In a decision notable for several reasons [enhanced version available to lexis.com subscribers], the New York State Court of Appeals—the state's highest court—reversed itself in K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co. [21 NY3d 384 (2014)] [enhanced version available to lexis.com subscribers] and reaffirmed its earlier ruling in Servidone Construction Corp. v. Security Insurance Company of Hartford [64 NY2d 419 (1985)] [enhanced version available to lexis.com subscribers].
In doing so, the court reestablished the rule it pronounced in Servidone when it held that a liability insurer who determines not to provide a defense to its insured may still contest its duty to indemnify on the basis of an exclusion to coverage.
In an unusual move, the Court of Appeals reversed its own 2013 ruling in K2 that held an insurer who breaches its duty to defend is precluded from contesting its obligation to indemnify the insured's liability regardless of potentially applicable policy exclusions. K2 was roundly viewed as reversing Servidone sub silentio, although it appeared that the Servidone precedent had not been raised for the court's attention. The court evidently agreed to reconsider K2 when it realized the decision could not be reconciled with Servidone.
On reconsideration, the court reaffirmed the rule stated in Servidone, that an insurer who declines to provide a defense may still rely upon a policy exclusion to contest its duty to indemnify a liability adjudged against the insured.
Further demonstrating its continued support for Servidone, the court's revised opinion in K2 found that the basis for the insured's liability was conduct within a policy exclusion, and accordingly excused the insurer from indemnity. In doing so, the court followed Servidone, holding that the insurer need not honor a judgment against its insured for liability for an excluded risk, even when it arguably violated its duty to defend the insured.
The opinion closes an unusual chapter in New York State jurisprudence in which the original decision in K2 by the state's highest court overlooked the rule it had earlier pronounced in Servidone. The court's decision on reargument reaffirms that the rule established in Servidone remains viable not only in New York, but also for several other states that had adopted it.
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