On January 7, 2014, the Court of Appeals of New York revisited its decision in K2 Investment v. American Guarantee, 21 N.Y.3d 384 (2013). The Court’s June 11, 2013 decision held that an insurance company’s wrongful refusal to provide a defense to its insured precludes it from relying on a policy exclusion to avoid indemnity obligations, even if the underlying action establishes that the exclusion is applicable. After the Court issued its opinion, the American Guarantee & Liability Insurance Company moved for reargument, which the Court granted on September 3, 2013. Chief Judge Jonathan Lippman and Judges Victoria A. Graffeo and Robert S. Smith heard the parties’ arguments.

In the reargument, counsel for American Guarantee asserted that the Court’s decision was incorrect and that the state’s interest in upholding the terms of insurance contracts should have compelled additional proceedings on the insurer’s claimed exclusions. Counsel for K2 Investment supported the Court’s decision, arguing in part that the insurer should not be permitted to assert policy exclusions after leaving its insured without the ability to fund a defense. Though the Court has yet to issue its decision, the Court’s questioning at the reargument suggests that it is not inclined to overturn its previous decision.

As noted in our July 19, 2013 alert (“New York Court of Appeals Holds Insurers Cannot Rely on Policy Exclusions to Escape Coverage Duties”) this matter is important for both insurers and insureds. Under the Court’s current rule, an insurer may be obligated to provide coverage where the true facts would otherwise preclude coverage if it wrongfully denies its duty to defend. As such, an insurers’ initial coverage analysis is rendered all the more significant, as an early mistake may render an insurer liable for risks it had contracted to avoid.