New York Insurance Coverage Update

New York Court of Appeals Vacates K2, Rejecting “Automatic Indemnity” Where Insurer Breaches Duty to Defend

In K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., the insurer breached its duty to defend, and a default judgment was entered against its insured. The New York Court of Appeals has vacated its controversial June 2013 decision in which it held that an insurer that breaches its duty to defend “must indemnify its insured for the resulting judgment, even if policy exclusions would otherwise have negated the duty to indemnify.” The Court acknowledged that it had failed to take account of its controlling precedent in Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419 (1985), in which it held that an insurer’s breach of the broad duty to defend “does not create coverage” as “there can be no duty to indemnify unless there is first a covered loss.” In Servidone, the Court of Appeals explained that the duty to defend is broader than the duty to indemnify because the duty to defend is generally triggered if the allegations of the complaint against the insured reflect a “possibility” of coverage whereas the duty to indemnify or pay is determined “not from the pleadings but from the actual facts.” In vacating K2, the Court of Appeals has made clear that Servidone will continue to remain the law in New York.

Even though the insurer in K2 breached the duty to defend, the Court held that it could rely upon policy exclusions to defeat any indemnity obligation. The Court recognized that an insurer will still have an incentive to defend where appropriate, including because its insured may default, and the insurer may not relitigate facts established against the insured in the underlying action.  As such, the Court opined that it “continues to be sound advice” for an insurer to “seek a declaratory judgment concerning the duty to defend or indemnify” where “coverage may be arguable.”  Indeed, the insurer in K2 was unable to challenge the amount of the default judgment against its insured.  However, the facts necessary to resolve the policy exclusions were not resolved in the underlying action.  The insurer’s breach of the duty to defend did not result in a loss of the exclusions or “automatic indemnity” for the judgment.  Instead, the Court concluded that there were questions of fact as to the application of the exclusions and, therefore, the claimants were not entitled to summary judgment as to indemnity. [K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., No. 6 (N.Y. Feb. 18, 2014).]

New York Court of Appeals Finds “Noncooperation” Disclaimer Was Timely

The New York Court of Appeals held that a disclaimer based upon the insured’s noncooperation was timely under New York Insurance Law §3420(d), even though it came about four months after the insurer knew or should have known that the corporate insured’s president would not cooperate. The insurer issued its disclaimer within several weeks of determining that another of the insured’s employees also would not cooperate. The Court reasoned that insurers may disclaim for noncooperation “after it is clear that further reasonable attempts to elicit their insured’s cooperation will be futile.” [Country-Wide Ins. Co. v. Preferred Trucking Services Corp., No. 21 (N.Y. Feb. 18, 2014).]

New York Court of Appeals Upholds Insurer’s Disclaimer in Letters that Contained “Reservation of Rights” Language 

The New York Court of Appeals held that an insurer timely and effectively disclaimed coverage for assault and battery claims asserted against its insured in two letters written through a third-party administrator. The Court stated that although the letters contained some “contradictory and confusing” language about a “reservation of rights,” they “specifically and consistently stated” that the policy excluded coverage for the claims. These statements were sufficient to apprise the insured that the insurer was disclaiming coverage on the ground of the exclusion for assault and battery. [QBE Ins. Corp. v. Jinx-Proof Inc., No. 25 (N.Y. Feb. 18, 2014).]

New York Court of Appeals Rejects Policy Provision Barring Suit Before Property Could Reasonably Be Replaced 

The New York Court of Appeals, answering a question certified to it by the U.S. Court of Appeals for the Second Circuit, ruled that a provision in a fire insurance policy limiting the time in which the insured could bring suit to two years from the date of the fire was unenforceable where the policy also stated that the insured could recover the cost of replacing destroyed property – but only after the property already had been replaced – and the property could not reasonably be replaced within two years.  [Executive Plaza, LLC v. Peerless Ins. Co., No. 2 (N.Y. Feb. 13, 2014).]