New York Law Review

Tag: Johnson v. General Mutual

  • Johnson v. General Mutual Insurance Co., 24 N.Y.2d 42 (1969): Insured’s Right to Recover Expenses from Insurer’s Failure to Defend

    Johnson v. General Mutual Insurance Co., 24 N.Y.2d 42 (1969)

    An insured may recover legal expenses incurred in defending a declaratory judgment action brought by an injured party’s subrogee when the insurer wrongfully failed to defend the underlying tort action, but cannot recover expenses for prosecuting cross-claims against the insurer in the same action; the insured may also pursue a separate action for consequential damages resulting from the wrongful cancellation of the insurance policy.

    Summary

    This case concerns an automobile accident, a liability insurance policy, and the insurer’s wrongful cancellation of the policy. The insured, Kucskar, was involved in an accident, and the injured parties sued him. His insurer, General Mutual, wrongfully canceled his policy and refused to defend him. MVAIC, as subrogee for the injured parties, then sued Kucskar and General Mutual in a declaratory judgment action. Kucskar cross-claimed against General Mutual for failure to defend and for consequential damages. The court held that Kucskar could recover expenses for defending the declaratory judgment action but not for prosecuting his cross-claims and could pursue a separate action for consequential damages.

    Facts

    Kucskar obtained automobile insurance through a broker. He financed the premium through Agent’s Service Corp. An accident occurred in October 1961, injuring the Johnsons. General Mutual notified Kucskar that his insurance was canceled, based on a notice from Agent’s due to alleged non-payment of premiums. However, Kucskar had paid the installment. Agent’s also failed to provide the statutorily required 13-day notice for cancellations by mail. The injured infants initially obtained a default judgment against Kucskar, which was later vacated. MVAIC, as subrogee for the infants, then sued Kucskar.

    Procedural History

    MVAIC, on behalf of the injured infants, brought a declaratory judgment action against General Mutual and Kucskar, seeking to compel General Mutual to defend the tort actions. Kucskar cross-claimed against General Mutual. The trial court granted summary judgment against General Mutual, requiring it to defend the tort actions and pay any judgments. The Appellate Division modified the judgment, disallowing Kucskar’s expenses in the declaratory judgment actions and his claim for consequential damages. Both Kucskar and General Mutual appealed.

    Issue(s)

    1. Whether the insured can recover legal expenses incurred in defending a declaratory judgment action brought against him due to the insurer’s wrongful failure to defend the underlying tort action.
    2. Whether the insured can recover legal expenses incurred in prosecuting cross-claims against the insurer in the same declaratory judgment action.
    3. Whether the insured can recover consequential damages resulting from the wrongful cancellation of the insurance policy.

    Holding

    1. Yes, because the declaratory judgment action arose directly from the insurer’s breach of its duty to defend the tort actions.
    2. No, because expenses incurred in prosecuting a cross claim to establish coverage or recover legal expenses are not actionable damages.
    3. The disposition of the claim for consequential damages should be without prejudice to his bringing a separate action at law for that purpose, because the insured has a duty to mitigate his damages and should demonstrate his efforts to obtain substitute insurance or other alternatives.

    Court’s Reasoning

    The court distinguished this case from Doyle v. Allstate Ins. Co., which held that expenses incurred in actions to establish insurance coverage are not recoverable. Here, the declaratory judgment action was brought by the injured parties, not the insured, and was a direct consequence of the insurer’s failure to defend. The court reasoned that it would be unrealistic to separate the consequences of the declaratory judgment action from the tort action. The court stated, “the expense of defending the declaratory judgment actions arose as a direct consequence of the insurer’s breach of its duty to defend the tort actions. Hence, the expense is a compensable damage sustained by insured.” However, relying on Doyle and Sukup v. State of New York, the court disallowed recovery for expenses incurred in prosecuting the cross-claim, stating that these are not actionable damages. Regarding consequential damages, the court found that the wrongful termination of insurance could detrimentally affect the insured’s license and registration. Following the procedure in Teeter v. Allstate Ins. Co., the court held that the claim for consequential damages should be without prejudice to the insured bringing a separate action, as the insured has a duty to mitigate damages by attempting to obtain substitute insurance.