New York Insurers, K2-II Is for You, Too
February 27, 2014| Von George Barson
On Tuesday, February 18, 2014, the New York Court of Appeals delivered good news to insurers and claim departments. The court reversed its earlier opinion in K2 Investment Group, LLC v. American Guar. & Liab. Ins. Co., which had held that a carrier refusing to defend its insured later loses the right to litigate coverage issues.
In its new nine-page opinion, the court referred to Servidone, an earlier case similar to this one and declared: "We stated the question as follows: Where an insurer breaches a contractual duty to defend its insured in a personal injury action, and the insured thereafter concludes a reasonable settlement with the injured party, is the insurer liable to indemnify the insured even if coverage is disputed…? We answered the question [and said]…no."
When it decided K2-I in 2013, the Court deviated from Servidone and other rulings to hold that the carrier refusing to defend would not have the opportunity to litigate the applicability of an exclusion in a subsequent action. Fast forward to 2014, less than a year later, and the court in K2-II reversed and reaffirmed the principle that a carrier will not lose its right to assert coverage defenses when challenging its indemnity obligations. In large part, the court based its 2014 turnaround on the importance of consistency and precedent. Insurers and insureds should be entitled to assume that the law remains unchanged "unless and until the Legislature decides otherwise."
The net result is that an insurer need not honor a judgment against its insured for liability for an excluded risk, even when the insurer may have violated its duty to defend. Insurers might be well-served by filing declaratory judgment actions to determine coverage in such scenarios, but the failure to do so did not mean that all policy defenses are automatically lost.
The K2-II case involved a Lawyers Professional Liability policy, but the outcome has broader implications for insurers. The court noted that most states also preserve the right to litigate exclusions and other coverage issues. The new ruling keeps New York in the majority on this issue.
This is very good news for New York insurers. For a great write-up, see the several law firm reports available online.