Court Opinion

ID: 5488586
Source: CourtListenerOpinion
Date Created: 2022-01-10 02:21:13.300632+00
Date Added: 2024-06-11T08:33:43.566731
License: Public Domain

Graffeo, J.
(dissenting). I would adhere to the general principle that a breach of a liability insurer’s duty to defend prohibits it from subsequently invoking policy exclusions to escape its corollary duty to satisfy a judgment entered against the insured by a third party (see Lang v Hanover Ins. Co., 3 NY3d 350, 356 [2004]). This rule makes sense for several reasons. An insurer should be subjected to some legal consequence for breaching its duty to defend an insured. Prohibiting exclusions from being collaterally invoked provides an insurer with an incentive to appear on behalf of the policyholder in the underlying lawsuit, as it agreed to do in return for the payment of premiums. It also encourages the initiation of a declaratory judgment by an insurer that seeks judicial authorization to rely on a policy exclusion to avoid indemnification. Bringing all of the interested parties—injured plaintiffs; insured defendants; and insurance carriers—together in a judicial forum further contributes to the efficient resolution of factual issues for the benefit of litigants without unduly burdening the ability of injured parties to obtain recovery for covered losses.
A fundamental purpose of an insurance contract is to provide “litigation insurance” for the policyholder (see e.g. Automobile Ins. Co. of Hartford v Cook, 7 NY3d 131, 137 [2006], citing Seaboard Sur. Co. v Gillette Co., 64 NY2d 304, 310 [1984]). This is particularly true in the context of legal malpractice insurance coverage such as that purchased by Jeffrey Daniels in this case. *589It is imperative that an insurer timely defend its insured. A contrary rule encourages unnecessarily repetitive judicial proceedings by allowing an insurer to wrongfully abandon its policyholder’s defense, subsequently forcing the insured to later litigate the effect of a policy exclusion on the duty to indemnify.
At first glance, Servidone Constr. Corp. v Security Ins. Co. of Hartford (64 NY2d 419 [1985]) appears to adopt a different rule. Closer scrutiny, however, reveals that Servidone may have intended to endorse a more limited principle. Our insurance cases have long drawn a distinction between “noncoverage” and “exclusions” (see e.g. Matter of Worcester Ins. Co. v Bettenhauser, 95 NY2d 185, 188-189 [2000]; Zappone v Home Ins. Co., 55 NY2d 131, 134 [1982]). Noncoverage involves the situation where an insurance policy does not contemplate coverage at its inception. For example, a homeowner’s policy would not provide malpractice liability coverage. Exclusions, in contrast, involve claims that fall within the ambit of the policy’s coverage parameters but are excepted by a particular contractual exclusion provision. Hence, a homeowner’s policy might contain an exclusion for certain types of water damage to the house. The distinction between the two is not always easy to identify and in many cases the result is the same—the insured will not be entitled to indemnification.
But our precedents make clear that the classification of an insurer’s defense as one based on noncoverage or one predicated on an exclusion can have significant legal ramifications. For example, we have held that the failure of a carrier to timely disclaim coverage under Insurance Law § 3420 (d) will preclude the carrier from later invoking a policy exclusion to deny coverage (see Matter of Worcester Ins. Co. v Bettenhauser, 95 NY2d at 188-189). In other words, the carrier will be obligated to indemnify the insured for the loss, despite the fact that the claim was expressly exempted under an exclusion clause. But an identical violation of Insurance Law § 3420 (d) will not bar the carrier from later raising a defense of noncoverage (see id. at 188 [“Disclaimer pursuant to section 3420 (d) is unnecessary when a claim falls outside the scope of the policy’s coverage portion”]). The rationale for this result is that, “[u]nder those circumstances, the insurance policy does not contemplate coverage in the first instance, and requiring payment of a claim upon failure to timely disclaim would create coverage where it never existed” (id.; see also Markevics v Liberty Mut. Ins. Co., 97 *590NY2d 646, 648-649 [2001]; Fair Price Med. Supply Corp. v Travelers Indent. Co., 10 NY3d 556, 565 [2008]).1
Servidone acknowledged this concept, explaining that the “bargained-for coverage” could not be “enlarged ... as a penalty for [the insurer’s] breach of the duty to defend” (64 NY2d at 424). As a result, the insurer could attempt to demonstrate that the loss at issue “was not within policy coverage” despite the breach (id. at 425). In so holding, Servidone contrasted earlier decisions in which our Court held that “an insurer cannot by virtue of its own breach escape liability for the reasonable settlement of a covered risk” where there was “no question that the loss was within the policy” (id. at 424, citing Isadore Rosen & Sons v Security Mut. Ins. Co. of N.Y., 31 NY2d 342 [1972]; Cardinal v State of New York, 304 NY 400 [1952]).
Servidone did, however, refer to the insurer’s ability to invoke a “policy exclusion” notwithstanding its breach of the duty to defend (64 NY2d at 425 [emphasis added]). But I believe Servidone should be applied more restrictively—and thereby reconciled with our other precedent—to clarify that an insurer’s breach of the duty to defend prohibits it from avoiding indemnification on the basis of policy exclusions, but not from demonstrating that there never was coverage for the loss in the first instance.2
*591Applying these principles here, it is apparent that American Guarantee must satisfy the judgment that was entered against its policyholder. Daniels purchased legal malpractice coverage from American Guarantee. A judgment premised on legal malpractice was secured against Daniels after American Guarantee refused to honor its obligation to defend him in that action. Assuming Daniels was insured against this particular claim under the terms of the malpractice policy, American Guarantee should not now be allowed to avoid satisfying the judgment on the ground that the claim in the underlying lawsuit actually fell under a policy exclusion. If, as the majority asserts, Daniels’ liability for professional negligence may have partially arisen from his actions as both an attorney and a manager of Goldan— and was therefore precluded under the “insured’s status” or “business enterprise” exclusion clauses—American Guarantee should have fully participated in the underlying action and attempted to establish the basis for the exclusion. I believe that these issues should have been resolved in the original action rather than being delayed for years. The majority’s decision to authorize additional litigation and fact-finding will prolong final resolution of this matter even further.
Accordingly, I would affirm the order of the Appellate Division.
Chief Judge Lippman and Judges Read and Rivera concur with Judge Smith; Judge Graffeo dissents and votes to affirm the order appealed from in an opinion in which Judge Pigott concurs; Judge Abdus-Salaam taking no part.
Upon reargument, this Court’s decision of June 11, 2013 vacated, the remittitur recalled, order appealed from reversed, with costs, and plaintiffs’ motion for summary judgment on their first and second causes of action seeking to enforce the default judgment in the underlying action denied.

