K2 Investment Group, LLC, et al., Respondents-Appellants,v.American Guarantee & Liability Insurance Company, Appellant-Respondent.BriefN.Y.January 7, 2014To be Argued by: MICHAEL A. HASKEL (Time Requested: 30 Minutes) New York County Clerk’s Index No. 117902/09 E Court of Appeals of the State of New York K2 INVESTMENT GROUP, LLC and ATAS MANAGEMENT GROUP, LLC, Plaintiffs-Respondents-Cross-Appellants, – against – AMERICAN GUARANTEE AND LIABILITY INSURANCE CO., Defendant-Appellant-Cross-Respondent. REPLY BRIEF FOR PLAINTIFFS-RESPONDENTS-CROSS- APPELLANTS K2 INVESTMENT GROUP, LLC and ATAS MANAGEMENT GROUP, LLC LAW OFFICES OF MICHAEL A. HASKEL Attorneys for Plaintiffs-Respondents-Cross- Appellants K2 Investment Group, LLC and ATAS Management Group, LLC 167 Willis Avenue Mineola, New York 11501 Tel.: (516) 294-0250 Fax: (516) 294-0854 Dated: December 14, 2012 i TABLE OF CONTENTS TABLE OF CONTENTS ............................................................................................ i TABLE OF AUTHORITIES .................................................................................... ii PRELIMINARY STATEMENT ............................................................................... 1 FACTS ....................................................................................................................... 3 ARGUMENT ............................................................................................................. 5 POINT I: GUARANTEE LACKED AN ARGUABLE BASIS FOR DISCLAIMING DEFENSE COVERAGE, AND INSTEAD DEMONSTRATED A GROSS DISREGARD AND CONSCIOUS DISREGARD FOR ITS INSURED’S INTERESTS, THEREBY ACTING IN BAD FAITH ............... 5 POINT II: GUARANTEE LACKED AN ARGUABLE BASIS FOR REJECTING K2/ATAS’S SETTLEMENT OFFER ................ 18 CONCLUSION ........................................................................................................ 19 ii TABLE OF AUTHORITIES Cases Am. Guarantee & Liability Ins. Co. v. Moskowitz, 19 Misc. 3d 548 (Sup. Ct. N.Y. County 2008), aff’d, 58 A.D.3d 426 (1st Dep’t 2009) ...................................... 10-11 American Guarantee & Liability Insurance Co. v. Moskowitz, 58 A.D.3d 426 (1st Dep’t 2009) .............................................................................................................. 10 CBLPath, Inc. v. Lexington Insurance Co., 73 A.D.3d 829 (2d Dep’t 2010) ......... 18 Dano v. Royal Globe Ins. Co., 59 N.Y.2d 827 (1983) ........................................... 6, 7 Dano v. Royal Globe Ins. Co., 89 A.D.2d 817 (4th Dep’t 1982), aff’d, 59 N.Y.2d 827 (1983) .............................................................................................................. 6-7 Daus v. Lumbermens Mut. Cas. Co., 241 A.D.2d 665 (3d Dep’t), lv. denied, 90 N.Y.2d 812 (1997) ......................................................................................... 5, 6, 7-8 Decker v. Amalgamated Mut. Cas. Ins. Co., 43 A.D.2d 939 (2d Dep’t), modified by 35 N.Y.2d 950 (1974) ........................................................................................ 6, 8-9 Decker v. Amalgamated Mut. Cas. Ins. Co., 35 N.Y.2d 950 (1974) ......................... 9 DMP Contracting Corp. v. Essex Ins. Co., 76 A.D.3d 844 (1st Dep’t 2010) ....... 6, 7 Fed. Ins. Co. v. N. Am. Specialty Ins. Co., 47 A.D.3d 52 (1st Dep’t 2007) .............. 5 Fed. Ins. Co. v. N. Am. Specialty Ins. Co., 83 A.D.3d 401 (1st Dep’t 2011) ........ 6, 7 Frontier Insulation Contractors v. Merchants Mut. Ins. Co., 91 N.Y.2d 169 (1997) ............................................................................................................................ 16, 18 Gibbs v. CNA Ins. Co., 263 A.D.2d 836 (3d Dep’t 1999) ................................. 13, 14 Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, reh’g denied, 31 N.Y.2d 709 (1972), cert. denied, 93 S. Ct. 1374 (1973) ....................................................... 6, 8, 9 Kincaid v. Simmons, 66 A.D.2d 428 (4th Dep’t 1979) ............................................ 18 iii Oot v. Home Ins. Co., 244 A.D.2d 62 (4th Dep’t 1998) .................................... 11-12 Pavia v. State Farm Mut. Auto Ins. Co., 82 N.Y.2d 445 (1993), reh’g denied, 83 N.Y.2d 779 (1994) ........................................................................... 