Court of Appeals Vacates Problematic K2 Decision
New York’s highest court recently vacated its decision, upon reargument, in K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co. The new decision concludes that an insurer is not precluded from relying on policy exclusions to limit its indemnification obligations, even though the carrier may have breached its duty to defend. See K2 Inv. Group, LLC v American Guar. & Liab. Ins. Co., __ N.Y.3d __ (Feb.18, 2014).
In K2, the insurer, American Guarantee, refused to defend a legal malpractice claim brought against its insured. A default judgment was entered against the insured which then assigned its rights to the plaintiff, who in turn sought to recover directly from American Guarantee. In its June 2013 decision, the New York Court of Appeals held that American Guarantee was obligated to defend its insured based on the allegations in the complaint, and that by failing to provide a defense, was subsequently barred from relying upon policy exclusions with respect to indemnification. That decision was a significant departure from established precedent of the Court.
Upon reargument, the Court has now vacated its prior K2 decision (June 2013), relying on its position in Servidone Construction Corp. v. Security Insurance Co., that the duty to defend and the duty to indemnify are separate obligations. The Court had concluded in Servidone that even if the insurer breaches its duty to defend, it may still rely upon policy exclusions in contesting its obligation to indemnify the insured. Servidone Constr. Corp. v. Security Ins. Co., 64 N.Y.2d 419 (1985).
In the new K2 decision, the Court placed strong emphasis on the rule of stare decisis, noting that:
When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise.
The Court also reiterated its prior position in Lang v. Hanover Insurance Co. and suggested that an insurer should seek a declaratory judgment concerning the duty to defend or indemnify its insured.
One judge dissented based upon a public policy concern that the decision will result in unnecessary and repetitive judicial proceedings by “allowing an insurer to wrongfully abandon its policyholder’s defense…”. The dissent predicted that this decision will only “prolong final resolution of this matter even further.”
The Court’s turnabout in K2 appears to be another example of the deference paid to controlling precedent, particularly as the original K2 decision was inconsistent with earlier decisions of the Court. In so doing, the Court preserved the established ability of an insurer to invoke policy exclusions to avoid indemnification based on the facts developed during litigation, even if it did not defend its insured.
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