Court Opinion

ID: 5488585
Source: CourtListenerOpinion
Date Created: 2022-01-10 02:21:13.295842+00
Date Added: 2024-06-11T08:33:43.564241
License: Public Domain

OPINION OF THE COURT
Smith, J.
American Guarantee & Liability Insurance Company contends, on reargument, that our prior decision in this case, K2 Inv. Group, LLC v American Guar. & Liab. Ins. Co. (21 NY3d 384 [2013]) (K2-I), erred by failing to take account of a controlling precedent, Servidone Constr. Corp. v Security Ins. Co. of Hartford (64 NY2d 419 [1985]). We hold that American Guarantee is correct.
I
A brief summary of the case will do for present purposes: Claims for legal malpractice were brought against American Guarantee’s insured, Jeffrey Daniels, which American Guarantee—wrongly, it is now conceded—refused to defend. Daniels suffered a default judgment, and then assigned his rights against American Guarantee to the plaintiffs in the suit against him. Those plaintiffs brought the present case, seeking to enforce American Guarantee’s duty to indemnify Daniels for the judgment. In defense, American Guarantee asserted that the loss was not covered, relying on two exclusions in the policy. (The facts are described in more detail in our K2-I opinion, 21 NY3d at 387-389.)
In K2-I, we affirmed an order granting plaintiffs summary judgment, holding that American Guarantee’s breach of its duty to defend barred it from relying on policy exclusions. We later granted reargument (21 NY3d 1049 [2013]), and we now vacate our prior decision and reverse the Appellate Division’s order.
*585n
In Servidone—a case in which, as in this one, the insurer was relying on policy exclusions in defending against a suit for indemnification—we stated the question as follows:
“Where an insurer breaches a contractual duty to defend its insured in a personal injury action, and the insured thereafter concludes a reasonable settlement with the injured party, is the insurer liable to indemnify the insured even if coverage is disputed?” (64 NY2d at 421.)
We answered the question in Servidone no. In K2-I, we held that “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him” (21 NY3d at 387). The Servidone and K2-I holdings cannot be reconciled.
Plaintiffs suggest that the cases are distinguishable because in Servidone the insured had settled with the plaintiff in the underlying litigation, whereas here there was a judgment, not a settlement. We do not find the distinction persuasive. A liability insurer’s duty to indemnify its insured does not depend on whether the insured settles or loses the case. It is true that a judgment, unlike most settlements, is a binding determination of the issues in the underlying litigation. Thus it can be said here, as it could not in Servidone, that the issues in the suit brought against the insured are now res judicata. But that is irrelevant, because American Guarantee does not seek here, and the defendant in Servidone did not seek, to relitigate the issues in the underlying case. It is well established that such relitigation is not permitted after an insurer has breached its duty to defend (see the authorities discussed in K2-I, 21 NY3d at 390). The issue in Servidone, as here, is whether the insurer may rely on policy exclusions that do not depend on facts established in the underlying litigation.
Plaintiffs also rely, as we did in K2-I, on our decision in Lang v Hanover Ins. Co. (3 NY3d 350, 356 [2004]). We said in Lang that, when an insurer has refused to defend its insured, it “may litigate only the validity of its disclaimer” when it is later sued on a judgment obtained against the insured. But the issue we now face was not presented in Lang. We decided in Lang “that a judgment is a statutory condition precedent to a direct suit against the tortfeasor’s insurer” (id. at 352); we did not consider *586any defense based on policy exclusions. The sentence on which plaintiffs rely was offered as support for our statement that
“an insurance company that disclaims in a situation where coverage may be arguable is well advised to seek a declaratory judgment concerning the duty to defend or indemnify the purported insured” (id. at 356).
That continues to be sound advice, but Lang should not be read as silently overruling Servidone.
The dissent would read Servidone as being limited to cases in which the defense was “based on noncoverage” rather than “predicated on an exclusion” (dissenting op at 589). It is true, as the dissent says, that we have made such a distinction in cases arising under Insurance Law § 3420, which imposes an obligation of timely disclaimer. It could hardly be clearer, however, that we were not making that distinction in Servidone. Describing the defense asserted by the insurer in that case, we said:
“Security responded that, pursuant to an exclusion in the policy, a loss based upon any obligation the insured had assumed by contract was outside coverage” (64 NY2d at 422 [emphasis added]).
