Case Notes

Insurer Is Not Barred From Relying on Policy Exclusions to Disclaim Indemnity to an Insured

On Feb. 18, 2014, in K2 Inv. Group, LLC v. American Guar. & Liab. Ins. Co., 6 N.E.3d 1117, 22 N.Y.3d 578 (N.Y. 2014) (hereafter “K2 ' II“), the Court of Appeals of New York vacated its prior decision and reversed the Appellate Division's Order in K2 Inc. Group, LLC v. American Guar. & Liability Ins. Co., 21 N.Y.3d 384 (2013) (hereafter “K2 ' I“), holding that its ruling in K2 ' I was irreconcilable with an earlier, established decision: Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419 (1985).

In the K2 ' II decision, the Court of Appeals thus affirmed the proposition that an insurer is not barred from relying on policy exclusions to disclaim indemnity to an insured where the insurer earlier breached a contractual duty to defend the insured in a personal injury action.

Background and the K2 ' I Decision

Legal malpractice claims were brought against American Guarantee's insured, Jeffrey Daniels, whom American Guarantee refused to defend (it is now conceded that this denial of the duty to defend by American Guarantee was wrongful). Daniels later suffered a default judgment and assigned his rights against American Guarantee to the plaintiffs who had originally brought claims against him. These plaintiffs then brought suit against American Guarantee, seeking to enforce an indemnity obligation on the default judgment. American Guarantee responded that the loss was not covered pursuant to two exclusions in the policy.

In K2 ' I, the Court of Appeals affirmed an order granting summary judgment to plaintiffs, holding that American Guarantee's breach of its duty to defend Daniels barred it from then relying on policy exclusions to disclaim an obligation to indemnify the judgment. In making this determination, the Court of Appeals relied on Lang v. Hanover Ins. Co., 3 N.Y.3d 350, 356 (2004) to conclude that an insurance company that has disclaimed its duty to defend may litigate only the validity of its disclaimer, and cannot challenge the liability or damages determination underlying the judgment.

The K2 ' II Decision

In K2 ' II, the Court of Appeals determined that K2 ' I failed to take into account controlling precedent: Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419 (1985). In Servidone, an insurer relied on policy exclusions in defending against a suit for indemnification, and the Court of Appeals examined the following question:

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?

64 N.Y.2d at 421.

In Servidone, the Court of Appeals answered “no” to this question, concluding that an insurer is not barred from relying on policy exclusions to deny indemnity even after breaching the duty to defend.

The Court of Appeals carried this Servidone proposition forward in K2 ' II, holding that even though there was a settlement in Servidone , and a judgment in the instant underlying proceedings, this distinction was not persuasive. “A liability insurer's duty to indemnify its insured does not depend on whether the insured settles or loses the case.” Instead, the issue in the instant matter, as it was in Servidone, was “whether the insurer may rely on policy exclusions that do not depend on facts established in the underlying litigation.” In K2 ' II, the Court of Appeals answered this in the affirmative.

The Court of Appeals also examined its reliance on Lang in the K2 ' I decision, and concluded that Lang was distinguishable. In Lang, the Court of Appeals decided that “a judgment is a statutory condition precedent to a direct suit against the tortfeasor's insurer,” but did not consider any defense based on policy exclusions at that time. Here, the insurer did present a defense to indemnification based on policy exclusions. Thus, in K2 ' II, the Court of Appeals held that the application of Servidone is not limited, and may be applied to cases in which a defense is predicated on either non-coverage or on an exclusion.

Last, in the second part of its decision, the Court of Appeals determined that even though American Guarantee was not barred from relying on policy exclusions, the applicability of such exclusions presented a question of fact sufficient to defeat summary judgment. ' Brian M. Oubre, White and Williams

NY Refuses to Impose 'As Soon As Reasonably Possible' Requirement on All Insurer Disclaimers

The New York Court of Appeals, applying New York law, has held that an insurer is not required to disclaim coverage for environmental contamination claims on late notice grounds “as soon as reasonably possible,” a standard drawn from a statute only applicable to death and bodily injury claims arising out of New York accidents and brought under New York liability policies. KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., et al., No. 110 (N.Y. June 10, 2014).

