(Article from Insurance Law Alert, September 2025)
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Holding
An underlying settlement agreement together with consent judgment and assignment of insurance rights did not eliminate the insured’s liability for purposes of triggering the insurer’s duty to indemnify. Geiger v. Hudson Excess Ins. Co., 2025 N.Y. App. Div. LEXIS 4664 (App. Div. 1st Dep’t Aug. 7, 2025).
Background
Models and social medial influencers sued Vola, a night club operator, alleging use of their images in advertising without consent or payment. The parties eventually entered into a settlement agreement and consent judgment, pursuant to which Vola assigned to plaintiffs its right to prosecute its coverage claims against two insurers and to recover the amount of the judgment and defense costs. Plaintiffs then commenced a suit against the two insurers, Hudson and Lancer, seeking a declaration that they had a duty to defend and indemnify Vola in the underlying action.
A New York trial court ruled that Hudson’s policy was void ab initio due to material misrepresentations in the policy and granted its motion for summary judgment. With respect to Lancer, the trial court ruled that the insurer had a duty to defend but no duty to indemnify.
Decision
The appellate court affirmed the ruling in favor of Hudson. The court noted that Vola made numerous misrepresentations in its application relating to its hours of operation, alcohol sales, and entertainment aspects, among other things. Further, the court found these misrepresentations to be material since Hudson’s underwriting guidelines would have prohibited the issuance of the policies to a venue with such activities.
The appellate court also agreed that Lancer had a duty to defend the underlying suit. The court explained that a “knowing violation” exclusion did not eliminate the possibility of coverage because some of the allegations in the complaint alleged negligent conduct.
However, the appellate court ruled that the trial court should have denied Lancer’s summary judgment motion with respect to its duty to indemnify. The trial court had reasoned that because the settlement agreement language contained a “release,” it relieved Vola of any liability (i.e., it was not “legally obligated to pay” under the insurance policy), thereby extinguishing Lancer’s indemnity obligations. The appellate court rejected this reasoning, finding that the agreement not to execute the judgment in exchange for the assignment of rights did not constitute an actual “release” and that Vola was still “legally obligated” to pay for the purposes of Lancer’s potential indemnity obligations.
The appellate court noted that a release has the effect of discharging an obligation outright, whereas a covenant not to execute “recognizes the continuation of obligation or liability, and the party making the covenant agrees only to not assert any right or claim based upon the obligation.” Reading the settlement agreement together with the assignment and consent judgment, the court concluded that there was no general “release” and that the question of Lancer’s duty to indemnify should await resolution of liability.
Comments
The court emphasized the absence of New York precedent on the question of whether an insurer has liability where, as here, a settlement involves a consent judgment that incorporates an assignment of the insured’s rights coupled with a covenant not to execute the judgment. The court noted that the majority of courts in other jurisdictions have held that an insurer remains “legally obligated” to pay a claim under such circumstances. As a caveat, the court noted that this general principle applies only where the insured acted reasonably and in good faith, which was not disputed in this case.