Court Reverses Itself in Malpractice Insurance Ruling

, New York Law Journal


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

In dissent, Judge Victoria Graffeo (See Profile) wrote that the majority was not drawing the proper distinction between American Guarantee's obligations to indemnify or not to indemnify policyholders under policy "exclusions" as opposed to areas of "noncoverage" that the policies never considered.

Since American Guarantee breached its duty to indemnify Daniels, it cannot now claim policy exclusions apply to shield itself from indemnification when third parties like K2 and ATAS bring suit, Graffeo argued.

"Applying these principles here, it is apparent that American Guarantee must satisfy the judgment that was entered against its policyholder," Graffeo wrote in a dissent that Judge Eugene Pigott Jr. (See Profile) joined. "Assuming Daniels was insured against this particular claim under the terms of the malpractice policy, American Guarantee should not now be allowed to avoid satisfying the judgment on the ground that the claim in the underlying lawsuit actually fell under a policy exclusion."

Graffeo said the court's ruling also opens the door for additional litigation by American Guarantee over issues that should have been resolved years ago.

Underlying the dispute was a real estate company owned in part by Daniels, Goldan LLC, which accepted nearly $3 million in loans from K2 and ATAS.

Goldan went into bankruptcy in 2009 without repaying the loans.

The two creditors sued Daniels, in part, for legal malpractice. They claimed he had agreed to represent them in the transactions but then failed to record mortgages to secure the loans and failed to obtain title insurance, according to the court's ruling.

Daniels did not appear in the malpractice action, and a court entered judgments against him of $2.4 million to K2 and $688,716 to ATAS, the court said.

The lawyer then assigned all of his claims against American Guarantee to K2 and ATAS, which sued, seeking recovery of their losses due to the alleged legal malpractice on Daniels' part.

American Guarantee is arguing that Daniels, in violation of his malpractice insurance policy, was acting both on behalf of K2 and ATAS and also on his own behalf as a principal of Goldan when he allegedly committed the malpractice involving the $3 million in loans.

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