The policyholder, an electrical power and natural gas utility, had been engaged in ongoing negotiations with state regulatory actors over a number of years concerning the cleanup of seven manufactured gas plant sites. Several claims had been asserted against the policyholder relating to contamination emanating from the sites, and the policyholder began proactively investigating and remediating its sites. However, the policyholder did not notify its insurers of the potential for liability until many years later. Upon receiving notice, the insurers issued timely reservation of rights letters expressly reserving the right to deny coverage on late notice grounds and requesting more information from the policyholder.

In a subsequent coverage action between the policyholder and its excess insurers, the insurers included late notice as an affirmative defense in their answers. The insurers then sought summary judgment on the grounds of late notice. The trial court found as a matter of law that the policyholder's notice was late as to one site, but held that genuine disputes of material fact remained as to the other sites. The trial court specifically rejected the policyholder's contention that the insurers had waived the late-notice defense for each of the sites because they did not immediately disclaim coverage on that basis.

On cross-appeals of the trial court's ruling, the intermediate appellate court held that the policyholder's notices at two sites were late as a matter of law. However, the court ruled that summary judgment was premature because material issues of fact remained as to whether the insurers had waived their rights to disclaim based on late notice. The intermediate appellate court stated that there would be a wavier if the insurers had not met an “obligation to issue a written notice of disclaimer on the ground of late notice as soon as reasonably possible after first learning of the accident or of grounds for disclaimer of liability.”

The New York high court reversed, holding that the intermediate appellate court erred in holding that the insurers had an “obligation” to disclaim coverage “as soon as reasonably possible.” The court observed that the lower court had essentially recited the language of New York Insurance Law ' 3420(d), which applies only to cases involving death and bodily injury claims arising out of a New York accident and brought under a New York liability policy. The court held that the environmental contamination claims in this case did not fall within the scope of the statute and that the courts should not extend the statute's prompt disclaimer requirement beyond the limits set by the Legislature. The court remanded the case to the intermediate appellate court to determine if, under the common law doctrine of waiver, there were triable issues of fact as to whether the insurers had clearly manifested an intent to abandon their late notice defense.

In this case, the New York Court of Appeals agreed that the court below erred by judicially supplanting long-standing common law rules governing insurers' denials of coverage with a standard the Legislature chose to apply in limited circumstances in New York Insurance Law ' 3420(d). Insurance Law ' 3420(d) applies only to claims brought under a policy issued or delivered in New York regarding disclaimer of liability or coverage for death or bodily injury arising out of an accident occurring in New York. By imposing this standard here and stating that “a jury could determine that the insurers possessed sufficient knowledge to require that they meet the obligation to issue a written notice of disclaimer on the ground of late notice as soon as reasonably possible after first learning of the accident or of grounds for disclaimer of liability,” the court below misapprehended and overlooked settled New York law. Long Is. Light. Co. v Allianz Underwriters Ins. Co., 104 AD3d 581, 581-82 [1st Dept. 2013].

New York law does not require an “as soon as reasonably possible” standard for insurer coverage disclaimers outside the circumstances governed by Insurance Law ' 3420(d), and there is no need or proper basis on which to alter New York law governing coverage disclaimers to impose the unique standards of ' 3420(d) as a matter of general application. Essentially, the New York high court concluded that the common law principles of waiver and estoppel provide familiar and adequate constraints on insurers' coverage decisions, and that there was no basis on which to disturb existing New York precedent to impose a new timeliness requirement on all insurer disclaimers. ' Laura A. Foggan, Parker Lavin and Jennifer A. Williams, Wiley Rein

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Brian M. Oubre is an associate at White and Willams LLP, New York. Laura Foggan , a member of this newsletter's Board of Editors, is a partner in the Insurance Practice and Chair of the Insurance Appellate Group of Wiley Rein LLP, Washington, DC. Parker Lavin , and Jennifer Williams are associates at the firm.