5-7, 9, 10, 12, 13 Redcross v. Aetna Cas. & Sur.Co., 260 A.D.2d 908 (3d Dep’t 1999) ...................... 6 RJC Realty Holding Corp. v. Republic Franklin Ins. Co., 2 N.Y.3d 158 (2004) .... 15 Westpoint Int’l, Inc. v. Am. Int’l. S. Ins. Co., 71 A.D.3d 561 (1st Dep’t 2010) ...... 15 Worth Constr. Co. v. Admiral Ins. Co., 10 N.Y.3d 411 (2008) ............................... 15 1 PRELIMINARY STATEMENT This Reply Brief addresses Guarantee’s1 Reply Brief (“Reply Br.”) insofar as it concerns the issue of bad faith. Although Guarantee points to “questionable circumstances” surrounding the underlying transactions (Reply Br. 34, quoting Majority decision), no reasonable insurer would have concluded, as Guarantee did, that “questionable circumstances” – namely, Daniels’s purported role as attorney for Goldan, a company of which he was a member – provided any justification for disclaiming its duty to defend on the ground of the Subject Exclusions. First, without regard to whether or not there were “questionable circumstances”, Guarantee, ignoring the fact that the Legal Malpractice Claims fell entirely within the scope of the Policy, and premising its disclaimer on its own interpretation of the plain language of two policy exclusions, placed its own interests ahead of its insured. From prior decisional law interpreting the same types of policy provisions at issue here, Guarantee knew well the meaning of its own exclusions. Both the Non-attorney Status Exclusion and the Control of Business Enterprise Exclusion are defined by the nature of the Claim against the insured, that is, both exclusions are expressly triggered by a “claim” – in the first instance, the exclusion is triggered where the claim is based upon the insured’s capacity or status as an officer, director, partner, stockholder, etc. of a business entity, rather than as an 1 All abbreviations will be as set forth in the opening brief. 2 attorney; in the second, the exclusion is triggered when a claim is based upon acts and omissions “for” a business enterprise in which the insured had a controlling interest. (R205.) No reasonable insurer would have read the Legal Malpractice Claims as being based, in whole or in part, on the insured’s capacity or status as anything other than K2/ATAS’s attorney, and none would have read the Legal Malpractice Claims as being based on the performance of services for anyone other than K2/ATAS. To the contrary, the sole basis of the Legal Malpractice Claims was the insured’s acts and omissions in his capacity as attorney for K2/ATAS. Because the subject exclusions are inconsistent with K2/ATAS’s allegations of legal malpractice, which fall entirely within the Policy, the Legal Malpractice Claims presented traversable allegations as to each of the exclusions. To elaborate, by asserting in the Legal Malpractice Claims that Daniels was acting as K2/ATAS’s attorney, K2/ATAS presented a traversable allegation that could have been denied in an answer by Daniels; similarly, by claiming that the legal services Daniels was to perform were for K2/ATAS, a traversable allegation was made, which could have been denied on the alleged basis that Daniels was performing subject services, not for K2/ATAS, but for Goldan. If Guarantee had defended the Legal Malpractice Claims, the Non-attorney Status Exclusion and the Control of Business Enterprise Exclusion would have been heard on the merits. As it stands, Guarantee had to have anticipated, from the allegations in the Underlying Action 3 Complaint and from its alleged discussions with its insured, that its failure to provide a defense could result in a judgment against its insured for a covered claim which was based on allegations its insured denied. Guarantee also purports that the circumstances presented at bar raised “questions of fact regarding the applicability of exclusions” (Reply Brief for Defendant-Appellant-Cross-Respondent [“Reply Br.”] 35), and so Guarantee should be permitted to conduct discovery (see Opening Brief for Defendant- Appellant-Cross-Respondent [“Guarantee Opening Br.”] 11, 12, 41, 42, 47, 55). This contention begs the conclusion that Guarantee failed, inter alia, to adequately investigate claims falling within the Policy prior to disclaiming. Under the circumstances, such a failure clearly constitutes bad faith and renders the insurer liable for any judgment in excess of the policy limit. There is no doubt that Guarantee’s blind disclaimer, along with Guarantee’s refusal to settle within the policy limits, constituted a placement of its own interests over that of its insured. FACTS K2/ATAS respectfully refers this Court to the K2/ATAS’s Opening Brief of October 2, 2012 (“K2 Opening Br.”) for a full discussion of the relevant facts. However, for the purposes of this Reply, K2/ATAS would like to point out certain discrepancies in the facts stated by Guarantee in its Reply Brief. 