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AN INSURER WHO HAS NO DUTY TO DEFEND THE INSUREDS BECAUSE OF LATE NOTIFICATION, IN THE ABSENCE OF A PROVISION IN THE POLICY, MAY NOT RECOVER THE COSTS OF DEFENDING THE ACTION FROM THE INSUREDS AND THE SUCCESSFUL PLAINTIFF IN THE UNDERLYING ACTION (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, in a full-fledged opinion by Justice Duffy addressing a matter of first impression, determined the plaintiff insurer, which was not obligated to indemnify the insureds for a $900,000 default judgment because plaintiff insurer was not timely notified of the claim, could not recover the costs of defending the action from the insureds and the successful plaintiff in the underlying action. The policy was silent on the question. At issue was the effect of a reservation of rights in a letter to the insureds:

There is little doubt that the insurance company could have included in the policy a provision wherein it could recover its defense costs (upon a reservation of rights and a judicial determination that it is not required to indemnify) had it wanted to, but it did not do so here.

The insurance company points to its May 2017 letter wherein it reserved its rights to seek to recover the costs of defending the underlying litigation and argues that other New York courts … . * * *

Typically, a reservation of rights letter asserts defenses and exclusions that are set forth in the policy between the parties. Indeed, awarding an insurer its defense costs when the insurer issues a reservation of rights letter for the same despite the lack of any language in the policy at issue permitting the insurer to recover the costs of defending claims that are later determined not covered by the policy flies in the face of basic contract principles and allows an insurer to impose a condition on its defense that was not bargained for … . Moreover, “‘strong policy considerations militate against allowing an insurer to unilaterally declare that it can recoup the costs of defending an insured where it is later determined [that the policy at issue did not cover the asserted claims]'” as doing so would allow an insurer to define its duty to defend based upon the outcome of a declaratory judgment action and significantly curtail New York’s long held view that the duty to defend is broader than the duty to indemnify … .  Thus, we hold that the insurance company may not recover its defense costs based on the May 2017 letter wherein it reserved its rights to recoup its defense costs in the underlying litigation absent an express provision to that effect in the policy. American W. Home Ins. Co. v Gjonaj Realty & Mgt. Co., 2020 NY Slip Op 08027, Second Dept 12-30-20

 

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