On March 31, 2014, the United States District Court for the Northern District of New York in Quincy Mutual Insurance Company v. New York Central Fire Insurance Company found the primary insurance carrier, New York Central Fire Insurance Company (“New York Central”), to have handled the defense of its insured in bad faith when, for nearly ten years after receiving a final determination as to the insured’s liability and confirming that the underlying plaintiff’s damages would far exceed New York Central’s $500,000 policy limit, New York Central refused to offer more than $75,000 to settle the underlying action. As a result, the insured’s excess carrier, Quincy Mutual Insurance Company (“Quincy”), sustained unnecessary and avoidable exposure up to its $1 million policy limits, when the underlying matter ultimately settled for $1,069,726.20, plus interest in the amount of $427,831.87. The instant action commenced due to a dispute between the insurers regarding New York Central’s obligation to reimburse Quincy for the payment of interest. (Note: the underlying action settled by entry of a stipulated judgment, pursuant to which Quincy’s rights were preserved to pursue such claim).

By way of background, the underlying action was commenced in October 2001 by the underlying plaintiff against the insured alleging that in November 2000, the insured negligently failed to yield the right-of-way of a stop sign, causing a collision with the underlying plaintiff’s vehicle. Due to the severity of the injuries sustained by the underlying plaintiff as a result of the accident, she was forced to undergo six separate surgical procedures, was unable to return to work, and was ultimately rendered disabled, with projected life care expenses between $2.4 million and $4.4 million. Immediately after the accident, the insured was cited for failure to yield the right-of-way at a stop sign and, thereafter, pled guilty to a lesser traffic violation. Therefore, after nearly eight years of protracted litigation, the underlying action settled in 2009, with New York Central paying $497,558.07, thus rendering Quincy responsible for payment of the remaining judgment in the amount of $572,168.13, plus $427,831.87 in interest.

As a result of the settlement reached in the underlying action, Quincy was exposed to indemnity up to its full $1 million policy limits, and ultimately commenced the instant action claiming that New York Central acted in bad faith with a gross disregard of Quincy’s interests as the insured’s excess insurance carrier, when it refused to settle with the underlying plaintiff on two separate occasions for significantly less than the total of both policy limits. Despite the fact that liability had already been established early on against the insured, and after sufficient evidence was received confirming that the underlying plaintiff’s injuries would far exceed the policy limits of the New York Central policy, New York Central denied several reasonable settlement demands without any basis offering no more than $75,000 to resolve the underlying action.

Of significant note for primary insurers, the court rejected New York Central’s claim that Quincy contributed to any indemnity exposure, as it failed to settle any excess exposure prior to the tender of New York Central’s policy limits. It was thus held by the court that there is “no legal obligation on an excess carrier in Quincy’s position to negotiate a claim unless and until primary coverage is exhausted” as the imposition of such an obligation would render the excess carrier a “de facto primary insurer.”

Although extreme, the Quincy holding sets a precedent that primary carriers may be held accountable for bad faith actions in connection with the handling of a mutual insured’s defense in the underlying action that so clearly and deliberately disregard an excess carrier’s interests.

On February 18, 2014, the New York Court of Appeals, in Country-Wide Insurance Company v. Preferred Trucking Services Corporation, further clarified the application of New York Insurance Law § 3420 and the requirements imposed upon an insurer that seeks to disclaim coverage based upon the insured’s failure to cooperate. Over the past 47 years, since Thrasher v. U.S. Liability Insurance Company, 19 N.Y.2d 159 (1967), the state of the New York law regarding non-cooperation coverage denials has continued to evolve. Taking this evolution one step further, the High Court most recently focused on the specific circumstances presented when it unanimously reversed the lower courts, and rendered judgment in favor of Country-Wide Insurance Company (“Country-Wide”), finding its delay in disclaiming coverage based upon the insured’s non-cooperation to be reasonable, since the insured’s failure to cooperate had not previously been apparent.

