Refuse to defend your policyholder, and you may forfeit the right to fight the bill - even a $2.8 million one.
A New York appeals court ruled on June 5, 2026, that an insurer who disclaimed coverage and declined to defend its policyholder cannot later challenge the judgment that followed.
The decision, from the Appellate Division, Fourth Department, centered on Dryden Mutual Insurance Company and its policyholder, Cory Lisinski, who does business as CNL Construction and Maintenance. Louis Shattuck was injured doing construction work with Lisinski's tools and equipment. Lisinski reported the accident, but Dryden disclaimed coverage, arguing that Shattuck was an employee and so fell under a workers' compensation exclusion.
That call proved costly.
Left without a defense, Lisinski faced the lawsuit alone. Shattuck won a default judgment of $2,841,782 after a damages hearing, then took an assignment of Lisinski's rights against the insurer. He sued Dryden directly under New York's Insurance Law § 3420, which lets an injured judgment creditor pursue the insurer.
The court found Dryden should have defended. It described the duty to defend as exceedingly broad, applying whenever the allegations of a complaint suggest a reasonable possibility of coverage. The underlying suit claimed Shattuck was an employee, but it also alleged, in the alternative, that he was an independent contractor. That alternative was enough to bring the claim within reach of the policy and trigger the duty to defend - no matter how weak the suit might appear.
Dryden tried two arguments to escape liability. It said the claim should be dismissed because Lisinski never forwarded the default papers. The court held that Dryden's disclaimer amounted to a repudiation of the policy, which excused Lisinski from that step. Dryden also argued the default judgment was tainted by misconduct. The court found no proof that Lisinski was promised a share of the recovery or that anyone misled the court.
The sharpest part of the ruling dealt with the damages. Dryden wanted a new hearing so it could contest the figure. The court refused. An insurer that disclaims and declines to defend without seeking a declaratory judgment, it explained, takes the risk that the injured party will win a judgment - and may then litigate only whether its disclaimer was valid, not the liability or damages behind the award. By sitting out the original case, Dryden lost the right to argue about the number. The court awarded Shattuck damages up to the policy limit.
Then it went further. The trial court had dismissed Shattuck's bad-faith claims, but the appeals court brought them back. Bad faith, the court noted, requires showing a gross disregard of the insured's interests - a deliberate or reckless failure to treat the policyholder's interests on equal footing with the insurer's own. Because Dryden failed to meet its burden to have those claims thrown out, the court reinstated the first through fourth causes of action to the extent they allege bad faith. That exposure can climb past the policy limit. The bad-faith claims now return to the lower court for further proceedings.
For claims professionals, the message is plain. When a complaint pleads alternative theories and one might fall inside the policy, the duty to defend kicks in - even if the claim looks weak. Disclaiming and walking away, instead of defending under a reservation of rights or filing for a declaratory judgment, can forfeit an insurer's right to contest both liability and the size of the award.