4 The most striking discrepancy between K2/ATAS’s and Guarantee’s versions of the facts throughout this litigation has to do with whether the Underlying Action Complaint somehow provided a basis for Guarantee’s outright disclaimer of all coverage, defense and indemnity. Guarantee’s position that the relief sought by K2/ATAS “did not trigger the [insurance] agreement and fell outside the scope of covered ‘Damages’” (Reply Br. 38) is wholly unsupported, as is its claim that the “allegations were based on self-dealing and the failure to render services to others” (id.). The Underlying Action Complaint itself belies these assertions, as the allegations in the pleading are clearly not “based on self-dealing” or on the provision, or failure to provide, services to anyone other than K2/ATAS. (See generally R67-83.) Indeed, the purported “admissions” and “facts” asserted by Guarantee as to Daniels’s relationship with Goldan (see, e.g., Reply Br. 42, 45) are in direct conflict with the basic contention underlying the Legal Malpractice Claims, viz., that Daniels was liable for K2/ATAS’s full losses as a result of his professional negligence in failing to record the subject mortgages. Critically, this basic contention could have been traversed in the Underlying Action, a circumstance which requires not only a finding that the Policy covers the Legal Malpractice Judgment up to the policy limit, but a finding of bad faith justifying payment above the policy limit, because such a situation – disclaimer of defense based upon the 5 insured’s purported communications with the carrier in the face of a pleading that obviously alleged covered claims and presented traversable allegations – could only arise from the insurer’s placing of its own interests above of those of the insured, as will be discussed more fully herein. ARGUMENT POINT I GUARANTEE LACKED AN ARGUABLE BASIS FOR DISCLAIMING DEFENSE COVERAGE, AND INSTEAD DEMONSTRATED A GROSS DISREGARD AND CONSCIOUS DISREGARD FOR ITS INSURED’S INTERESTS, THEREBY ACTING IN BAD FAITH The K2 Opening Br. discussed the appropriate standard for determining bad faith (see K2 Opening Br. 69-70), which is a “conscious disregard” of the insured’s rights, Fed. Ins. Co. v. N. Am. Specialty Ins. Co., 47 A.D.3d 52, 64 (1st Dep’t 2007), a “conscious or knowing indifference” to the insured’s rights, Daus v. Lumbermens Mut. Cas. Co., 241 A.D.2d 665, 666 (3d Dep’t), lv. denied, 90 N.Y.2d 812 (1997), or a “gross disregard” of such rights, Pavia v. State Farm Mut. Auto Ins. Co., 82 N.Y.2d 445, 453 (1993), reh’g denied, 83 N.Y.2d 779 (1994). K2/ATAS then showed that the standard was met in this instance, insofar as (a) Guarantee refused to defend Daniels, notwithstanding its clear defense obligation under the Policy and relevant case law including a First Department decision rejecting a similar disclaimer by Guarantee (see K2 Opening Br. Point III-C); and (b) Guarantee refused to settle within policy limits, notwithstanding its clear 6 indemnity obligation under the Policy, and Guarantee’s own uncertainty concerning applicability of the exclusions (see id. Point III-D). In response, Guarantee first argues that it had an “arguable basis” for denying defense coverage, as a consequence of which, Guarantee contends there can be no claim for bad faith (Reply Br. 36), citing as support Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 431, reh’g denied, 31 N.Y.2d 709 (1972), cert. denied, 93 S. Ct. 1374 (1973); Redcross v. Aetna Cas. & Sur.Co., 260 A.D.2d 908, 911, 914 (3d Dep’t 1999), Pavia, 82 N.Y.2d at 452-53; Fed. Ins. Co. v. N. Am. Specialty Ins. Co., 83 A.D.3d 401, 402 (1st Dep’t 2011); DMP Contracting Corp. v. Essex Ins. Co., 76 A.D.3d 844, 847 (1st Dep’t 2010); Daus, 241 A.D.2d at 666; Decker v. Amalgamated Mut. Cas. Ins. Co., 43 A.D.2d 939, 940 (2d Dep’t), modified by 35 N.Y.2d 