. See also 1 Dunham, New Appleman New York Insurance Law 2d § 15.04 (1) (c) at 15-47 (“Most New York courts distinguish between a failure to disclaim on grounds of ‘noncoverage’ . . . which generally does not effect a waiver, and failure to disclaim based upon a policy exclusion, which generally does”).

. A number of decisions from other jurisdictions (see majority op at 586) are similarly reconcilable under a rule that allows noncoverage (but not exclusions) to be raised even if the duty to defend is breached (see e.g. Employers Ins. of Wausau v Ehlco Liquidating Trust, 186 Ill 2d 127, 150-151, 708 NE2d 1122, 1135 [1999] [an insurer that breaches the duty to defend “is estopped from raising policy defenses to coverage” but may seek to prove that “there clearly was no coverage or potential for coverage”]; Polaroid Corp. v Travelers Indem. Co., 414 Mass 747, 764, 610 NE2d 912, 922 [1993] [“agree(ing) with the Court of Appeals of New York that an insurer that wrongfully declines to defend a claim will have the burden of proving that the claim was not within its policy’s coverage”]; Alabama Hosp. Assn. Trust v Mutual Assur. Socy. of Ala., 538 So 2d 1209, 1216 [Ala 1989] [“A failure of an insurer to defend a claim against an insured does not work an estoppel on the issue of coverage”]; Flannery v Allstate Ins. Co., 49 F Supp 2d 1223, 1229 [D Colo 1999] [“I hold . . . that an insurer is not precluded from contesting coverage when it has breached its obligation to defend its insured”]).