In a 4-2 split, the New York Court of Appeals unwound a 2013 ruling that raised significant concern for insurers in denying requests for defense in liability matters. As a result, it is once again the rule in New York that an insurer does not forfeit its right to rely on policy exclusions to deny indemnity coverage where a court later determines that the insurer breached its defense obligation.
For the past 30 years, New York upheld the Servidone standard, which held that an insurer’s improper refusal to defend its insured precludes the insurer from subsequently re-litigating the amount of damages. Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419 (1985). However, an insurer could still litigate the issue of coverage based upon policy exclusions as a defense to payment of damages (i.e., the duty of indemnification).
In June 2013, the New York Court of Appeals, the state’s highest court, abruptly changed course in a decision now known as K2-I, holding that when an insurer breaches its duty to defend, it is thereafter precluded from relying on policy exclusions as a defense to indemnification. The court’s analysis and potential impact of the K2-I decision was discussed in a June I-Alert. K2-I expanded on the court’s decision in Lang v. Hanover Ins. Co., 3 N.Y.3d350, 356 (2004), which held that the consequences to an insurer of an improper coverage disclaimer would result in indemnification, “even if policy exclusions would otherwise have negated the duty to indemnity.”
Now, after granting the unusual move of reargument, the New York Court of Appeals vacated its K2-I opinion and issued in its place K2-II, which expressly affirms and restates the holding of Servidone.
The K2-II opinion is important to insurers for numerous reasons, which include:
It eliminates any perceived erosion of the Servidone standard.
It clarifies that Lang was not a departure from prior case law, but rather should be read in conjunction with prior case law.
It unequivocally holds that a breach of the duty to defend by an insurer does not automatically result in indemnification of any resulting judgment or settlement.