950 (1974); Dano v. Royal Globe Ins. Co., 59 N.Y.2d 827, 829-30 (1983). (See Reply Br. 36-37.) None of this authority supports Guarantee’s argument. Four of the cited cases did not even involve denial of defense coverage. See Pavia, 82 N.Y.2d at 453 (bad-faith failure to settle); Redcross, 260 A.D.2d at 913 (bad-faith failure to settle or to keep insureds informed of settlement negotiations); Dano v. Royal Globe Ins. Co., 89 A.D.2d 817, 818-19 (4th Dep’t 1982) (claim against first-party insurer for failure to negotiate and settle in good faith), aff’d by 7 Dano, 59 N.Y.2d at 8292; Fed. Ins. Co., 83 A.D.3d at 402-03 (excess insurer alleged primary insurer’s failure to assert the antisubrogation rule during its defense of the case constituted bad faith).3 To the extent that the cited authority does deal with disclaimer of defense coverage, all of the cases involve either demonstrable good faith by the insurer or lack of coverage that is clear and unambiguous under the plain language of the policy. Thus, in DMP Contracting Corp., the Appellate Division affirmed dismissal of a bad faith claim where the claimant conceded that the injury arose from the use of a vehicle, and the policy contained an unambiguous exclusion for such an injury. 76 A.D.3d at 846. This is clearly dissimilar to the case at bar, in which K2/ATAS pled that Daniels committed malpractice while representing them, and K2/ATAS never alleged facts that conceded the application of an exclusion. Similarly, Daus involved a disclaimer for late notice where the insured admittedly did not forward to the insurer the summons and complaint in the underlying action, and waited to inform the insurer of the pendency of the 2 In addition, the Appellate Division decision in Dano relied upon the bad faith standard asserted in Gordon that the insurer must have committed a “disingenuous or dishonest failure to carry out [the] contract.” Dano, 89 A.D.2d at 819 (quoting Gordon, 30 N.Y.2d at 437). Pavia subsequently rejected this standard for bad faith in favor of the lower “gross disregard” standard. See Pavia, 82 N.Y.2d at 453-54. 3 Notably, two of the aforementioned cases found issues of fact precluding summary judgment to the insurer as to at least one aspect of the bad faith claims asserted. See Redcross, 260 A.D.2d at 914 (issue of fact as to whether the insurer’s failure to keep the insureds informed of settlement negotiations constituted bad faith); Fed. Ins. Co., 83 A.D.3d at 402-03 (issue of fact as to whether the primary insurer’s nonassertion of antisubrogation defense constituted bad faith). 8 underlying action until after he received notice that a default judgment was being sought in said action. 241 A.D.2d at 666. Gordon and Decker both involve the insurer’s good faith assertion of a disclaimer based upon their belief that coverage was cancelled prior to the events underlying liability. In Gordon, following the insured’s failure to make payments to his premium financing company, the insurer withdrew coverage upon locating a notice of coverage cancellation sent by the finance company which, had it been proper, would have rendered the claim outside of the relevant policy. 30 N.Y.2d at 431. The notice of cancellation, however, was later determined to be ineffective. Id. at 432. In addressing the issue of bad faith, this Court specifically noted in its decision two extenuating circumstances, namely, the record showed the insurer acted upon the mistaken advice of counsel that the cancellation was effective and there was no coverage, id. at 433, and it was the insured’s agent, i.e., the finance company, not the insurer, that was responsible for the ineffectiveness of the notice of cancellation, id. at 434. The Appellate Division in Decker noted the similarity of the facts before it to the facts in Gordon, stating: As in Gordon, the chain of events which set the assertion of noncoverage in motion in the instant case was precipitated by Mrs. Mason’s apparently admitted failure to make timely payment on her policy. The only reason the policy was not effectively canceled upon the failure to pay was because of failure of compliance with the 9 technical standards of the Insurance Law and the Banking Law. The fact that Amalgamated continued to receive and to accept payments after the initial default in payment does not shield Mrs. Decker from the fact that it was Mrs. Mason’s default in payment which set in motion the events which led to the assertion of noncoverage. Finally, we find that here, as in Gordon, no actual adverse economic consequences befell Mrs. Mason as a result of Amalgamated’s assertion of noncoverage. Amalgamated has paid the limits of its policy . . . 