Kevin T. Coughlin, for appellant-respondent.
Michael A. Haskel, for respondents-appellants.
Complex Insurance Claims Litigation et al.; United Policyholders; New York Insurance Association, Inc. et al.; Coltec Industries Inc. et al., amici curiae.
American Guarantee & Liability Insurance Company contends, on reargument, that our prior decision in this case, K2 Inv. Group, LLC v Am. Guar. & Liab. Ins. Co. (21 N.Y.3d 384) (K2-I), erred by failing to take account of a controlling precedent, Servidone Const. Corp. v Security Ins. Co. of Hartford (64 N.Y.2d 419 ). 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 N.Y.3d 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 N.Y.3d 1049 ), and we now vacate our prior decision and reverse the Appellate Division's order.
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 N.Y.2d 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 N.Y.3d 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 N.Y.3d 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 N.Y.3d 350, 356 ). 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 ...