Nearly 47 years ago, the Court of Appeals in Thrasher articulated a three-prong test for determining whether an insurer can properly disclaim coverage to its insured for failure to cooperate. Pursuant to this test, the insurer must demonstrate that: (i) it acted diligently in seeking to bring about the insured’s cooperation; (ii) the efforts it employed were reasonably calculated to obtain the insured’s cooperation; and (iii) the attitude of the insured, after his or her cooperation was sought, was one of “willful and avowed obstruction.” Since Thrasher, the three-prong test has been applied by the New York courts in evaluating the efforts of an insurer to determine whether the surrounding circumstances of each case can satisfy the heavy burden required to establish a lack of cooperation. The New York courts focus on whether an insurer has acted diligently, used reasonably calculated efforts to encourage the insured’s cooperation and, further, issued a timely disclaimer for lack of cooperation in compliance with New York Insurance Law § 3420(d). At the same time, such an evaluation must be undertaken on a case-by-case basis, leaving no definitive rule as to what is diligent and reasonably calculated, and what constitutes an inexcusable delay.

This declaratory judgment action was commenced by Country-Wide against its named insured, Preferred Trucking Services Corporation (“Preferred”), and its driver, Carlos Arias (“Arias”), seeking a declaration that it timely disclaimed coverage in connection with the underlying bodily injury action due to the non-cooperation of Preferred and Arias. By way of background, the underlying action was commenced in March 2007 by plaintiffs Filippo Gallina and his spouse against, amongst others, Preferred and Arias seeking to recover for the bodily injuries purportedly sustained as a result of an accident that had occurred during the unloading of a Preferred truck that was operated by Arias.

Country-Wide received first notice of the underlying lawsuit on October 4, 2007, by facsimile from plaintiffs’ counsel, which annexed a copy of plaintiffs’ September 21, 2007, motion for default judgment against Preferred and Arias. On October 10, 2007, Country-Wide issued correspondence to Preferred and Arias, wherein a defense was afforded to Preferred and Arias, subject to a reservation of its rights to deny coverage for failure to cooperate. Upon receipt of the reservation of rights correspondence, Preferred’s President expressed a willingness to cooperate; however, at all times thereafter, all further efforts to contact Preferred proved unsuccessful.

On July 28, 2008, the Country-Wide investigator reached Arias’ daughter, and obtained contact information for him. Contact was made with Arias on August 18, 2008, at which time he advised the investigator that he would cooperate and appear for a deposition in the underlying action. Thereafter, on October 13, 2008, Arias, for the first time, refused to cooperate when he advised the investigator that he did not “care about the EBT date” as he was dealing with a “family situation.” As a result of Arias’s failure to appear for his deposition on behalf of Preferred, the Preferred Answer was stricken by the trial court on October 16, 2008.  By correspondence dated November 6, 2008, Country-Wide disclaimed its obligation to defend and indemnify Preferred and Arias in the underlying action due to its failure to cooperate in breach of the cooperation provision of the Country-Wide business auto policy. The underlying action proceeded to inquest and damages were rendered against Preferred.

The Appellate Division affirmed the trial court’s grant of summary judgment in favor of the underlying plaintiffs, finding the Country-Wide disclaimer untimely, rendering it obligated to provide indemnification to Preferred and Arias in the underlying action. While the Preferred President had provided sufficient evidence of his failure to cooperate, there was no indication of non-cooperation on the part of Arias until October 13, 2008. Therefore, because Country-Wide had continued to seek the cooperation of Arias in good faith through October 13, 2008, it could not disclaim coverage to Preferred prior to that time. Therefore, the November 6, 2008 disclaimer, which came less than 30 days after Arias’ failure to cooperate, was timely as a matter of law. The Order of the lower court was therefore reversed and judgment was rendered in favor of Country-Wide, finding it to have no coverage obligation in connection with the underlying $2.6 million judgment.

At this juncture, there is no precise standard under New York law with respect to the timeliness of disclaimers; rather, as evidenced by this most recent decision, New York courts must look to the circumstances of each individual case when determining the timeliness of a non-cooperation disclaimer. Nonetheless, insurers must continue to act diligently, and use reasonable efforts to obtain the cooperation of their insured(s), and only upon notice of the insured’s failure to cooperate, issue a disclaimer of coverage. Even where the insurer has successfully established a lack of cooperation on the part of the insured, such a coverage defense will be waived absent a timely disclaimer by the insurer. It is therefore of paramount importance for an insurer to remain mindful of its need to timely disclaim coverage, while it attempts to establish the insured’s non-cooperation.

Gallo Vitucci Klar LLP is pleased to announce that Kalliopi “Popi” Kousis has been selected to serve as the Regional Chair for the Northeast Region of the Women’s Construction Litigation Alliance (WCLA).

