conceding coverage while referencing an endorsement as an alternative, limited path.
  • Closing argument policing: trial courts can cure ambiguous burden-adjacent statements with prompt, direct admonishments; appellate relief will remain uncommon absent persistent or extreme misconduct.

Complex Concepts Simplified

Coverage grant (insuring agreement)
The part of the policy that says what kinds of losses are covered (here, “Water Damage” caused by breaking/cracking of certain systems). The insured typically must prove the loss fits here.
Exclusion / exception to coverage
A provision that takes away coverage that would otherwise exist. Once the insured shows the loss fits the coverage grant, the insurer must prove an exclusion applies.
Endorsement
A policy add-on that modifies coverage (sometimes expanding, sometimes limiting, sometimes creating a separate limited coverage bucket—like sewer backup with a specific sublimit). Whether it functions as an “exclusion” depends on how it operates in the case: it is not automatically an exclusion just because it limits recovery.
Burden of proof (in this context)
Who must persuade the jury. Nevada follows the sequence: insured proves a loss apparently within the policy; insurer proves an exclusion—if the insurer is actually relying on an exclusion to defeat otherwise-established coverage.
Attorney misconduct in closing argument
Improper statements that can unfairly influence the jury. Even if a remark is improper, a new trial usually requires showing the impropriety was so severe that sustained objections and a judge’s admonishment could not cure it.
Waiver for raising issues late
Arguments generally must be raised in the opening appellate brief. Raising a new point only in a reply brief is typically too late.

Conclusion

The Court’s core contribution is a clarified trial rule: when an insurer does not concede the primary coverage grant, a limited endorsement (such as sewer backup) is not treated as an “exclusion” that shifts the burden of proof to the insurer. The insured retains the burden to prove the loss falls within the policy’s main coverage terms. The opinion also reinforces Nevada’s high threshold for new trials based on closing-argument misconduct when timely objections are sustained and the jury is effectively admonished, and it reiterates that reply-brief-only arguments are waived.