The National Association of Mutual Insurance Companies welcomed a corrective decision by the New York Court of Appeals maintaining that insurance policy provisions govern the scope of coverage even when a liability insurer wrongfully declines to defend an insured.
NAMIC joined with other insurance organizations in filing an amicus brief urging the court to withdraw its earlier decision in the case of K2 Investment Group v. American Guarantee & Liability Insurance Company. The brief asserted that more than 30 years of New York case law establishes that, while an insurer that wrongfully declines to defend an insured is bound by the facts necessarily decided in the underlying action, the terms of the insurance policy nevertheless determine the scope of coverage.
The decision issued by the court on Feb. 18 was consistent with that assertion where the court concluded that an insurer that wrongfully fails to provide a defense can still rely on its policy provisions including exclusions on the issue of indemnification of an insured. The decision represents a reversal of the conclusion in the court's earlier decision in the case that “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.”
“Last year’s decision by the New York Court of Appeals was troubling and great cause for concern regarding its potential impact on insurance costs,” commented Paul Tetrault, state and policy affairs counsel for NAMIC. “The court is to be commended for listening to the concerns expressed, agreeing to reconsider the case, and ultimately issuing a corrective decision.”
In its new decision, the court recognized that in its first analysis, it failed to take proper account of a previous case in which it answered the same essential question as the one addressed in the current case. After recognizing their conflicting holdings, the court opted to adhere to its earlier precedent, stating that, when it 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.”
Public Affairs Director