Louis Amelia, a National insured, lost control of his vehicle and injured several individuals, resulting in a number of lawsuits.  National initially disclaimed coverage, but was ordered to provide primary coverage in a declaratory judgment action, with Liberty providing excess.  National settled a number of the lawsuits, and exhausted its $1 million coverage limits.  National therefore refused to pay about $50,000 in additional defense costs because its limits had been exhausted.  Indeed, the National policy provided that its duty to defend ended when its limits were up.

Seems simple, right?  Not in the world of New York auto coverage.  Liberty filed suit, and the appellate court held that, pursuant to New York Insurance Department regulations and other precedent, National was not off of the hook despite the policy language and despite having no limits left.  New York law requires an automobile liability insurer to pay all defense costs until a case ends.  The trial court decision awarding Liberty summary judgment was thus upheld.

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Typically, when an insurer relies on material misrepresentations made by the insured upon application for coverage, the appropriate remedy is rescission of the policy.  But there may be circumstances where rescission is impractical or inappropriate, as recently occurred in Syncora Guarantee Inc. v. Countrywide Home Loans, Inc. 

As has been well documented, Countrywide has been under fire for various lending practices that were exposed when the housing bubble burst. Here, Countrywide sold or conveyed Mortgage Loans to trusts. The trusts, in turn, issued notes backed by the Mortgage Loans to investors. The investors were promised a return of principal with interest. Syncora, in essence, insured that payments received from the Mortgage Loans would be sufficient to cover the payments due to the investors.  If the mortgages were not paid, the policies issued by Syncora would cover the shortfall.

Syncora eventually filed suit against Countrywide, alleging that Countrywide misrepresented the terms of the underlying Mortgage Loans, and claims that if it had known the true details of the loans, it may have either declined to issue its financial guaranty insurance policies or issued the policies on different terms.  Syncora made claims for fraud, breach of contract, and for “rescissory damages.”

The insurer argued that it was entitled to rescissory damages because rescission of the policy would be unfair to the investors, was prohibited by the underlying investment contracts, and it also appears the Syncora had already paid out indemnity under the policies.

The Court pointed out that, “rescissory damages, while not often used in New York, are far from an unknown form of relief. … Rescissory damages are designed to be the economic equivalent of rescission in a circumstance in which rescission is warranted, but not practicable. A solid body of case law so holds.”

Countrywide argued that several courts applying New York law have held that rescissory damages are not available in New York, but the Court found that, although the cited cases did not grant rescissory damages, the cases did not hold against their availability.  The Court found that, under the circumstances of this case, rescission was warranted but impractical.  As such, the Court held that if Syncora can prove its case, it is entitled to rescissory damages, less premium collected.

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The Appellate Division, First Department, recently dealt with an issue involving a lawyers’ professional liability policy that could have a wide ranging impact on all insurance coverage disputes.  In K2 Investment Group, LLC, et al. v. American Guarantee & Liability Insurance Company, the court, in essence, ruled that the insurer did not have a right to litigate facts in a declaratory judgment action that pertained to its duty to indemnify when the insurer denied coverage at the outset of the litigation of the underlying action and a default judgment was entered against the insured.

Plaintiffs, a group of lending companies, claimed that the insured, Jeffrey Daniels, failed to record mortgages securing a loan that plaintiffs made to Daniels’ company. The insurer denied coverage under its professional liability policy based on a policy exclusion that barred coverage for losses arising out of Daniels’ acts for a business enterprise in which he had a controlling interest. The insurer contended that Daniels’ liability arose out of his actions to obtain a loan for his own company. The policy also excluded claims arising out of Daniels’ status as a shareholder of a business enterprise.  Generally, the position of the insurer was that Daniels was not acting as plaintiffs’ attorney, but rather in furtherance of his own company — acts that were excluded from the malpractice policy.

When the insurer failed to pick up Daniels’ defense, the insured defaulted and assigned his rights under the policy to the plaintiffs, who then commenced a declaratory judgment action against the insurer seeking the judgment amount.  Plaintiffs then moved for summary judgment, which the trial Court granted.

On appeal, the Appellate Division majority found that the exclusions did not apply because, according to the allegations in the complaint, the insured’s liability did not arise out of his ownership interest in his company but instead in his role as attorney to the plaintiffs/lenders. The insurer argued that there was an issue of fact in respect of this issue.  But the Court held that the insurance company did not have a right to litigate this factual issue in the declaratory judgment action because a default judgment had already been entered in the underlying suit due to the insurer’s failure to defend Daniels in the underlying action.

The two dissenting judges argued that the insurer’s duty to indemnify is based on a determination of all applicable facts and because the issue was not litigated in the underlying action, the insurer was entitled to litigate the issue in the DJ action.

If this decision stands and is given precedent on this issue, it could impact the way insurers handle disclaimers on the issue of indemnity.  Without sufficient factual proof to withstand a motion for summary judgment at the outset, insurers may need to reserve their rights and wait until underlying lawsuits develop before being able to issue effective indemnity disclaimers.  Otherwise, they risk a default being entered in the underlying action and may lose their only opportunity to establish factual support for their coverage positions.

Thanks to Mendel Simon for his contribution to this post.  If you would like further information, please write to Mike Bono at .

In the case of MBIA v. Countrywide (a/k/a Bank of America), New York County trial court Judge Eileen Bransten was asked to decide the question of when “causation occurs in claims for insurance fraud and breach of representations and warranties.”  The question arose because MBIA had paid out more than $2.5 billion in insurance claims on mortgage securities sponsored by Countrywide.  In answering Judge Bransten’s question, MBIA claimed that causation occurred when Countrywide “made misrepresentations that were material and which induced MBIA to issue financial guaranty insurance policies” which MBIA would not have have issued if it had known of the true facts.  Countrywide, in contrast, argued that MBIA had to prove that its claims payments were directly and proximately caused by Countrywide’s misrepresentations.

In a lengthy and complicated opinion, Judge Bransten has sided with MBIA.  The decision, which leaves open trial questions on the exact quantum of damages (dependent on the adduced proof) has the potential to require BOA to repay the monies MBIA has already paid out.

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