43 A.D.2d at 940. Notwithstanding, this Court reversed the Appellate Division’s dismissal of the bad faith claims, holding that there was an issue of fact as to whether the reliance on counsel negated the charge of bad faith. Decker v. Amalgamated Mut. Cas. Ins. Co., 35 N.Y.2d 950, 952-53 (1974).4 Here, in contrast to Gordon and Decker, there are no allegations that Guarantee disclaimed on good faith reliance upon its counsel or agents – Guarantee itself made the determination to withdraw coverage in the Underlying Action, refused to settle within the policy, and refused to indemnify Daniels. Moreover, here the disclaimer was not based on a non-traversable and technical issue such as late notice or cancellation. To the contrary, the disclaimer was issued notwithstanding Guarantee’s opportunity to provide for the defense of traversable allegations made in the Legal Malpractice Claims, see supra p. 2. Under the 4 Gordon and Decker both utilized the “disingenuous or dishonest failure to carry out a contract” standard for bad faith. See Decker, 43 A.D.2d at 940 (quoting Gordon, 30 N.Y.2d at 437). As discussed supra p. 7 n.2, this Court in Pavia subsequently rejected this standard in favor of the lower “gross disregard” standard. 10 circumstances, Guarantee’s disclaimer is a clear example of “conscious disregard” and “gross disregard.” Guarantee would have this Court believe that if an insurer determines there is any “arguable basis” for disclaimer, the disclaimer is automatically in good faith. This contention is untenable. Allowing an insurer to escape liability for bad faith by simply coming up with some reason for disclaiming, no matter how suspect, displaces the test articulated in Pavia and invites unreasonable risk-taking based purely on the carrier’s own economic interests and in defiance of its well-settled contractual obligations requiring good faith. Notwithstanding Guarantee’s arguments in its Reply, the case law cited by K2/ATAS is far more germane to the situation at bar. Guarantee calls the facts underlying the First Department’s finding in American Guarantee & Liability Insurance Co. v. Moskowitz, 58 A.D.3d 426 (1st Dep’t 2009), that it had a duty to defend, “entirely different” than the facts herein. However, in both Moskowitz and in the instant case, Guarantee denied defense coverage based upon its unreasonably narrow construction of the complaint, claiming in both cases that the facts fit within an exclusion and that the damages claimed were not covered. Here, as in Moskowitz, the complaint alleged that the attorney represented the suing client, R85-87; Am. Guarantee & Liability Ins. Co. v. Moskowitz, 19 Misc. 3d 548, 551 11 (Sup. Ct. N.Y. County 2008), aff’d, 58 A.D.3d 426 (1st Dep’t 2009).5 In both cases, Guarantee denied its duty to defend or indemnify. K2 Opening Br. 12-14; 19 Misc. 3d at 552. The Non-attorney Status Exclusions relied upon in both cases were worded in a similar, if not identical, manner (see K2 Opening Br. 71). Guarantee disclaimed in both cases on the ground, inter alia, that the damages sought were outside the policies’ definitions of covered damages, K2 Opening Br. 13; 19 Misc. 3d at 552, which definitions were also similar if not identical (K2 Opening Br. 72). Thus, Moskowitz is not only factually analogous to the instant case, but also provides further testament to Guarantee’s propensity for disclaiming unreasonably. Guarantee also claims that Oot v. Home Ins. Co., 244 A.D.2d 62 (4th Dep’t 1998) (cited in K2 Opening Br. 38, 45, 53, 66, and 73, and by the Majority at R370) is distinguishable due to differences in the wording of the exclusion at bar versus the exclusion in that case (see Reply Br. 41-42). However, these differences are inconsequential to the reasoning in Oot, which is highly supportive of a finding of bad faith here. In Oot, the insurer disclaimed defense coverage based upon an exclusion similar (although admittedly non-identical) to the Control of Business Enterprise Exclusion, claiming that the exclusion applied because the 5 In Moskowitz, the client did not allege legal malpractice, but instead claimed for fraud, civil racketeering and unjust enrichment. 