In J.P. Morgan Securities, Inc. v. Vigilant Insurance Co., No. 113 (N.Y. June 11, 2013), the New York Court of Appeals (New York’s

The New York Court of Appeals recently held that an insurer that has breached its duty to defend its insured may not later rely on policy exclusions to escape its duty to indemnify. K2 Investment Group, LLC v. American Guarantee & Liability Insurance Company, No. 106 (N.Y. June 11, 2013). Instead, the insurer “may litigate only the validity of its disclaimer.” Id. at *8. “If the disclaimer is found bad, the insurance company must indemnify its insured for the resulting judgment, even if policy exclusions would otherwise have negated the duty to indemnify.” Id. The ruling expands a previous decision by the Court – Lang v. Hanover Insurance Company, 820 N.E. 2d 855 (N.Y. 2004) – which precluded an insurer in breach of its duty to defend from later relying on defenses that would have defeated the underlying claim against its insured. The instant case arose out of loans made by K2 Investment Group, LLC to another company, Goldan, LLC, that were to be secured by a mortgage. When Goldan later defaulted it was discovered that the mortgage had not been recorded. Plaintiff sued Goldan and its principals, one of whom was an attorney alleged to have failed to record the mortgage. The legal malpractice insurer declined to defend and indemnify the claim contending the alleged conduct was outside the insured-attorney's role as an attorney. The result of K2 Investment Group’s suit was a default by the insured-attorney and a judgment excess of the policy limit, following which the insured-attorney assigned all claims under the policy to K2 Investment Group. K2 Investment Group then pursued the insurer alleging breach of contract and bad faith failure to settle the underlying lawsuit. The Court of Appeals found the insurer in clear breach of its duty to defend, as the underlying complaint “unmistakably plead[] a claim for legal malpractice.” Slip op. at 5. Because of that breach, the Court held the insurer could not rely on certain exclusions in its policy to dispute its duty to indemnify. According to the Court, the K2 Investment Group holding “will give insurers an incentive to defend the cases they are bound by law to defend, and thus to give insureds the full benefit of their bargain.” Id.at 7. This is a significant victory for policyholders and will considerably affect an insurer's assessment of its duty to defend a claim tendered under a liability policy.