Court Reverses Itself in Malpractice Insurance Ruling

, New York Law Journal

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the judges of the Court of Appeals
Standing, left to right: Judges Jenny Rivera, Robert Smith, Susan Phillips Read, Sheila Abdus-Salaam, and Eugene Pigott Jr. Seated, Judge Victoria Graffeo and Chief Judge Jonathan Lippman

ALBANY - The state Court of Appeals conceded Tuesday that it erred in a June 2013 ruling and reversed itself, determining that an insurer could try to prove in court that a lawyer's malpractice insurance policy did not cover a $3 million loss.

The court also threw out a 2010 change in the way Nassau County makes refunds to taxpayers in tax certiorari cases, finding that the county adopted the new procedures in violation of the state constitution and state tax law. In another tax matter, the court found that the state's method for determining residency was flawed.

In the legal malpractice case, K2 Investment Group v. American Guarantee & Liability Insurance Company, 6, the judges decided that their ruling last year contradicted another Court of Appeals' determination—Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 NY2d 419 (1985)—that held precedent over the issue.

The first time the judges ruled on the K2 Investment matter last year, they said American Guarantee could not invoke policy provisions that, according to the insurer, excluded coverage for attorney Jeffrey Daniels, whom the company had refused to defend.

On Tuesday, the judges said in a 4-2 decision that the insurer could argue the policy excluded malpractice coverage for Daniels, even though a default award of $3 million has been made against him.

"In short, to decide this case we must either overrule Servidone or follow it," Judge Robert Smith (See Profile) wrote for the majority. "We choose to follow it."

The court said Servidone stood for the position that an insurer could assert that it was not obligated to indemnify a policyholder who reaches a settlement with an injured party if its policy excluded such coverage.

"Under these circumstances, we seen no justification for overruling Servidone," Smith said in a ruling in which he was joined by Chief Judge Jonathan Lippman (See Profile) and Judges Susan Phillips Read (See Profile) and Jenny Rivera (See Profile). "Plaintiffs have not presented any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985."

Smith added that both insurers and policyholders are entitled to "assume that the decision will remain unchanged unless or until the Legislature decides otherwise."

"In other words, the rule of stare decisis, while it is not inexorable, is strong enough to govern this case," Smith wrote.

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