Rare New York Court Of Appeals Reversal In Significant Insurance Coverage Decision

It is extremely rare that the New York Court of Appeals grants a motion to reargue, and even rarer that it reverses its decision upon such a motion. But that is exactly what happened recently, and the court's latest decision represents a significant victory for liability insurers in situations following a finding that an insurer has breached its duty to defend its insured.

In June 2013, in K2 Investment Group, LLC v. American Guaranty & Liability Insurance Co., [21 N.Y.3d 384 (N.Y. 2013)] (K2-I), the New York Court of Appeals ruled that if a liability insurer breached its duty to defend, it was subsequently precluded from relying on policy exclusions to deny a duty to indemnify its insured with respect to an underlying judgment or settlement. Based on K2-I, an insurer's improper refusal to defend its insured meant that it may be liable up to its policy limits — even if the policy contained an exclusion that would have precluded a duty to indemnify.

The K2-I decision was directly contrary to well-established New York precedent — sometimes referred to as the "Servidone" rule (Servidone Const. Corp. v. Security Ins. Co. of Hartford, [64 N.Y. 2d 419 (1985)] namely, that where an insurer had improperly refused to defend its insured, the insurer was precluded from re-litigating the amount of damages, but was still entitled to assert that coverage did not apply based...