The WCLA is a nonprofit public benefit corporation that supports and encourages women in construction litigation. With respect to WCLA, “construction litigation” is used as a broad term to encompass all areas of litigation regarding every facet of the construction industry, including but not limited to premises and products liability, professional liability (particularly architects, engineers, insurance and real estate agents/brokers, mortgage brokers and lenders), construction defect, mechanic’s lien issues, insurance coverage and employment practices.

In her position, Ms. Kousis will set the direction to encourage and support women in construction litigation in the Northeast Region and promote educational and networking opportunities for WCLA members.

Gallo Vitucci Klar LLP is a 50-attorney full-service insurance defense firm with offices in New York and New Jersey. Our Construction Group defends building owners, building managers, developers, general contractors, construction managers and subcontractors in construction defect and construction site accident lawsuits. Our other practice groups include transportation, premises liability, insurance coverage and professional liability.

On February 18, 2014, in a split decision (4-2-1), the New York Court of Appeals, in K2 Inv. Group, LLC v American Guaranty & Liability Insurance Company, reiterated the well-settled precedent set forth in Servidone Construction Corp. v. Security Insurance Company of Hartford, 64 N.Y.2d 419 (1985) that an insurer’s denial of defense to its insured will not preclude the assertion of coverage defenses to support said denial in subsequent litigation regarding its duty to indemnify the insured.

As you will recall from our prior June 2013 legal alert, the K2 plaintiffs were two limited liability companies that made loans totaling $2.83 million to Goldan, LLC (“Goldan”), a company owned by the named insured attorney Jeffrey Daniels (“Daniels”), to be secured by mortgages. Upon Goldan’s default in repaying the loans, the K2 plaintiffs discovered that the mortgages had not been recorded, and as a result a legal malpractice action was commenced against Goldan and Daniels. In response to Daniels’ tender of his defense to his legal malpractice carrier, American Guaranty & Liability Insurance Company (“American Guaranty”), a disclaimer of coverage was issued to Daniels based on two policy exclusions. Thereafter, Daniels defaulted and the K2 plaintiffs obtained a default judgment against him for legal malpractice. Daniels then assigned to the K2 plaintiffs all his rights against American Guaranty, and they commenced an action seeking to recover the judgment. In its defense, American Guaranty contended that coverage for the loss to be unavailable due to the application of policy exclusions.

In affirming the lower-court decisions, which created a new rule, the Court of Appeals found an insurer that has breached its duty to defend the insured precluded from raising any coverage defense in subsequent litigation.

American Guaranty sought reconsideration of the June 11, 2013, decision, claiming it was rendered improperly by the Court of Appeals without adequate consideration for the well-settled New York precedent. Absent evidence that the holding of Servidone was unworkable or that since its adoption in 1985 it has resulted in significant injustice or hardship, it remained valid precedent. Thus, the June 11, 2013, decision was vacated and the holding of the Appellate Division reversed.

In reaching its decision, the court disagreed with the plaintiffs’ efforts in distinguishing K2 from Servidone and, further, rejected the plaintiffs’ interpretation of the holding provided by Lang v. Hanover Insurance Company, 3 N.Y.3d 350 (2004). The plaintiffs argued that by breaching its duty to defend its insured, American Guaranty was barred from raising any coverage defenses in the instant coverage action. Contrary to the plaintiffs’ argument, the Court of Appeals found an insurer’s duty to indemnify “does not depend on whether the insurer settles or loses the case.” Rather, an insurer’s coverage defenses will be preserved by the inclusion of the exclusion within the insurance policy itself. It was further argued by the plaintiffs that Lang provided additional support for the overturning of the court’s prior holding in Servidone as it held “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.” The Court of Appeals found the holding in Lang to provide nothing more than “sound advice,” which in no way was intended to inhibit an insurer from asserting a coverage defense based upon a policy exclusion.

The Court of Appeals previously refused to address whether there were questions of fact regarding the application of the policy exclusion; however, in light of its recent vacatur, the court has found a question of fact to exist as to whether the malpractice claims arose “in whole or in part” out of the named insured’s status as the manager or out of his “acts or omissions” for the borrower. In line with the Appellate Division’s dissenters, the Court of Appeals has reversed the prior grant of summary judgment to the plaintiffs, finding a question of fact to exist as to the application of the American Guaranty policy exclusion.

