New York Law Review

Tag: policy exclusions

  • K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., 23 N.Y.3d 584 (2014): Insurer’s Right to Assert Policy Exclusions After Breaching Duty to Defend

    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”.

  • K2 Investment Group, LLC v. American Guarantee & Liability Insurance Company, 21 N.Y.3d 384 (2013): Insurer Waives Policy Exclusions by Wrongfully Denying Defense

    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.

  • Seaboard Surety Co. v. The Gillette Company, 64 N.Y.2d 304 (1984): Insurer’s Duty to Defend Extends to Potentially Covered Claims

    Seaboard Surety Co. v. The Gillette Company, 64 N.Y.2d 304 (1984)

    An insurer’s duty to defend is broader than its duty to indemnify and arises whenever the allegations in a complaint against the insured fall within the scope of the risks undertaken by the insurer, even if some claims are excluded.

    Summary

    Seaboard Surety Company sought a declaratory judgment that it had no duty to defend The Gillette Company and J. Walter Thompson Company in a suit brought by Alberto-Culver Company. Alberto sued Gillette and Thompson for unfair competition, deceptive trade practices, and libel based on a television commercial. Seaboard refused to defend, citing exclusions in the “Libel Policy.” The New York Court of Appeals held that Seaboard had a duty to defend because the complaint contained allegations that potentially fell within the policy’s coverage, and the exclusions did not unambiguously negate the duty to defend all claims.

    Facts

    In 1974, Gillette ran a television commercial prepared by Thompson that unfavorably compared an Alberto-Culver product to Gillette’s. Alberto sued Gillette and Thompson in federal court, alleging unfair competition, deceptive trade practices, consumer fraud, and common-law libel. Alberto claimed the commercial “falsely implie[d]” deficiencies in its product and “falsely” disparaged its business, reputation, and products. Alberto also alleged unauthorized use of its trademark. Gillette and Thompson requested Seaboard to defend them under their insurance policies, but Seaboard disclaimed coverage. The Alberto action was eventually settled by Gillette and Thompson.

    Procedural History

    Seaboard filed a declaratory judgment action seeking a ruling that it had no duty to defend or indemnify Gillette and Thompson. The trial court initially dismissed the action against Gillette. The trial court granted Thompson’s motion for partial summary judgment, holding Seaboard had a duty to defend. The Appellate Division affirmed. The Appellate Division reversed the dismissal against Gillette. The trial court then granted Gillette’s motion for partial summary judgment on Seaboard’s duty to defend and ordered a trial on the defense cost claims. The Appellate Division affirmed, and Seaboard appealed to the New York Court of Appeals.

    Issue(s)

    Whether the exclusions from liability coverage contained in the insurance policies negate the insurer’s duty to defend Gillette and Thompson in the Alberto action.

    Holding

    Yes, because the allegations in Alberto’s complaint triggered Seaboard’s duty to defend since some claims fell within the policy’s general coverage and were not unambiguously excluded. A declaration that there is no obligation to defend could be properly made only if it could be concluded as a matter of law that there is no possible factual or legal basis on which the insurer might eventually be held to be obligated to indemnify the insured under any provision of the insurance policy.

    Court’s Reasoning

    The court stated that an insurer’s duty to defend is broader than its duty to indemnify. The duty to defend arises when the allegations in the complaint fall within the scope of the risks undertaken by the insurer, regardless of the truthfulness of the allegations. The court emphasized that the duty to defend is triggered if the complaint alleges any facts or grounds that bring the action within the protection purchased. Citing International Paper Co. v Continental Cas. Co., the court noted that such coverage is, in fact, ‘litigation insurance’ as well. The court also stated, “So long as the claims [asserted against the insured] may rationally be said to fall within policy coverage, whatever may later prove to be the limits of the insurer’s responsibility to pay, there is no doubt that it is obligated to defend.”

    The court further stated that exclusions from coverage must be “clear and unmistakable” and are to be strictly and narrowly construed. The insurer bears the burden of establishing that the exclusions apply and are subject to no other reasonable interpretation.

    In this case, the court found that Alberto’s complaint included allegations that were not explicitly listed in the exclusions. Alberto’s claims of product disparagement and misuse of trademark fell within the scope of the policy’s general inclusions and did not “solely and entirely” fall within the relied-upon exclusory provisions. The court concluded that Seaboard failed to demonstrate that the allegations necessarily fell within the policies’ exclusions. Because there was a possible factual or legal basis on which Seaboard might eventually be obligated to indemnify Gillette and Thompson, Seaboard had a duty to defend.