esting difference between this promise and
the others previously mentioned: the insurer
recognizes a suit may be false or groundless.
This wording may lead to the belief that
a groundless suit alleging an occurrence
excluded by the policy (such as intentional
bodily injury) will be defended; this is not
always the case. The intent is to make clear
that a suit may make allegations that are, in
fact, groundless, but so long as the allegations fall within the scope of coverage the
insurer will provide a defense. The expenses
incurred by the insurer in defending a suit
are in addition to the limit of liability.
Personal Umbrella Liability forms: Although ISO has developed a personal umbrella form, many insurers have long had
their own. A review of various insurers’
forms shows that all promise to provide a
defense (based, of course, upon the allegations); this expense is in addition to the limit of liability. The umbrella insurer also has
the right to coordinate a defense with the
primary insurer if the primary insurance is
first called upon.
Directors and Officers (D&O): A common feature of D&O forms is that defense
costs are included within the limit of liability. In other words, the amount available to settle claims may be depleted by the
amounts incurred to defend against a claim
or suit. Sometimes these forms do not obligate the insurer to provide a defense but
will reimburse defense costs. The duty to
reimburse is not viewed as imposing a duty
to defend upon the insurer (for example,
Valassis Communications, Inc. v. Aetna Cas.
& Sur. Co., 97 F.3d 870 [6th Cir. 1996]).
Although it might appear that a self-insurer has no duty to itself, that is not the case.
Usually, a self insurer is under the same obligation to defend as other insurers if there is
a contractual agreement equivalent to insurance, which was what the court held in Koenig
v. City of Dayton, 502 N.E.2d 233 (Oh. 1985).
But, there is a minority viewpoint to the contrary (see Northern Indiana Public Service Co.
v. Bloom, 847 N.E.2d 175 [Ind. 2006]).
So drawing on the stipulations set forth
in the forms themselves, how can insurers
properly draw the lines of their obligation
to the insured? Couch on Insurance (3rd
By Melissa F. Brill
The New York Court of Appeals’ recent decision in K2 Investment
Group, LLC, et al. v American Guarantee & Liability Insurance
Company may—or may not—be a game changer. Under New
York law, the duty to defend is exceedingly broad. If the complaint
contains any facts or allegations that bring the claim potentially
within the policy, then the insurer must defend. The duty to defend arises when the allegations within the four corners of the complaint potentially give
rise to a covered claim, or where the insurer has knowledge of facts establishing a reasonable possibility of coverage. Even if a purportedly covered claim is frivolous or groundless, the allegations still trigger the duty to defend.
Generally, an insurer has no duty to defend where the allegations in the complaint
raise no possibility that the insurer would be required to indemnify its insured. While
facts beyond the complaint cannot be used to disclaim the duty to defend, they must
be taken into account if the insurer has actual knowledge of facts that, if pled, would
trigger its duty to defend. The duty to indemnify is narrower, arising only where the
claim for which the insured is liable falls within the policy’s coverage.
The K2 Decision
In K2, the Court of Appeals recently held—in what may be new law—that because
an insurer breached its duty to defend, it could not later rely on otherwise potentially
applicable exclusions to deny coverage for indemnification. In other words, an insurer’s wrongful failure to defend may mean that the insurer is liable in an amount
up to its policy limits, even if a policy exclusion might preclude coverage for indemnification. The unanimous ruling potentially expands insurers’ indemnity obligations
beyond the coverage afforded by the policy and, as the court suggests, makes a predenial declaratory judgment action an important strategic consideration.
In the underlying dispute that gives rise to K2, plaintiffs loaned the insured’s company
$2.83 million backed by mortgages. When the company failed to repay the loans, plaintiffs discovered that the insured’s principle, an attorney, never recorded the mortgages.
Plaintiffs sued, alleging that the insured attorney acted as their attorney in regard to the
loans and that his failure to record the mortgage constituted legal malpractice.
The insured notified his malpractice insurer of the claim, and the insurer denied
coverage for defense and indemnity, saying the allegations were not based on the
rendering or failing to render legal services for others. The insurer rejected plaintiffs’
$450,000 settlement offer on the same basis. Plaintiffs secured a default judgment
in excess of the policy limits. The insured attorney assigned to underlying plaintiffs
his causes of action for breach of contract and bad faith failure to settle against the
malpractice insurer, resulting in the K2 coverage action.
In the K2 coverage action, the insurer moved for summary judgment, arguing that
the policy’s “insured status” and “business enterprise” exclusions barred coverage
because the claims arose from the insured attorney’s capacity or status as a member
and owner of the defaulting company, and from his acts or omissions on the company’s behalf. The trial court disagreed and granted plaintiffs’ cross motion, holding
that the insurer breached its duty to defend the insured attorney, and was obligated
to pay the judgment against him up to the policy’s limit. The trial court dismissed the
bad faith claims. The Appellate Division, First Department, affirmed both rulings, with
two judges dissenting on the basis that issues of fact existed regarding the exclusions’ application.
NY Insurers Breaching Duty to
Defend May Lose Defenses