Reversing its prior decision, the New York Court of Appeals held that the insurer could raise policy exclusions regarding its duty to indemnify after it incorrectly denied its duty to defend. K2 Invest. Group, LLC v. Am. Guar. & Liab. Co., 2014 N.Y. LEXIS 201 (N.Y. Ct. App. Feb. 18, 2014).
The insured was sued for legal malpractice. His insurer, American Guarantee, refused to defend and a default judgment was entered. The insured assigned his rights against American Guarantee to the plaintiffs. When the underlying plaintiffs sued, American Guarantee said coverage was barred by two exclusions.
In a previous decision, K2 Inv. Group, LLC v. Am Guar. & Liab. Ins. Co., 21 NY 3d 284, the court held that American Guarantee's breach of its duty to defend prevented it from relying on policy exclusions. This, however, contradicted another case issued by the court, Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 N.Y 2d 419 (1985).
The New York court noted that other jurisdictions had followed Servidone, including the Hawaii Supreme Court in Sentinel Ins. Co. v. First Ins. Co. of hawaii, Ltd., 76 Haw. 277, 290-297, 875 P.2d 894, 907-914 (1994).
The court saw no justification for overruling Servidone. When a question of insurance law was decided, insurers and insured should be able to assume that the decision would remain unchanged unless the Legislature decides otherwise.