Insurer Is Not Barred From Relying on Policy Exclusions to Disclaim Indemnity to an Insured

On Feb. 18, 2014, in K2 Inv. Group, LLC v. American Guar. & Liab. Ins. Co., 6 N.E.3d 1117, 22 N.Y.3d 578 (N.Y. 2014) (hereafter “ K2 ' II “), the Court of Appeals of New York vacated its prior decision and reversed the Appellate Division's Order in K2 Inc. Group, LLC v. American Guar. & Liability Ins. Co. , 21 N.Y.3d 384 (2013) (hereafter “ K2 ' I “), holding that its ruling in K2 ' I was irreconcilable with an earlier, established decision: Servidone Const. Corp. v. Security Ins. Co. of Hartford , 64 N.Y.2d 419 (1985).

In the K2 ' II decision, the Court of Appeals thus affirmed the proposition that an insurer is not barred from relying on policy exclusions to disclaim indemnity to an insured where the insurer earlier breached a contractual duty to defend the insured in a personal injury action.

Background and the K2 ' I Decision

Legal malpractice claims were brought against American Guarantee's insured, Jeffrey Daniels, whom American Guarantee refused to defend (it is now conceded that this denial of the duty to defend by American Guarantee was wrongful). Daniels later suffered a default judgment and assigned his rights against American Guarantee to the plaintiffs who had originally brought claims against him. These plaintiffs then brought suit against American Guarantee, seeking to enforce an indemnity obligation on the default judgment. American Guarantee responded that the loss was not covered pursuant to two exclusions in the policy.

In K2 ' I, the Court of Appeals affirmed an order granting summary judgment to plaintiffs, holding that American Guarantee's breach of its duty to defend Daniels barred it from then relying on policy exclusions to disclaim an obligation to indemnify the judgment. In making this determination, the Court of Appeals relied on Lang v. Hanover Ins. Co. , 3 N.Y.3d 350, 356 (2004) to conclude that an insurance company that has disclaimed its duty to defend may litigate only the validity of its disclaimer, and cannot challenge the liability or damages determination underlying the judgment.

The K2 ' II Decision

In K2 ' II , the Court of Appeals determined that K2 ' I failed to take into account controlling precedent: Servidone Const. Corp. v. Security Ins. Co. of Hartford , 64 N.Y.2d 419 (1985). In Servidone, an insurer relied on policy exclusions in defending against a suit for indemnification, and the Court of Appeals examined the following question:

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?

64 N.Y.2d at 421.

In Servidone, the Court of Appeals answered “no” to this question, concluding that an insurer is not barred from relying on policy exclusions to deny indemnity even after breaching the duty to defend.

The Court of Appeals carried this Servidone proposition forward in K2 ' II, holding that even though there was a settlement in Servidone , and a judgment in the instant underlying proceedings, this distinction was not persuasive. “A liability insurer's duty to indemnify its insured does not depend on whether the insured settles or loses the case.” Instead, the issue in the instant matter, as it was in Servidone, was “whether the insurer may rely on policy exclusions that do not depend on facts established in the underlying litigation.” In K2 ' II, the Court of Appeals answered this in the affirmative.

The Court of Appeals also examined its reliance on Lang in the K2 ' I decision, and concluded that Lang was distinguishable. In Lang, the Court of Appeals decided that “a judgment is a statutory condition precedent to a direct suit against the tortfeasor's insurer,” but did not consider any defense based on policy exclusions at that time. Here, the insurer did present a defense to indemnification based on policy exclusions. Thus, in K2 ' II, the Court of Appeals held that the application of Servidone is not limited, and may be applied to cases in which a defense is predicated on either non-coverage or on an exclusion.

Last, in the second part of its decision, the Court of Appeals determined that even though American Guarantee was not barred from relying on policy exclusions, the applicability of such exclusions presented a question of fact sufficient to defeat summary judgment. ' Brian M. Oubre, White and Williams

NY Refuses to Impose 'As Soon As Reasonably Possible' Requirement on All Insurer Disclaimers

The New York Court of Appeals, applying New York law, has held that an insurer is not required to disclaim coverage for environmental contamination claims on late notice grounds “as soon as reasonably possible,” a standard drawn from a statute only applicable to death and bodily injury claims arising out of New York accidents and brought under New York liability policies. KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., et al., No. 110 (N.Y. June 10, 2014).