The dissenters continue to believe the Appellate Division holding should be affirmed as the holding of Servidone shall have a more restrictive application than that prescribed by the majority. While both the majority and the dissent find a distinction between a defense based upon “noncoverage” as opposed to an “exclusion” for purposes of New York Insurance Law § 3420, which obligates an insurer to timely disclaim coverage. The dissent has found the Servidone holding to provide clarification “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 there was never coverage for the loss in the first instance.” The majority, on the other hand, having found no such distinction to exist, found the term “outside of coverage” to explain a loss to which a policy exclusion applied.cc

In sum, having found Servidone to be the applicable New York standard for coverage disclaimers, the court has disregarded the rule previously articulated by the Appellate Division in this matter. Going forward, as long as a disclaimer is timely, an insurer will not sustain an extra penalty for breach of the duty to defend, and will be permitted to litigate the exclusions in a second action. The Court of Appeals has clarified the holding in Lang to mean that an insurer who disclaims “may litigate only the validity of its disclaimer” shall not be limited to when said disclaimer was made.

Following a two-week jury trial and four hours of deliberation, Mary L. Maloney obtained a defense verdict for our client, U.S. Elevator, in the matter of Cobb v. County of Passaic and U.S. Elevator, in the Superior Court of the State of New Jersey, County of Passaic, before Judge Anthony J. Graziano. The verdict of “no negligence” on the part of U.S. Elevator was rendered by an eight-person jury on December 20, 2013. Plaintiff’s last settlement demand was $650,000. The offer prior to, and during, trial was $20,000.

The 40-year-old male plaintiff claimed that he slipped and fell on oil on the floor of the elevator shaft at the Passaic County jail while performing pest control services for his employer. His claims of the presence of oil on the floor of the shaft, which was a walk-in space, as well as his prior complaints of oil, were confirmed by trial testimony of witnesses for the Passaic County Jail. Plaintiff also claimed that U.S. Elevator violated the terms of its contract with the County by failing to leave the space in a “broom-swept condition.”

The case was defended by Ms. Maloney on the grounds that the oil was a necessary by-product of the hydraulic elevator and that the elevator company was unaware of anyone but its employees entering the elevator shaft. The jury found that the elevator company was not negligent and non-suited the plaintiff.

The injuries alleged by plaintiff were tears of the right meniscus for which resulted in three arthroscopic surgeries. Plaintiff’s orthopedic expert, Peter DiPaolo, M.D., testified that plaintiff required a total knee replacement, with additional replacement(s) needed as plaintiff ages, due to the 15-year life span of the artificial replacement joint. Also claimed were post-traumatic arthritis of the right knee, disc bulges and protrusion at T9-10, and an inability by plaintiff to return to work in any capacity.

Plaintiff offered the expert testimony of engineer John Posusney, P.E., who opined that U.S. Elevator violated certain OSHA and other related regulations. Ms. Maloney was able to persuade the jury that U.S. Elevator was not negligent in its maintenance of the elevators and that OSHA regulations were not violated.

Defendants relied upon the testimony of orthopedist Mark Berman, M.D., who confirmed the necessity of the first surgery based on his review of the films, but opined that the second and third surgery were unnecessary and that a total knee replacement is not indicated.

Following a five-day retrial, Matthew J. Vitucci once again obtained a favorable verdict for our client, Megabus, in the matter of Ebrahem v. Coach Leasing, Inc. As we reported in our legal alert of September 3, 2013, this matter was originally tried in the U.S. District Court for the Southern District of New York before Judge Shira A. Scheindlin, resulting in a verdict of only $11,700 with 50% comparative negligence (for a net award of $5,850), which was set aside by Judge Scheindlin. The matter was reassigned to Judge Edgardo Ramos for the retrial. Plaintiff in closing argument at the retrial requested a verdict from the jury amounting to over $2.2 million. The jury unanimously returned a defense verdict.

Despite plaintiff’s opportunity to better prepare his experts for cross-examination, and despite plaintiff’s economist Dr. Dwyer’s opportunity to correct her erroneous calculations that were admitted to on the stand in the first trial, Mr. Vitucci was still able to improve upon his already-winning result. The jury unanimously found that although plaintiff underwent a six-level lumbar fusion and a left knee menisectomy, these were not related to the subject accident and plaintiff did not suffer a serious injury.

