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Vol. 4, Iss. 1
January 14, 2015

I Goofed: Top Ten Coverage Cases Revisited

This year’s installment of the Top Ten Coverage Cases (Coverage Opinions; December 3, 2014) did not include the New York Court of Appeals’s decision in K2 Investment Group v. American Guarantee and Liability Insurance Co. It should have. But my mistake is more than just overlooking a case. I even went so far as to include a note, specifically explaining why K2 was not included on the list. That makes it so much worse than simply failing to include a case that I didn’t know about.

In K2, the New York high court held that an insurer that breaches its duty to defend does not forfeit the right to apply otherwise applicable coverage defenses to any determination of its duty to indemnify. This 2014 decision was a do-over of the Court of Appeals’s 2013 decision in K2 that held otherwise.

The court reached its “no forfeiture” decision on the basis that this was already the law in New York under its 1985 decision in Servidone Construction Corp. v. Security Ins. Co. of Hartford. Simply put, Servidone was overlooked by the court in its earlier decision. Now, acknowledging Servidone, and the weight of stare decisis, the court was left to conclude that an insurer that breaches its duty to defend does not forfeit the right to apply otherwise applicable coverage defenses to any determination of its duty to indemnify.

K2, both I and II, was the subject of tremendous attention and commentary in coverage circles. But, despite all of this, when all was said and done, the decision did nothing to alter New York law. Servidone was the law in New York before K2. Servidone is the law in New York after K2. In essence you could say that the case never even existed. That’s why I chose not to include it as one of the year’s ten most significant coverage decisions.

But then I went to the DRI Insurance Coverage conference in New York in early December. One of the presenters was Kevin Coughlin, of Coughlin Duffy, LLP, who represented American Guarantee in K2. I listened as Kevin explained why K2-II was so significant. And as I sat there it didn’t take long to realize that I goofed when I excluded it from the list of the year’s top ten most significant coverage decisions. My reason, that K2 didn’t represent any change in New York law, was simply too narrow-minded. I missed the big picture. Kevin did a tremendous job of painting that portrait of K2. And I was sold.

The frustration of my miscue is that nothing Kevin was saying I didn’t know. The irony of my miscue is that Coverage Opinions almost always focuses on the wider impact of decisions beyond simply the matter at hand for the involved parties. But, despite all this, for whatever reason, I got it in my head that K2 was just a case about an unchanged New York rule. Nothing to see here folks. Move along. Kevin cured my tunnel vision.

Kevin explained K2’s significance like this. After K2-I was decided, policyholders celebrated the victory. And that’s not surprising. It was unquestionably a significant decision as the forfeiture rule is a harsh sanction for an insurer that breaches the duty to defend. Policyholders were poised to hold up K2 – not to mention coming from the venerable New York Court of Appeals – as part of an effort to convince other courts nationally to also adopt the forfeiture rule. And the ammunition didn’t end there. Policyholders also had the benefit of the ALI’s adoption of the forfeiture rule in its Principles of the Law of Liability Insurance. [The Principles project is now a Restatement and it remains to be seen how the drafters will address the forfeiture rule in this new environment.]

Then, along came K2-II. K2-I was vacated. And with that the air came out of policyholders’ ability to float New York’s forfeiture rule to other states. But it wasn’t just that K2-I was vacated, because Servidone was the law, and the court’s hands were tied by stare decisis. If K2-II had been just that, then policyholders may have been able to argue that, based on K2-I, if the New York high court had been writing on a clean slate, it would have adopted the forfeiture rule. But the New York Court of Appeals in K2-II did more than just point to Servidone, the principle of stare decisis, and say end of story. The court also addressed the substance of the no forfeiture rule, noting that there is “much to be said” for it, several states follow it and the court was not presented with “any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985.”

For these reasons, K2-II deserved to be in the 2014 rendition of the Top Ten Coverage Cases of the Year. I coughed up a fur ball here. Kevin Coughlin set me straight. For the record, I told him as much after his DRI presentation.


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