The policyholder, an electrical power and natural gas utility, had been engaged in ongoing negotiations with state regulatory actors over a number of years concerning the cleanup of seven manufactured gas plant sites. Several claims had been asserted against the policyholder relating to contamination emanating from the sites, and the policyholder began proactively investigating and remediating its sites. However, the policyholder did not notify its insurers of the potential for liability until many years later. Upon receiving notice, the insurers issued timely reservation of rights letters expressly reserving the right to deny coverage on late notice grounds and requesting more information from the policyholder.

In a subsequent coverage action between the policyholder and its excess insurers, the insurers included late notice as an affirmative defense in their answers. The insurers then sought summary judgment on the grounds of late notice. The trial court found as a matter of law that the policyholder's notice was late as to one site, but held that genuine disputes of material fact remained as to the other sites. The trial court specifically rejected the policyholder's contention that the insurers had waived the late-notice defense for each of the sites because they did not immediately disclaim coverage on that basis.

On cross-appeals of the trial court's ruling, the intermediate appellate court held that the policyholder's notices at two sites were late as a matter of law. However, the court ruled that summary judgment was premature because material issues of fact remained as to whether the insurers had waived their rights to disclaim based on late notice. The intermediate appellate court stated that there would be a wavier if the insurers had not met an “obligation to issue a written notice of disclaimer on the ground of late notice as soon as reasonably possible after first learning of the accident or of grounds for disclaimer of liability.”

The New York high court reversed, holding that the intermediate appellate court erred in holding that the insurers had an “obligation” to disclaim coverage “as soon as reasonably possible.” The court observed that the lower court had essentially recited the language of New York Insurance Law ' 3420(d), which applies only to cases involving death and bodily injury claims arising out of a New York accident and brought under a New York liability policy. The court held that the environmental contamination claims in this case did not fall within the scope of the statute and that the courts should not extend the statute's prompt disclaimer requirement beyond the limits set by the Legislature. The court remanded the case to the intermediate appellate court to determine if, under the common law doctrine of waiver, there were triable issues of fact as to whether the insurers had clearly manifested an intent to abandon their late notice defense.

In this case, the New York Court of Appeals agreed that the court below erred by judicially supplanting long-standing common law rules governing insurers' denials of coverage with a standard the Legislature chose to apply in limited circumstances in New York Insurance Law ' 3420(d). Insurance Law ' 3420(d) applies only to claims brought under a policy issued or delivered in New York regarding disclaimer of liability or coverage for death or bodily injury arising out of an accident occurring in New York. By imposing this standard here and stating that “a jury could determine that the insurers possessed sufficient knowledge to require that they meet the obligation to issue a written notice of disclaimer on the ground of late notice as soon as reasonably possible after first learning of the accident or of grounds for disclaimer of liability,” the court below misapprehended and overlooked settled New York law. Long Is. Light. Co. v Allianz Underwriters Ins. Co., 104 AD3d 581, 581-82 [1st Dept. 2013].

New York law does not require an “as soon as reasonably possible” standard for insurer coverage disclaimers outside the circumstances governed by Insurance Law ' 3420(d), and there is no need or proper basis on which to alter New York law governing coverage disclaimers to impose the unique standards of ' 3420(d) as a matter of general application. Essentially, the New York high court concluded that the common law principles of waiver and estoppel provide familiar and adequate constraints on insurers' coverage decisions, and that there was no basis on which to disturb existing New York precedent to impose a new timeliness requirement on all insurer disclaimers. ' Laura A. Foggan, Parker Lavin and Jennifer A. Williams, Wiley Rein

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Brian M. Oubre is an associate at White and Willams LLP, New York. Laura Foggan , a member of this newsletter's Board of Editors, is a partner in the Insurance Practice and Chair of the Insurance Appellate Group of Wiley Rein LLP, Washington, DC. Parker Lavin , and Jennifer Williams are associates at the firm.