January 2026 New York Insurance Coverage Update

Southern District Finds Mutual Mistake And Reforms Excess Policy To Avoid Illusory Coverage

The insured, a plumbing company, faced millions of dollars in potential liability for claims arising from a fire at an apartment building where the insured performed work. The insured sought coverage for those claims under a primary policy issued by The Travelers Indemnity Company of Connecticut and a “follow form” excess policy issued by GuideOne National Insurance Company. Travelers initially denied coverage based upon a Residential-Work Exclusion that excludes coverage for “work … on or for any project that … is … any residential condominium [or] any residential apartment …,” but then agreed to cover the claims by “reforming” the policy to remove the exclusion. GuideOne denied coverage based on the same exclusion and filed an action seeking a declaration of no coverage under its excess policy. After a bench trial, the Southern District of New York found “by clear and convincing evidence that there was a mutual mistake between [the insured] and GuideOne as to the scope of coverage” under the excess policy at the time it was issued. Specifically, the court found GuideOne was aware that the insured performed all of its work on residential buildings and they both intended the excess policy to cover that work. The court also found that, when the “follow form” excess policy was issued, neither GuideOne nor the insured was aware the Travelers primary policy contained the Residential-Work Exclusion, which was not listed in Travelers’ proposal accepted by the insured. The court further found that the exclusion, if applied, would exclude coverage for all of the insured’s work, resulting in illusory coverage, contrary to the parties’ intent. Accordingly, the court held that the excess policy must be reformed to not include the Residential-Work Exclusion. [GuideOne Nat’l Ins. Co. v. Systems 2000 Plumbing Serv., No. 22-cv-5018 (JPO), 2025 U.S. Dist. LEXIS 264250 (S.D.N.Y. Dec. 22, 2025).]

Eastern District Magistrate Recommends That Insured’s Motion For Judgment On Pleadings Be Denied And Discovery Proceed On Insurer’s Indemnity Obligation For Settlement Of Advertising Injury Claims

The insured, a wholesaler of pocket lighters, was sued by a competitor alleging trade dress infringement in connection with the insured’s advertising and sale of its products. The insured sought coverage for the suit under its general liability policy issued by North American Capacity Insurance Company, which covers damages because of “personal and advertising injury,” defined to include “[t]he use of another’s advertising idea in [the insured’s] ‘advertisement’; or … [i]nfringing upon another’s … trade dress … in [the insured’s] ‘advertisement,’” and excludes coverage for certain conduct and claims. NAC initially denied coverage based, in part, on its determination that the insured’s alleged infringement did not occur during the NAC policy period but later agreed to defend the insured after receiving information that some of the alleged infringement was during its policy period. The parties settled the trade dress suit with the insured and NAC both funding a portion of the settlement and reserving rights to seek reimbursement. The insured filed an action against NAC in the Eastern District of New York seeking a declaration of coverage for the trade dress suit and NAC asserted a counterclaim seeking a declaration of no coverage and reimbursement of its portion of the settlement. The insured’s motion to dismiss NAC’s counterclaim was referred to a magistrate and addressed as a motion for judgment on the pleadings because it was filed after the insured answered NAC’s counterclaim. The magistrate, distinguishing between an insurer’s duty to defend and its duty to indemnify, rejected the insured’s argument that the court’s prior finding that NAC has a duty to defend precludes NAC’s counterclaim, which seeks reimbursement of its settlement payment on the basis that at least a portion is not covered. Based upon NAC’s allegations that some alleged infringement occurred outside of its policy period, the magistrate found that judgment on the pleadings was not appropriate because of “a factual dispute as to whether the entirety of the alleged infringement occurred during the Policy Period.” The magistrate rejected the insured’s argument that NAC must conclusively establish that its policy exclusions apply to preclude coverage to survive the insured’s motion, explaining that “NAC only needs to ‘state a claim to relief that is plausible on its face.’” The magistrate found “NAC plausibly establishes the applicability of the Policy Exclusions by alleging that the ‘Knowing Violation of Rights of Another’ and ‘Material Published Prior to Policy Period’ exclusions eliminate or restrict indemnity coverage.” Accordingly, the magistrate recommended that the insured’s motion to dismiss NAC’s counterclaim be denied and discovery resume. [Arrow Lighter, Inc. v. N. Am. Capacity Ins. Co., 19-cv-1828 (ENV)(PK), 2025 U.S. Dist. LEXIS 264443 (E.D.N.Y. Dec. 22, 2025).]