In the most recent Corporate Insurance Law column published in the New York Law Journal, we discuss the recent K2 Investment Group decisions issued by the New York State Court of Appeals regarding the consequences of an insurer’s breach of the duty to defend. In the first K2 Investment Group ruling (“K2-1″) issued in June 2013, the Court of Appeals held that an insurer that breaches the duty to defend its insured may not rely on policy exclusions to escape the duty to indemnify for loss.
Eight months later in February 2014, in response to the insurer’s motion for reargument, the Court of Appeals reversed itself in the second K2 Investment Group ruling (“K2-2″). In K2-2, the Court of Appeals explained that an insurer that breaches the duty to defend, while liable for defense costs, does not waive the right to rely on exclusions to deny coverage with regard to the duty to indemnify.
In so ruling, the Court of Appeals relied on the Servidone case, which the Court had not considered in the K2-1 ruling. The bottom line, according to K2-2, is that in the absence of a loss covered under the terms of the policy, the insurer has no duty to indemnify, even where the insurer has breached the duty to defend.
The K2-2 ruling is applicable precedent where the exclusions in the policy bar coverage for the claim at issue. It is important to note, however, that K2-2 does not govern the situation where the claim is covered under the terms of the policy. In that case, in accordance with the rule discussed by the Court of Appeals in Isadore Rosen, if the insurer breaches the duty to defend, the insurer will be liable for a reasonable settlement entered into by the insured to resolve the claim.