19 Misc. 3d at 551. A fortiori, where, as here, legal malpractice is alleged against the insured, the insurer’s duty to defend is crystal clear. 12 allegedly negligent legal work was performed by the insured for an organization in which he had an interest. See 244 A.D.2d at 69-70. The Oot court reasoned that “the exclusion is apparently designed to exclude claims based upon legal work performed by an insured for an enterprise in which he or she has some kind of ownership interest and thus where the insured is likely to benefit directly from recovery under the policy.” Id. at 70. Oot found the insured no longer had anything that might have been construed as an ownership interest, at the time the legal malpractice claim was made, in the entity for which the legal work had been performed and that was asserting such claim. See id. The reasoning in Oot applies at bar as well. At bar, the facts are even more favorable to K2/ATAS, because Daniels never had an ownership interest in K2/ATAS, the entities for which the legal work was performed. Indeed, Daniels was not once in the Underlying Action Complaint alleged to have performed any legal services for any individual other than K2/ATAS (see generally R85-87); thus, K2/ATAS’s Legal Malpractice Claims are based on services performed for K2/ATAS, not Goldan, and the Control of Business Enterprise Exclusion was plainly inapplicable. Tellingly, Guarantee does not attempt to refute K2/ATAS’s analysis of how the factors articulated in Pavia establish bad faith herein, including its claim that it needs discovery to determine applicability of the exclusions. (See K2 Opening Br. 75-76.) The disclaimer could not have been reasonable in light of Guarantee’s 13 admission that even now, it needs discovery. (See Guarantee Opening Br. 11, 12, 41, 42, 47, 55.) No reasonable insurer would have disclaimed in the midst of such great uncertainty, and in light of the severe consequences that could befall its insured by virtue of withdrawal of defense. See Pavia, 82 N.Y.2d at 454-55. While Guarantee acknowledges that insurers generally cannot rely on extrinsic evidence to deny an obligation to defend (Reply Br. 43), Guarantee purports that “a party’s characterization of the causes of action alleged in a complaint are not controlling.” (Id. 43-44.) Here, however, Guarantee credited Daniels’s purported “characterization of events” leading to the Underlying Action Complaint, rather than the cold, hard language of that complaint itself, viz., Guarantee decided that Daniels’s written notice that a claim might arise from his representation of Goldan triggered an exclusion, despite the Underlying Action Complaint’s clear articulation of K2/ATAS’ claim that their malpractice claim arose from Daniels’ representation of them, not Goldan. Moreover, Guarantee’s citation to Gibbs v. CNA Ins. Co., 263 A.D.2d 836 (3d Dep’t 1999) (Reply Br. 43-44), is unsupportive of its contention. There, the insurer’s exclusion for intentional acts was premised on the defendant-insured’s guilty plea to first degree sexual assault in a prior criminal proceeding and there is no evidence that the allegations in the civil complaint were inconsistent with the insured’s plea. Gibbs, 263 A.D.2d at 837. This instance is hardly analogous: the 14 statements Guarantee cites as “admissions” by Daniels, to the extent even admissible, are certainly not tantamount to a criminal plea and, moreover, they are incompatible with the allegations of the Underlying Action Complaint. Guarantee had no “reasonable belief” that it could disclaim based on conflicting factual statements by its insured and K2/ATAS; if anything, this was more of a reason for Guarantee to assist Daniels in asserting a defense. In addition, in Gibbs the relevant exclusion was one for expected or intended injury. Id. at 836, 837. As discussed in the K2 Opening Br. at 31, an intentionally inflicted injury cannot, as a matter of law and public policy, be covered by insurance, and thus there was a strong public policy reason for the insurer in Gibbs to be able to invoke an exclusion for intentional harm. Moreover, in arguing that it had an “arguable” basis for disclaiming, Guarantee