Duty to Defend Breach Doesn’t Waive Indemnity Defense:

Ct. of Appeals of NY reverses itself.

The Court of Appeals of New York, by a vote of 4-2, reversed its previous ruling that a breach of the duty to defend precludes the insurer from later challenging its indemnity obligation.  In its previous ruling the court held that because Zurich had breached its duty to defend it could not assert its “business enterprise” policy exclusion to avoid paying a $3,100,000 legal malpractice default judgment. The court found that it was mistaken in not adhering to New York precedent in Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419 (1985), which found that a breach of the duty to defend does not automatically preclude an insurer from contesting coverage. The self-reversal came on the heels of significant criticism of the original ruling, and amicus briefs on both sides. The court stated that it was faced with the choice to either overrule Servidone or follow it, and it chose to follow it, finding that there was no indication that the Servidone rule was unworkable or caused significant injustice or hardship in the nearly 30 years since it was adopted. K2 Inv. Group v. American Guar. & Liab. Ins. Co., No.  106 (N.Y. Feb. 18, 2014).

This is an interesting legal issue which states handle differently. These approaches include: automatic liability for breach of the duty to defend; automatic liability if you don’t file a declaratory judgment and provide independent counsel; automatic liability but only for policy exclusions; and various other iterations of these outcomes.

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