The case arose from an accident that occurred in 2012 at the Manhattan entrance to the Lincoln Tunnel in which the defendants’ bus and plaintiff’s livery taxi had a minor side-swipe collision where each party alleged the other caused the impact. Plaintiff offered the expert testimony of the performing spinal surgeon, Dr. Sebastian Lattuga; the performing knee surgeon, Dr. Neofitos Stefanides; an expert engineer, Grahme Fischer; and an expert economist, Dr. Debra Dwyer. Despite the testimony of these experts, Mr. Vitucci was able to persuade the jury that plaintiff did not suffer a serious injury as a result of the subject accident. Defendants relied upon the testimony of neurosurgeon Dr. Douglas Cohen, orthopedic surgeon Dr. Gregory Montalbano, and biomechanical engineer Dr. Mariusz Ziejewski. Because the jury first determined a lack of serious injury, the question of negligence was never reached.

Let’s hope Matt will not have to go 3-for-3!

On October 10, 2013, the New York Court of Appeals, in Soto v. J. Crew Inc., et al., unanimously affirmed both the trial court and the Appellate Division, First Department, and held an employee of a commercial cleaning contractor was not engaged in “cleaning” under New York Labor Law § 240(1) (also known as the “Scaffold Law”), when he fell from a four-foot-tall A-frame ladder while attempting to dust a six-foot-tall display shelf at a retail store and, therefore, was precluded from recovery for his injuries against the store and the building owner.

Labor Law § 240(1) imposes a nondelegable duty and absolute liability upon owners and contractors for failing to provide safety devices necessary for workers that are subjected to certain elevation-related risks.  To recover under Labor Law § 240(1), the injured worker must establish: (i) he was engaged in a covered activity, i.e., erection, demolition, repairing, altering, painting, cleaning or pointing of a building structure; and (ii) he was injured as a direct result of not having adequate protection from elevation-related risks.

In Soto, the plaintiff brought suit against the retail store and the building owner based upon various theories, including the violation of Labor Law § 240(1), alleging he sustained injuries while engaged in a commercial cleaning activity. On appeal to New York’s highest court, the Court of Appeals unanimously affirmed the lower courts, finding the Legislature did not intend for the Scaffold Law to provide coverage to injured employees engaged in all cleaning activities occurring in a commercial setting. Rather, “routine, household window washing”-type activities, such as the dusting performed by the plaintiff, do not fall within the purview of the Scaffold Law.

To clarify the reach of the Scaffold Law, the cour, set forth the following guidepost of activities that do not qualify as “cleaning” within the purview of Labor Law § 240(1): (i) routine activities such as the ordinary maintenance and care provided to a commercial property on a frequent and recurring basis; (ii) activities that do not require specialized equipment or expertise nor the unusual deployment of labor; (iii) activities involving insignificant elevation risks comparable to those inherent in typical domestic or household cleaning; and (iv) activities that are unrelated to an ongoing construction, renovation, painting, alteration or repair project.

Applying the above factors to the instant matter, the Court of Appeals agreed with the lower courts, finding the plaintiff’s dusting of a six-foot-high display shelf did not fall within the ambit of Labor Law § 240(1), but rather, was a mere routine task, with no specialized equipment, knowledge or tools, that involved a height differential analogous to the cleaning of a home, and had no relation to any construction activity.

The instant decision demonstrates the intent of the Court of Appeals to limit any further expansion of the Scaffold Law in the context of commercial cleaning based upon its distinction between covered and non-covered cleaning activities. As a matter of practice, by providing a list, which focuses on those “cleaning” activities that fall outside of the statute as opposed to those that fall within the statute, New York courts, going forward, are granted far less discretion in their interpretation and application of the Scaffold Law in the context of “cleaning.”

Following a five-day jury trial and four hours of deliberation, Matthew Vitucci obtained a favorable verdict for our client, Megabus, in the matter of Ebrahem v. Coach Leasing, Inc., tried in the United States District Court for the Southern District of New York before Judge Shira A. Scheindlin. The verdict came back apportioning liability 50/50 and awarding no pain and suffering damages and medical expenses totaling only $11,700. Defendants’ 50% apportioned share of damages, resulting in a net award of only $5,850. Plaintiff’s last settlement demand was $3.2 million and in closing argument, plaintiff requested a verdict amounting to $2.4 million.

The case arose from an accident that occurred in 2012 at the Manhattan entrance to the Lincoln Tunnel in which the defendants’ bus and plaintiff’s livery taxi had a minor side-swipe collision where each party alleged the other caused the impact. Plaintiff alleged that this accident caused injury to his left knee requiring a partial menisectomy and lumbar spine injury necessitating a six-level lumbar fusion.