misinterprets its own policy provisions. Guarantee’s duty to defend and indemnify is triggered by a “claim” which is made by a third party and is based upon a specific set of circumstances or facts that include the insured’s performing legal services that give rise to damages. Even Guarantee does not deny that the Legal Malpractice Claims allege the performance of legal services giving rise to damages to Daniels’s clients, K2/ATAS; thus, Guarantee does not deny that the Legal Malpractice Claims allege circumstances that require coverage. Guarantee instead contends that it had an “arguable” basis for disclaiming under the Non- 15 attorney Status Exclusion and the Control of Business Enterprise Exclusion. Guarantee tells us that either or both of these exclusions are implicated because Daniels was not K2/ATAS’s attorney, or was performing services for Goldan, a company which he allegedly controlled. However, as the Majority found, the Legal Malpractice Claims do not arise, in whole or in part, from the facts and circumstances that would trigger these exclusions. (See R368 [“That Daniels was an owner of Goldan or might have been acting in the interest of Goldan instead of his clients . . . does not change the essence of the complaint, which is that Daniels committed legal malpractice in his representation of plaintiffs.”].) Both the covered nature of the claim, and the traversability of its allegations based on the two exclusions, are apparent from the face of the Underlying Action Complaint, and Guarantee should have realized the Legal Malpractice Claims fell entirely within the Policy and if proven, required indemnification. The Majority’s holding on this point was consistent with case law finding that the background set forth in the Complaint, such as Daniels’s membership in Goldan, is not the basis for the claim, and the claim does not “arise out of” such circumstances. See Westpoint Int’l, Inc. v. Am. Int’l. S. Ins. Co., 71 A.D.3d 561, 562 (1st Dep’t 2010); see also Worth Constr. Co. v. Admiral Ins. Co., 10 N.Y.3d 411, 415, 416 (2008); RJC Realty Holding Corp. v. Republic Franklin Ins. Co., 2 N.Y.3d 158, 165 (2004). Notably, 16 each of these cases was discussed in the K2 Opening Br. (at pp. 41, 42, 51, 58-59), but not addressed by Guarantee. At the time it was informed of the Underlying Action against Daniels, insofar as Guarantee knew that K2/ATAS were asserting claims for legal malpractice, Guarantee also knew all that it needed to know in order to determine that it was required to defend Daniels, regardless of what “questionable circumstances” it may have suspected existed. See, e.g., Frontier Insulation Contractors v. Merchants Mut. Ins. Co., 91 N.Y.2d 169, 175 (1997) (insurer must defend “whenever the allegations within the four corners of the underlying complaint potentially give rise to a covered claim”). Since both of the Subject Exclusions are defined by the injured parties’ description of the claim, not the insureds’, Guarantee did not have any tenable argument for acting as if there was no possibility of coverage. Guarantee’s attempts to reinvent K2/ATAS’s claims fail, for if Guarantee wanted to consider matters outside the Underlying Action Complaint in connection with these exclusions, it would need to rewrite its policy language to read that the Non-attorney Status Exclusion and Control of Business Entity Exclusion are triggered by circumstances outside the injured parties’ claim. However, this would be more akin to a situation involving a late notice or lack of cooperation defense. 17 Second, Guarantee seems to argue that it could not be liable for bad faith in the face of “conflicts of interest” in the roles Daniels played (Reply Br. 35). However, Guarantee’s contention, both in its assumption that there were conflicts that somehow excused it from providing coverage (id.) and in its implicit conclusion that the conflicts absolve it of bad faith, is wrong. Significantly, Guarantee does not explain how any conflict prevented Guarantee from attempting to establish the viability of the Subject Exclusions by interposing a defense on behalf of Daniels denying K2/ATAS’s allegation that there was an attorney-client relationship between K2/ATAS and Daniels, and denying any legal malpractice injured K2/ATAS. If, as Guarantee contends, Daniels did not perform legal services