K2 Investment Group, LLC v. American Guarantee & Liability Insurance Company, 21 N.Y.3d 384 (2013)
When a liability insurer breaches its duty to defend its insured, the insurer forfeits the right to later rely on policy exclusions to avoid its duty to indemnify the insured for a judgment against them.
Summary
K2 Investment Group sued attorney Jeffrey Daniels for legal malpractice after loans they made to Goldan, LLC, where Daniels was a principal, went unpaid due to Daniels’ failure to record mortgages securing the loans. Daniels tendered the claim to his malpractice insurer, American Guarantee, who disclaimed coverage, asserting the allegations were not based on legal services for others. Daniels defaulted, and K2 obtained a judgment exceeding the policy limit. As Daniels’ assignee, K2 sued American Guarantee for breach of contract and bad faith. The New York Court of Appeals held that because American Guarantee breached its duty to defend, it could not later rely on policy exclusions to escape its duty to indemnify Daniels, emphasizing the insurer’s obligation to defend whenever a complaint suggests a reasonable possibility of coverage.
Facts
K2 Investment Group and another LLC made loans totaling $2.83 million to Goldan, LLC, expecting mortgages to secure the loans. Jeffrey Daniels, an attorney and a principal of Goldan, failed to record the mortgages. Goldan defaulted on the loans, leading to a lawsuit by K2 against Goldan and its principals, including a legal malpractice claim against Daniels, alleging Daniels acted as their attorney and his failure to record the mortgages deviated from accepted legal practice.
Procedural History
Daniels notified American Guarantee, his malpractice insurer, of the claims and forwarded the complaint. American Guarantee disclaimed coverage. Daniels defaulted, resulting in a judgment for K2 exceeding the policy limit. K2, as Daniels’ assignee, sued American Guarantee for breach of contract and bad faith. Supreme Court granted summary judgment to K2 on the contract claim, holding American Guarantee breached its duty to defend. The Appellate Division affirmed. American Guarantee appealed based on a two-justice dissent, and K2 cross-appealed; the Court of Appeals affirmed.
Issue(s)
Whether an insurer, having breached its duty to defend, can later assert policy exclusions to deny indemnity for a default judgment against its insured.
Holding
Yes, because an insurance company that wrongfully disclaims its duty to defend may only litigate the validity of its disclaimer and cannot later rely on policy exclusions to avoid indemnification. By breaching its duty to defend, American Guarantee lost its right to rely on policy exclusions.
Court’s Reasoning
The Court reasoned that American Guarantee breached its broad duty to defend, which arises whenever a complaint suggests a reasonable possibility of coverage. The court quoted Automobile Ins. Co. of Hartford v Cook, 7 NY3d 131, 137 (2006), stating: “[A]n insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage.” Even if the claim seemed doubtful, the insurer was obligated to defend. The court emphasized that insurers who disclaim coverage where coverage may be arguable should seek a declaratory judgment. Quoting Lang v Hanover Ins. Co., 3 NY3d 350, 356 (2004), the court stated that an insurer that disclaims without seeking a declaratory judgment “may litigate only the validity of its disclaimer and cannot challenge the liability or damages determination underlying the judgment.” By breaching its duty to defend, American Guarantee forfeited its right to argue policy exclusions. The Court acknowledged a possible exception for cases involving public policy, such as intentional wrongdoing (citing Hough v USAA Cas. Ins. Co., 93 AD3d 405 (1st Dept 2012)), but found no such public policy concern applicable here. The rejection of a settlement offer below the policy limit does not automatically prove bad faith unless a pattern of conscious indifference to the insured’s potential liability for a large judgment is shown. The court found no evidence American Guarantee knew the malpractice claim’s value exceeded the offer or policy limits.