Commercial Real Estate Blog by Madison

Appeals Court Addresses Insurer’s Duty to Defend

In a recent case, K2 Investment Group, LLC, et al. v., American Guarantee & Liability Insurance Company, 21 N.Y. 3d 384, 993 N.E. 2d 1249, 917 N.Y.S. 2d 229 (N.Y. Ct. App. 2013), the New York Court of Appeals addressed the duty of an insurer to defend it s insured. Even though this case did not involve title insurance, it will likely be cited in title and other insurance litigation involving the duty an insurance company has to it’s insured.

In this case, the plaintiffs made loans to be secured by mortgages. Following default, the plaintiffs commenced an action against various parties, including Jeffrey Daniels, a lawyer, for legal malpractice. The insured tendered the claim to his malpractice carrier, American Guarantee & Liability Insurance Company. The complaint contained allegations that the insured was a principal of the borrower. The plaintiffs alleged that the insured failed to record the mortgages and obtain title insurance. American Guarantee denied the claim and did not tender a defense based on a policy exclusion for claims arising out of an insured’s actions undertaken in his capacity as a member or owner of a business enterprise.

Duty to Defend Broader Than Duty to Indemnify

The Court held that American Guarantee breached its duty to defend. The court found that it was clear that the complaint was for legal malpractice, which triggered the duty to defend under the policy. The court further held that American Guarantee, having breached its duty to defend, could not invoke policy exclusions that may otherwise have been available and was required to indemnify the insured for the judgment against him.

It is axiomatic that the duty to defend is broader than the duty to indemnify. When there is any arguable duty to defend, an insurer that denies a claim does so at its peril. The safer course would be to seek a declaratory judgment concerning coverage or to defend with a reservation of rights. In this case, the court found that the insurance company waived the rights it might otherwise have had to deny an indemnification obligation by breaching its broad contractual obligation to defend. This will likely be cited in insurance litigation across all sectors, including title insurance.

A motion for re-argument was granted Sept. 3, 2013. Stay tuned for an update!

Note: Portions taken from November 26, 2013 article in The Docket, a monthly TitleNews Online feature provided by ALTA’s Title Counsel Committee, which reviews significant court rulings and other legal developments with relevance to the title insurance industry.

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