[Copyrighted Material Omitted]
[971 N.Y.S.2d 230]
Coughlin Duffy LLP, New York City (Robert J. Kelly and Michael S. Chuven of counsel), and Steinberg & Cavaliere, LLP, White Plains, for appellant-respondent.
Law Offices of Michael A. Haskel, Mineola (Michael A. Haskel, Susan Haskel and Brandon M. Zlotnick of counsel), for respondents-appellants.
[993 N.E.2d 1251] We hold that, when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on [971 N.Y.S.2d 231] policy exclusions to escape its duty to indemnify the insured for a judgment against him.
Plaintiffs are two limited liability companies that made loans totaling $2.83 million to a third such company, Goldan, LLC. The loans were to be secured by mortgages. Goldan failed to repay the loans, and plaintiffs discovered that their mortgages had not been recorded. A bankruptcy petition was later filed against Goldan.
Plaintiffs brought a lawsuit against Goldan and its two principals, Mark Goldman and Jeffrey Daniels, asserting a number of claims. One claim was asserted by each plaintiff against Daniels, a lawyer, for legal malpractice. Plaintiffs alleged that Daniels acted as their attorney with respect to their loans to Goldan, and that his failure to record the mortgages was " a departure from good and accepted legal practice."
Daniels notified his malpractice carrier, American Guarantee and Liability Insurance Company, of the malpractice claims against him, and forwarded a copy of the complaint. American Guarantee refused to provide " either defense or indemnity coverage," for the reason, among others, that the allegations against Daniels " are not based on the rendering or failing to render legal services for others." After this disclaimer, plaintiffs made a settlement demand on Daniels for $450,000— significantly less than the $2 million limit of American Guarantee's policy. Daniels transmitted the demand to American Guarantee, which rejected it for the reasons it had previously given for denying coverage.
Daniels defaulted in plaintiffs' action against him, and plaintiffs obtained a default judgment in excess of the policy limit. The judgment was entered only as to plaintiffs' legal malpractice claims; their other claims against Daniels were discontinued. [993 N.E.2d 1252] After judgment was entered, Daniels assigned to plaintiffs all his rights against American Guarantee and plaintiffs, as Daniels's assignees, brought the present action against American Guarantee for breach of contract and bad faith failure to settle the underlying lawsuit. On their contract claims, plaintiffs seek to recover the $2 million policy limit, and on their bad faith claims they seek to recover the full amount of their default judgment.
American Guarantee moved for summary judgment dismissing the complaint, relying on two policy exclusions, the so-called " insured's status" and " business enterprise" exclusions. The policy ...