Attorneys Robert Maddox and Jamie Carsey deliver their opening statements in Reimers v. Everest. Click here to see video from the trial. Click here for a copy of the complaint.

Reno - Opening statements began Tuesday in a $5 million class action in Nevada state court accusing Everest Indemnity Insurance Co. of acting in bad faith by refusing to cover defense costs in an underlying suit brought by hundreds of homeowners who claimed a developer’s poorly designed drains caused flooding after a levee collapse.

Plaintiff Elizabeth Reimers initially sued Matthews Homes, which had a $2 million commercial general liability policy from Everest, after the collapse of a century-old earthen levee in 2008 sent mud and floodwaters into hundreds of homes in Fernley, Nevada. Everest refused to provide a defense for Matthews in that underlying class action on the basis of an earth movement exclusion in the policy, according to Reimers’ complaint.

Matthews settled the underlying class action in 2012 for $5 million, and as part of the settlement agreement any bad faith and breach of contract claims owned by Matthews against Everest were assigned to the class plaintiffs, in return for a commitment to not attempt to collect the judgment from Matthews. The class plaintiffs then filed the current suit against Everest in 2013.

The class plaintiffs allege on Matthews’ behalf that Everest acted in bad faith by invoking the earth movement exclusion without taking adequate steps to determine if the exclusion actually applied. They argue the exclusion only applies to naturally occurring events, and that despite the levee being comprised of natural materials, the collapse resulted from officials at the Truckee-Carson Irrigation District pumping in more water than the levee could handle.

“The Fernley flood was caused by human error,” Robert Maddox of Maddox Segerblom & Canepa LLP told jurors during his opening statement on behalf of the class plaintiffs, according to a Courtroom View Network webcast of the proceedings. “This was a man-made event.”

Maddox told jurors that Everest used the earth movement exclusion as a way to deny coverage after initially trying to refuse payment based on the argument that the flood fell outside the coverage period of Matthews’ policy.

Matthews’ CGL policy was in effect from March 2004 until March 2007, and the levee collapsed in January of 2008. Everest and their claims administrator, Carl Warren & Co., initially denied coverage on that basis but later conceded the Matthews policy included tail coverage that extended six years from the completion of an insured construction project, Maddox told jurors.

Maddox asked the jury to determine that Everest is responsible for the $5 million settlement with Matthews, in addition to an unspecified amount in potential punitive damages.

A jury’s interpretation of how Everests’ coverage obligations are affected by the earth movement exclusion could have broad implications, especially in states like California, where insurance claims stemming from events such as mudslides are common. Everest has devoted substantial resources to this litigation. In addition to local Nevada counsel, Everest’s trial team includes attorneys from the Texas-based firm of Thompson Coe Cousins & Irons LLP.

During opening statements on behalf of Everest, Jamie Carsey told the jury that all liability policies contain exclusion provisions, and that Everest acted properly when it relied on the exclusion to deny coverage for Matthews defense costs in the underlying class action.

Carsey described Matthews as a “sophisticated construction company” that elected not to purchase a policy with earth movement coverage despite building homes downstream from a levee with a history of failures.

Everest acted properly in applying the exclusion, Carsey argued, because the Reimers’ complaint makes specific mention of mud and dirt entering homes. She said the exclusion can apply when earth movement is merely a contributing factor to property damage, and that earth movement isn’t required to be the sole cause for Everest to use it as the basis for denying a claim.

“The exclusion is not that limited,” Carsey told the jury. “The exclusion applies regardless of any other cause or event.”

Everest already suffered a pre-trial setback in the case after Judge Janet Berry granted a motion for partial summary judgment in favor of the class plaintiffs and ruled that the terms of the earth movement exclusion as written in the Matthews policy are ambiguous. In January the Nevada Supreme Court declined to review Judge Berry’s ruling after an appeal from Everest.

The trial is expected to last up to three weeks.

An attorney for the plaintiff class and a representative for Everest did not immediately respond to requests for comment from CVN.

The plaintiff class is represented by Robert C. Maddox and Ardea Canepa of Maddox Segerblom & Canepa LLP and by Vernon E. Leverty and Patrick R. Leverty of Leverty & Associates Law Chtd.

Everest is represented by Brian S. Martin and Jamie R. Carsey of Thompson Coe Cousins & Irons LLP and by Jack G. Angaran of Georgeson Angaran Chtd.

The case is Elizabeth Reimers, et al. v. Everest Indemnity Insurance Co., case number CV13-00737, in the Second Judicial District Court of Nevada in Washoe County.