Articles

New York’s Highest Court Reverses Its K2 Decision

Case:
K2 Investment Group, LLC v. American Guarantee & Liability Insurance Company
New York Court of Appeals
2014 N.Y. LEXIS 201, 2014 NY Slip Op 1102 (2014)(K2-II).

As insurance policies issued in the Gulf Coast often contain New York choice of law provisions, the New York Court of Appeals’ February 18, 2014 decision reversing itself and reaffirming its earlier ruling in Servidone Construction Corp. v. Security Insurance Company of Hartford, 64 N.Y.2d 419 (NY 1985), is of notable interest.

In a rare move, the New York Court of Appeals reversed its earlier decision in K2 Investment Group LLC v. American Guarantee & Liability Insurance Company, 2013 N.Y. LEXIS 1461 (N.Y. June 11, 2013)(K2-I), which held that a liability insurer’s breach of its duty to defend bars the insurer from later relying on policy exclusions to avoid indemnification. Instead, the Court chose to follow the longstanding rule stated in Servidone, supra, that an insurer which breaches a contractual duty to defend its insured is not precluded from contesting the duty to indemnify where coverage is disputed.

The decision in K2-I stood in direct conflict with Servidone and the Court found no justification for overruling Servidone, noting that “[w]hen 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 K2-II decision reaffirms the Servidone rule that an insurer’s breach of the duty to defend cannot operate to enlarge a policy’s coverage, remains viable not only in New York, but also for several other states which have adopted it.

Writing for a two-judge dissent, Judge Victoria Graffeo expressed her belief that an insurer should be penalized for breaching the duty to defend and that Servidone should be applied more restrictively — “to clarify that an insurer's breach of the duty to defend prohibits it from avoiding indemnification on the basis of policy exclusions, but not from demonstrating that there never was coverage for the loss in the first instance.”

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