for K2/ATAS – an allegation that can no longer be made in light of the default judgment against Daniels – a defense based on Daniels’s own position, if proven, would have been complete as to the Legal Malpractice Claims, and would not have posed any conflict between Daniels and Guarantee. Certainly, Guarantee has argued that Daniels told it that he was Goldan’s attorney, and that the services he was to perform were for the benefit of Goldan (Reply Br. 38-39, 45); these services would have included the recording of the subject mortgages. Thus, Guarantee could have assisted Daniels by retaining defense counsel to deny all the material allegations of the Legal Malpractice Claims by asserting Daniels was to perform legal services for Goldan only. This too would have been a complete 18 defense to the Legal Malpractice Claims, if true, and would not have posed any conflict of interest between Guarantee and Daniels. Finally, Guarantee never refutes the clear jurisprudence as to the insurer’s broad duty to defend, viz., that it was not permitted to disclaim defense based upon information outside the four corners of the underlying complaint, including an admission by the insured himself that the claim fails within an exclusion. (See K2 Opening Br. 77 [citing Frontier Insulation Contractors, 91 N.Y.2d at 175, and Kincaid v. Simmons, 66 A.D.2d 428, 430-31 (4th Dep’t 1979)].) POINT II GUARANTEE LACKED AN ARGUABLE BASIS FOR REJECTING K2/ATAS’S SETTLEMENT OFFER In response to K2/ATAS’s bad faith argument with regard to failure to settle, Guarantee cites CBLPath, Inc. v. Lexington Insurance Co., 73 A.D.3d 829 (2d Dep’t 2010), a case in which the insured claimed the insurer’s refusal to engage in pre-litigation settlement negotiations constituted bad faith, id. at 829-30. There, however, the court granted summary judgment to the insurer because the plaintiff in the underlying litigation had made no pre-litigation settlement demand within the policy limit. Id. at 831-32. This is hardly analogous to this case, in which a settlement demand, clearly within the policy limit, was made after the litigation commenced and indeed, after Guarantee had already withdrawn its defense. (See R145 [6/8/09 Letter].) 19 Guarantee claims there were “serious doubts as to the likelihood of liability against Daniels because Daniels identified to [Guarantee] that he was not representing the Respondents” (Reply Br. 49.) Assuming arguendo that Guarantee’s characterization of what Daniels told it was accurate and admissible, whether “serious doubts” existed as to the likelihood of liability must take into account not just what the facts were concerning the Legal Malpractice Claims, but whether Daniels would have been able to prove alleged facts supportive of his defense in light of Guarantee’s precipitous and unjustified withdrawal of his defense. By abandoning Daniels’s defense, then arguing that, notwithstanding such abandonment, there remained “serious doubts” as to Daniels’s liability such that Guarantee was not obligated to settle, Guarantee impermissibly seeks to take advantage of its own wrong. Just as it acted in bad faith in disclaiming its duty to defend, Guarantee acted in gross disregard of its insured’s interests by refusing to consider K2/ATAS’s settlement demand within the policy limits after its refusal to defend impaired Daniels’s ability to defend the Legal Malpractice Claims. As such, Guarantee should be liable for the full Legal Malpractice Judgment. CONCLUSION For the aforesaid reasons, as to the third and fourth causes of action for bad faith, the Court should reverse the Order and grant K2/ATAS’s cross-motion for summary judgment, awarding to K2/ATAS an amount equivalent to the Legal Malpractice Judgment entered against Daniels, plus interest running from the date of the entry of said Judgment, costs, and disbursements. Alternatively, the Court should at least reverse only that aspect of the Order granting Guarantee summary judgment on the bad faith claims. Dated: Mineola, New York December 14, 2012 Of Counsel: Michael A. Haske] Susan Haskel Brandon M. Zlotnick Respectfully submitted, LAW OFFICES OF MICHAELA. HASKEL 20 Michael A. Haskel Attorneys for Plaintiffs-Respondents- Cross-Appellants, K2 Investment Group, LLC and ATAS Management Group, LLC 167 Willis Avenue Mineola, NY 11501-2621 (516) 294-0250