K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., 23 N.Y.3d 584 (2014)
An insurer that breaches its duty to defend its insured may still rely on policy exclusions to deny indemnification, provided the exclusions do not depend on facts established in the underlying litigation.
Summary
This case addresses whether an insurer that wrongly refuses to defend its insured can later rely on policy exclusions to avoid indemnifying the insured for a resulting judgment. The New York Court of Appeals, on reargument, reversed its prior decision and held that an insurer is not barred from asserting policy exclusions, even after breaching its duty to defend, as long as the exclusions do not require relitigating issues from the underlying case. The Court emphasized the importance of stare decisis and declined to overrule its prior precedent in Servidone Constr. Corp. v Security Ins. Co. of Hartford, which allowed insurers to invoke policy exclusions even after breaching the duty to defend.
Facts
Jeffrey Daniels, insured by American Guarantee, faced legal malpractice claims. American Guarantee refused to defend Daniels, who then suffered a default judgment. Daniels assigned his rights against American Guarantee to the plaintiffs from the malpractice suit, who then sued American Guarantee to enforce the duty to indemnify. American Guarantee argued that policy exclusions barred coverage.
Procedural History
The plaintiffs were initially granted summary judgment, which was affirmed by the Appellate Division. The Court of Appeals initially affirmed in K2 Investment Group, LLC v American Guar. & Liab. Ins. Co., but later granted reargument. On reargument, the Court of Appeals reversed the Appellate Division’s order and denied the plaintiffs’ motion for summary judgment.
Issue(s)
Whether an insurer that breaches its contractual duty to defend its insured is barred from later relying on policy exclusions to deny indemnification for a judgment against the insured.
Holding
No, because the insurer is not barred from relying on policy exclusions to deny indemnification, provided the exclusions do not depend on facts established in the underlying litigation.
Court’s Reasoning
The Court relied heavily on its prior decision in Servidone, which held that an insurer could still assert policy exclusions even after breaching its duty to defend. The Court rejected the argument that Servidone was distinguishable because it involved a settlement rather than a judgment. The Court stated that the duty to indemnify does not depend on whether the case is settled or results in a judgment. The Court distinguished Lang v Hanover Ins. Co., stating that while Lang held that an insurer may litigate only the validity of its disclaimer, it did not involve a defense based on policy exclusions. The Court emphasized the importance of stare decisis, finding no reason to overrule Servidone, which had been followed for nearly three decades. The Court also found that the applicability of the “insured’s status” and “business enterprise” exclusions presented an issue of fact sufficient to defeat summary judgment, as the malpractice claims could have arisen partly out of Daniels’s status as a manager of Goldan. The court reasoned that the alleged malpractice may have occurred because Daniels was serving two masters (plaintiffs, his clients, and Goldan, the company of which he was a principal), thus possibly triggering the policy exclusions. As the court in Servidone stated: “Security responded that, pursuant to an exclusion in the policy, a loss based upon any obligation the insured had assumed by contract was outside coverage”.