Plaintiff offered the expert testimony of the performing spinal surgeon, Dr. Sebastian Lattuga; the performing knee surgeon, Dr. Neofitos Stefanides; an expert engineer, Grahme Fischer; and an expert economist, Dr. Debra Dwyer. Despite the testimony of these experts, Mr. Vitucci was able to persuade the jury that that the majority of the alleged injuries and medical treatment were due to pre-existing degenerative disc disease and knee degradation, and not to the impact from this accident. Furthermore, he was able to persuade the jury that the cost of future medical expenses offered by Dr. Dwyer were both erroneously calculated (as she had to concede on the stand) as well as inappropriately large.

Prior to the trial, plaintiff claimed that he could no longer work at all and was making a claim for lost wages since the date of accident through his projected working future. Successful surveillance taken prior to trial, however, led to plaintiff withdrawing his lost wages claim.

Defendants relied upon the testimony of neurosurgeon Dr. Douglas Cohen, orthopedic surgeon Dr. Gregory Montalbano, and biomechanical engineer Dr. Mariusz Ziejewski.

On August 27, 2013, the New Jersey Appellate Division addressed an issue of first impression in the State of New Jersey, and perhaps the nation. Specifically, in Kubert v. Best, a unanimous court found that a person who texts someone that is driving can be held liable for personal injuries sustained by others who are involved in an accident with the recipient driver.

Although the Kubert court refuted that it was opening the floodgates to litigation against remote texters because the duty is limited to situations where the remote texter knows or has reason to know that recipient is driving and likely to read the text while operating his vehicle, it is nevertheless anticipated that plaintiffs’ attorneys will attempt to pursue such a claim where the recipient driver has a limited policy.

In Kubert, a driver and passenger of a motorcycle each lost a leg as a result of collision with a vehicle driven by an 18-year-old driver, Kyle Best. Best had crossed the center line of the road, and struck the plaintiff’s motorcycle head on because he was distracted by a text he received from his 17-year-old girlfriend, Shannon Colonna, immediately prior to the accident.

It was undisputed that Best had violated New Jersey’s prohibition against texting while driving. Therefore, a settlement was reached between the plaintiffs and Best. However, plaintiffs subsequently brought suit against Colonna upon the basis that she aided and abetted Best’s unlawful texting. Plaintiffs alternatively argued that Colonna had an independent duty to avoid texting a person who was driving a motor vehicle. Colonna interposed a motion for summary judgment upon the basis that she was not present in the vehicle when the accident occurred, and therefore was unaware that Best was driving at the time he received her text.

The trial court granted Colonna’s motion for summary judgment and the Appellate Division affirmed. The Appellate Division agreed that there was insufficient evidence that Colonna was aware that Best was driving at the time they exchanged texts. However, the Appellate Division rejected the defendant’s claim that a sender of a text never has a duty to avoid texting a person driving a vehicle.

Rather, after conducting a “full duty analysis,” the Appellate Division concluded that a sender of a text “may” be liable if he “knew or had special reason to know that the driver would read the message while driving and would thus be distracted from attending to the road and the operation of the vehicle.”

In reaching this determination, the dourt noted that neither New Jersey nor any other jurisdiction has dealt with this issue. Therefore, the court relied on several New Jersey cases wherein passengers of motor vehicles were held liable for accidents because they either encouraged the drivers to violate the law or failed to warn others that the driver was violating the law (e.g., drinking while intoxicated).

The court cautioned that its decision should not be construed to mean that “the mere sending of a wireless transmission” is enough to impose liability. Rather, the court emphasized that it must shown that the remote sender knew or had reason to know that the recipient was driving and likely to read the text message while driving. The court reasoned that this limitation is warranted because “the sending of a text message by itself does not demand that the recipient take action.” Stated differently, “it is the primary responsibility of the driver to obey the law and to avoid distractions.”

In short, although Kubert has given rise a to a “new” duty against remote texters in New Jersey, as indicated by Judge Espinosa in his concurring opinion, “the bar set by the majority for the imposition of liability is high and will rarely be met.” That is because it will be extremely difficult to prove that the sender knew or had reason to know that the driver was going to violate his duty to avoid distractions, such as text messages received while operating a motor vehicle.