Thus, “outside coverage,” as Servidone used the term, describes a loss to which a policy exclusion applies.
In short, to decide this case we must either overrule Servidone or follow it. We choose to follow it.
There is much to be said for the rule of K2-I, as our previous opinion shows; but, as the Servidone opinion shows, there is also much to be said for the Servidone rule. Several states follow the Servidone approach (e.g. Sentinel Ins. Co., Ltd. v First Ins. Co. of Haw., Ltd., 76 Haw 277, 290-297, 875 P2d 894, 907-914 [1994]; Polaroid Corp. v Travelers Indem. Co., 414 Mass 747, 760-766, 610 NE2d 912, 919-923 [1993]), while others adopt a rule like that of K2-I (e.g. Employers Ins. of Wausau v Ehlco Liquidating Trust, 186 Ill 2d 127, 150-154, 708 NE2d 1122, 1134-1136 [1999]; Missionaries of Co. of Mary, Inc. v Aetna Cas. & Sur. Co., 155 Conn 104, 112-114, 230 A2d 21, 25-26 [1967]). A federal district judge, writing in 1999, said that “[t]he majority of jurisdictions which have considered the question” follow the Servidone rule (Flannery v Allstate Ins. Co., 49 F Supp 2d 1223, 1227 [D Colo 1999]).
Under these circumstances, we see no justification for overruling Servidone. Plaintiffs have not presented any indication that the Servidone rule has proved unworkable, or caused *587significant injustice or hardship, since it was adopted in 1985. When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the legislature decides otherwise. In other words, the rule of stare decisis, while it is not inexorable, is strong enough to govern this case.
m
Having decided that American Guarantee is not barred from relying on policy exclusions as a defense to this lawsuit, we must also decide whether the applicability of the exclusions it relies on presents an issue of fact sufficient to defeat summary judgment. We conclude that it does.
The exclusions in question are the so-called “insured’s status” and “business enterprise” exclusions, contained in the following policy language:
“This policy shall not apply to any Claim based upon or arising out of, in whole or in part . . .
“D. the Insured’s capacity or status as:
“1. an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise . . .
“E. the alleged acts or omissions by any Insured . . . for any business enterprise ... in which any Insured has a Controlling Interest.”
The malpractice claims brought against Daniels, American Guarantee’s insured, were based on the allegation that he represented plaintiffs as lenders in a transaction with a borrower known as Goldan. The alleged malpractice consisted of Daniels’s failure to record mortgages that Goldan had given to plaintiffs. Daniels was one of two principals of Goldan; it is fair to infer that he was at least a “manager” of Goldan, and had a “Controlling Interest” in it, within the meaning of the policy. We cannot say on this record as a matter of law that the malpractice claims did not arise “in whole or in part” out of his status as a manager; nor can we say that they did not arise out of any of his “acts or omissions” on Goldan’s behalf. We therefore agree with the Appellate Division dissenters that plaintiffs’ motion for summary judgment should have been denied.
The Appellate Division majority’s rationale for granting summary judgment was, essentially, that a case arising out of the alleged attorney-client relationship between plaintiffs and Daniels *588could not also arise out of Daniels’s managerial status with, or acts or omissions for, Goldan. But the claims could arise out of both. Because the malpractice case was resolved on default, the record tells us little about the substance of the claims; it is at least possible, however, that the alleged malpractice occurred because Daniels was serving two masters—plaintiffs, his clients, and Goldan, the company of which he was a principal. If that is the case, it can fairly be said that the malpractice claims arose partly out of Daniels’s law practice and partly out of his status with or activity for Goldan—precisely the situation that the insured’s status and business enterprise exclusions seem to contemplate.
Accordingly, upon reargument, our prior decision should be vacated, the remittitur recalled, the order of the Appellate Division 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.