New York Court Requires Insurer that Issued Duty to Defend Policies to Advance Defense Costs During Coverage Litigation, but Insurer that Issued Duty to Advance Policies Has No Such Obligation

A New York trial court has ruled that an insurer that issued a series of duty to defend policies was obligated to pay for a policyholder’s defense costs, subject to a right of recoupment, while a coverage action between the parties was pending.  QBE Americas, Inc. v. ACE Am. Ins. Co., 2014 NY Slip Op 51330(U) (N.Y. Sup. Ct. Aug. 27, 2014).  The court held that an insurer that had issued duty to advance policies, however, did not have such an obligation.

The policyholder, an insurance company, filed a coverage action seeking indemnification under a number of its professional liability policies for approximately 40 lawsuits and a state government investigation alleging that it engaged in a kickback scheme in connection with force-placed insurance.  Prior to discovery, the insured moved for summary judgment regarding the duty of two primary insurers with respect to defense costs in those lawsuits.  One of the insurers had issued duty to defend policies, while the other insurer’s policies contained a duty to advance.

First, in addressing the insured’s claim for costs of litigation that had already been resolved, the court observed that a determination as to the insured’s entitlement to defense costs would be tantamount to a final determination on the merits as to coverage, and it therefore refused to address the issue prior to discovery due to a number of unresolved factual issues.  In so ruling, the court noted that, unlike defense costs incurred in connection with pending litigation, there was no risk that the insured’s delay in having its legal fees paid would hamper its ability to put forth the best possible defense.

Next, the court discussed the duty of the primary insurers with respect to the pending litigation for which coverage was sought.  The court first noted that, under New York law, a duty to defend policy requires the insurer to advance all of its insured’s defense costs while, by contrast, a duty to advance policy merely obligates the insurer to pay a pro-rata share of the costs based on the percentage of litigation attributable to covered entities and covered claims.  Next, the court ruled that the insurer that had issued the duty to advance policies was not obligated to advance defense costs for the pending litigation because the insured had not proved that it had satisfied the retention of those policies by the actual payment of covered defense costs.

With respect to the insurer that had issued the duty to defend policies, however, the court ruled that it was obligated to advance all of the insured’s litigation costs going forward because the duty to defend obligated it to pay for all defense costs so long as the costs were incurred in a lawsuit in which the possibility existed that any of the claims asserted against the insured might be covered. However, the court held that the insurer was not required to pay for past expenses (even for pending litigation) to the extent that the insured had failed to seek payment for those costs as they were being incurred.  The court ruled that the costs for which the insured did not seek payment, as well as the costs incurred for litigation that was settled or otherwise discontinued, would only be decided as part of a final adjudication under the merits.