On June 11, 2013, in a unanimous decision, the New York Court of Appeals, in K2 Inv. Group, LLC v American Guar. & Liab. Ins. Co., reiterated the rule in New York that where an insurer disclaims defense coverage, relying upon a policy exclusion, and the disclaimer is invalid, the insurer may not rely on the exclusion to dispute indemnity coverage, when the insured defaults in the underlying action.

It is well-settled in New York that disclaimer is unnecessary when a claim falls outside the scope of a policy’s coverage portion, since “requiring payment of a claim upon failure to timely disclaim would create coverage where it never existed.” Matter of Worcester Ins. Co. v. Bettenhauser, 95 N.Y.2d 185, 188 (2000).

But once complaint allegations fall within the scope of a policy’s coverage portion, caution is warranted. In Lang v. Hanover Ins. Co., 3 N.Y.3d 350, 356 (2004), the Court of Appeals noted in dicta that where an insurer wrongly disclaims coverage and a default judgment is rendered against its insured, “having chosen not to participate in the underlying lawsuit, the insurance carrier may litigate only the validity of its disclaimer and cannot challenge the liability or damages determination underlying the judgment.”

The K2 decision now makes clear that the discussion in Lang was more than mere dicta and that the court meant what is said when it limited insurers who have refused to defend their insured, resulting in a default judgment, to litigating the validity of the disclaimer.

The K2 plaintiffs were two limited liability companies that made loans totaling $2.83 million to Goldan, LLC, a company owned by the named insured attorney Jeffrey Daniels. The loans were to be secured by mortgages. When Goldan failed to repay the loans, the K2 plaintiffs discovered that their mortgages had not been recorded. The K2 plaintiffs then sued Goldan and Daniels, as to the latter asserting that Daniels had acted as an attorney for the K2 plaintiffs with respect to the loan transaction and that his failure to record the mortgages was “a departure from good and accepted legal practice.”

When Daniels tendered the defense of the suit to his legal malpractice insurer, American Guaranty, it declined coverage, citing an exclusion for “[c]laims … arising out of … the Insured’s capacity or status as an ‘an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise.'” Daniels defaulted, and the K2 plaintiffs obtained a judgment against him for legal malpractice only. Daniels then assigned to the K2 plaintiffs all his rights against American Guaranty, and they commenced an action seeking to recover the judgment.

Both the trial court and the Appellate Division, First Department, found that the exclusions were inapplicable, although a dissenter in the Appellate Division concluded that issues of fact existed as to whether the exclusions applied. It seems that American Guaranty’s position on appeal was that there were questions of fact regarding the application of the policy exclusion precluding summary judgment in favor of the plaintiffs.

The Court of Appeals rejected the invitation to reach the dispute whether there were questions of fact or not. It reasoned that American Guaranty’s position that there were questions of fact regarding the application of the policy exclusion was tantamount to an admission that it wrongfully disclaimed the duty to defend its insured, and since American Guaranty admitted its disclaimer on the duty to defend was invalid, it was required to indemnify its insured for the underlying judgment.

Practically speaking, we were not surprised by K2 because of the Court’s admonition in Lang. Since Lang, our practice has been to advise insurers to disclaim coverage on the duty to defend only when: (i) the claim falls outside the policy’s coverage portion (without considering exclusions); or (ii) an exclusion clearly applies based upon either the complaint allegations themselves, or undisputed facts. In summary, unless the insurer is confident that, based upon the evidence on hand at the time of the disclaimer, it can win a summary judgment motion on the duty to defend, the insurer should not disclaim coverage.

As a side note, some commentators have suggested that K2 may be drastically changing the law by overruling Servidone Const. Corp. v Sec. Ins. Co. of Hartford, 64 N.Y.2d 419, 423-25(1985), which held that “an insurer’s breach of [its] duty to defend does not create coverage and that, even in cases of negotiated settlements, there can be no duty to indemnify unless there is first a covered loss.”

We are not sure K2 will have such a broad effect. Although the K2 decision is broadly worded, it is not clear that Lang and K2 apply when the insured (or another insurer) defends the underlying action, and there is no default judgment against the insured. In Servidone, the insured did defend the case, and in that situation the Court of Appeals permitted the insurer to litigate whether the settlement payment was for a covered loss. K2 does not explicitly overrule Servidone, and may be simply clarifying the rules in the situation where the insured defaults. This will be an issue to watch.