New York’s highest court has reversed itself on an important duty to defend opinion.   In K2 Inv. Group, et al. v. Am. Guar. & Liab. Ins. Co., (Feb. 18, 2014), available here, the Court of Appeals held that an insurer which breaches its duty to defend does not lose its right to rely on policy exclusions as a defense to indemnity.  A summary of the underlying facts in K2 can be found here and here in our previous posts.

Writing for the majority, Judge Smith reversed the previous K2 opinion based on Servidone Const. Corp. v. Security Ins. Co., 64 N.Y.2d 419 (1985), which he characterized as “controlling precedent.”   InServidone, the following question was addressed: “Where an insurer breaches a contractual duty to defend its insured…, and the insured thereafter concludes a reasonable settlement with the [claimant], is the insurer liable to indemnify the insured even if coverage is disputed?”  The question was answered in the negative.  The Court of Appeals saw no way to reconcile Servidone with its initial holding in the K2dispute – namely, that “when a liability insurer has breached its duty to defend…, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.”

The issuance of this new K2 opinion demonstrates that Servidone remains the law in New York.  Thus, an insurer who breaches its duty to defend may nonetheless argue that the loss falls outside of the coverage afforded by the policy – whether by application of an exclusion or by virtue of being beyond the scope of the insuring agreement – in order to challenge its duty to indemnify.