By now most insurance professionals are familiar with the important decision issued by New York’s highest court in K2 Investment Group, LLC v. American Guarantee Liability Co.  The Court of Appeal’s June 2013 decision has caused an upheaval in how insurers handle disclaimers of coverage.  We analyzed the significance of K2 in our post of June 28, 2013, as well as the Court’s decision granting a motion to reargue the K2 decision in a subsequent post.

On January 7, 2014, the Court of Appeals heard oral argument on the motion to reargue the K2 decision, and the justices signaled a possible intent to reaffirm the position that “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on Policy exclusions” to avoid indemnification.

In their briefs, the insurer and amici argue that K2 conflicts with the Court of Appeals prior decisions in Lang v Hanover Ins. Co., and Servidone Constr. Corp. v Security Ins. Co., in which the Court defined the penalties for an insurer’s failure to defend an insured.  In those decisions, the Court held that an insurer loses the right to challenge the facts decided in the underlying lawsuit in a later coverage lawsuit.  But notwithstanding the insurer’s breach of the duty to defend, the court would still undertake an analysis as to whether the insurer owed indemnification.

In opposition to the insurer’s motion to reargue, plaintiffs argue that the K2 decision “peacefully coexist[s]” with both Lang and Servidone, as those decisions involved the settlement of the underlying lawsuit whereas K2 involved a default judgment.  Plaintiff contends that there are different public policy concerns where an insured is left undefended as with the insured in K2.

While it is perilous to try to glean too much insight into a judge’s frame of mind at oral argument, the bench at oral argument on K2 appeared willing to essentially abrogate the Court’s ruling in Servidone.  Chief Judge Jonathan Lippman put it succinctly: “Our question is: What should be our rule going forward?”  A decision by New York’s highest court should answer that question shortly.

Thanks to Steve Kaye for his contribution to this post.  For more information, please write to Mike Bono.