New York’s Second Department Splits from First Department

DOES AN INSURER HAVE AN ENTITLEMENT TO RECOUP DEFENSE COSTS WHEN NO DUTY TO INDEMNIFY EXISTS?

In a case of first impression for the New York Supreme Court, Appellate Division, Second Department, the court chose not to follow prior decisions of its sister court and federal courts applying New York law. The Second Department held that an insurer could not recover defense costs under its reservation of rights where no indemnity obligations exist, resulting in a split with the First Department.

In American Western Home Insurance Co. v. Gjonaj Realty & Management Co., 192 A.D.3d 28, 30, 138 N.Y.S.3d 626, 628 (2020), the Second Department had to decide whether an insurance company could recover the costs of defending its insureds “where there has been a reservation of rights by the insurance company and a determination by the court that the insurance company has no obligation to defend and provide insurance coverage to the insureds in an underlying personal injury action commenced against them.” The Second Department held that an insurer may not recoup defense costs under a reservation of rights unless the insurance policy expressly allows it to do so.