Covenant Not to Execute ≠ Release: First Department Adopts Majority Rule Preserving Insurer’s Indemnity Exposure After Consent Judgment with Assignment

Introduction

In Geiger v. Hudson Excess Insurance Company, 2025 NY Slip Op 04609 (App. Div. 1st Dep’t Aug. 7, 2025), the First Department issued a significant insurance-coverage decision arising out of a publicity-rights suit against a Queens nightlife venue. The case involves two separate commercial liability policies issued to the same insured, Vola Corp. (operating as “Sorry Not Sorry”): one by Hudson Excess Insurance Company and one by Lancer Indemnity Company, covering different policy periods.

The underlying federal action alleged that Vola used models’ images in advertising without consent or compensation. After both insurers denied defense and indemnity, Vola settled by consenting to a judgment and assigning its insurance claims to the plaintiffs in exchange for a covenant not to execute the judgment against Vola. The New York Supreme Court granted Hudson summary judgment (voiding its policy for material misrepresentations) and held Lancer owed a duty to defend but not to indemnify. On appeal, the First Department affirmed much of the ruling but made a pivotal modification: it reinstated the insureds’ indemnity claim against Lancer, holding that a consent judgment with an assignment and a covenant not to execute does not operate as a release that eliminates the insurer’s potential indemnity obligation.

The ruling establishes an important New York precedent on the effect of settlements that combine consent judgments, covenants not to execute, and assignments of coverage rights—clarifying that the insured remains “legally obligated to pay,” preserving the insurer’s potential indemnity exposure where coverage exists.

Summary of the Judgment

Hudson Excess Insurance Company
- Policy rescinded ab initio due to material misrepresentations in the application (hours, operations, entertainment, alcohol promotions, hookah, income mix). The insured’s contradictory affidavit was a “feigned issue of fact.”
- Result: Hudson owes no duty to defend or indemnify; cross-claims against Hudson are moot.
Lancer Indemnity Company
- Duty to defend affirmed: Even though the underlying complaint alleged “knowing violation” (potentially excluded), it also alleged negligence, and Lancer conceded at least some instances were within its policy—triggering the duty to defend the entire action.
- Duty to indemnify: The First Department reversed the dismissal. A consent judgment coupled with an assignment of rights and a covenant not to execute is not a release, and does not extinguish indemnity exposure. Whether Lancer must indemnify remains to be decided based on coverage, exclusions, and policy period (Mar. 31, 2015–Mar. 31, 2016).
Procedural discretion: The court permitted plaintiffs’ summary judgment motion to proceed despite missing pleadings because the record was otherwise sufficiently complete.

Key Issues

Whether Hudson could rescind its policy ab initio based on material misrepresentations in Vola’s application.
Whether Lancer had a duty to defend where the complaint alleged both knowing and negligent misuse of images and some instances fell within the policy period.
Whether a consent judgment, assignment of rights, and covenant not to execute extinguish the insurer’s potential duty to indemnify.

Detailed Analysis

I. Rescission of the Hudson Policy: Material Misrepresentation and the “Feigned Issue of Fact” Doctrine

The First Department affirmed rescission ab initio of Hudson’s policy, applying well-settled New York law under Insurance Law § 3105(b)(1). A misrepresentation is material if the insurer would have refused to issue the policy or would have done so only at a higher premium had it known the truth. Although materiality is usually a fact question, it becomes one of law when the evidence is clear and substantially uncontradicted.

Hudson showed that Vola represented the premises as a bar/restaurant with 70% food/30% alcohol sales, limited hours, and no entertainment, promotions, hookah, or late closing. Hudson’s evidence—advertisements and social media—showed the opposite: nightclub-style operations with DJs, exotic dancing, hookah, drink specials, and late-night hours. A senior underwriter attested that such risks were prohibited under Hudson’s guidelines and the policy would not have issued “but for” the misstatements.

In response, Vola’s owner submitted an affidavit asserting the business matched the application, yet the same affidavit also conceded that the operation was “primarily a bar,” contradicting the application’s 70% food-sales representation. The court treated this as a “feigned attempt” to create a factual dispute, insufficient to defeat summary judgment. Result: Hudson’s policy was void ab initio, eliminating any duty to defend or indemnify and mooting cross-claims.

Precedents and Statutory Anchors

Dwyer v First Unum Life Ins. Co., establishing rescission for material misrepresentation.
Insurance Law § 3105(b)(1): materiality defined by whether the insurer would have refused the contract if the truth were known.
Process Plants Corp. v Beneficial Nat’l Life Ins. Co.: materiality as a matter of law where evidence is clear.
Interested Underwriters at Lloyd’s v H.D.I. III Assoc.; Arch Specialty Ins. Co. v Kam Cheung Constr., Inc.: misrepresentation material where policy would be declined or priced differently.
Bleecker St. Health & Beauty Aids, Inc. v Granite State Ins. Co.: burden-shifting in summary judgment.
Dixon v Sum Realty Co.: rejection of a feigned factual dispute based on internally inconsistent affidavits.

II. Lancer’s Duty to Defend: “Arguable Coverage” Governs

The court reaffirmed New York’s broad duty-to-defend framework. The duty is triggered by the allegations in the complaint; if any claim is even arguably within coverage, the insurer must defend the entire action, even if other claims fall outside coverage or within exclusions. Here, notwithstanding exclusions for “knowing violation” and for material published with knowledge of falsity, the complaint also alleged negligent use of images, and Lancer acknowledged that at least two instances fell within its policy. That sufficed to trigger the defense obligation.

Precedents

BP A.C. Corp. v One Beacon Ins. Group: duty to defend is triggered by allegations.
Town of Massena v Healthcare Underwriters Mut. Ins. Co.; Frontier Insulation Contrs. v Merchants Mut. Ins. Co.: any arguable coverage triggers defense of the entire action.
Mendes & Mount v American Home Assur. Co.: supports both the duty-to-defend analysis and the principle that indemnity determinations can await resolution of liability.

III. Lancer’s Duty to Indemnify: Adoption of the Majority Rule on Consent Judgments with Assignments and Covenants Not to Execute

The decision’s centerpiece is the First Department’s express adoption of the majority rule: a consent judgment, combined with an assignment of the insured’s claims against the insurer and a covenant not to execute, does not operate as a general release and does not eliminate the insured’s “legal obligation to pay” the judgment. Consequently, such arrangements do not, as a matter of law, extinguish the insurer’s potential duty to indemnify.

The court carefully distinguished between a “release,” which eliminates or discharges liability, and a “covenant not to execute,” which merely promises forbearance and recognizes the continued existence of the obligation. Although the parties’ document was styled “Settlement Agreement and Release,” it had to be read together with the simultaneously executed, so-ordered consent judgment. Taken together, the court construed the agreement as a covenant not to execute with an assignment—not a release—which preserves liability and, therefore, potential coverage.

The court aligned New York with the majority view recognized in other jurisdictions and by federal courts predicting New York law, notably Intelligent Digital Systems, LLC v Beazley Ins. Co., Inc., which held that “legally obligated to pay” encompasses consent judgments notwithstanding covenants not to enforce them. It rejected the minority approach (e.g., certain Florida decisions) that treats such arrangements as releases extinguishing insurance obligations.

Importantly, the First Department did not hold that Lancer must indemnify; it held only that the settlement structure did not bar indemnity as a matter of law. Whether indemnity is owed remains to be determined based on coverage, exclusions, and whether the relevant advertising uses occurred within Lancer’s policy period (March 31, 2015–March 31, 2016). The court also emphasized that neither the settlement nor the consent judgment constituted an admission of liability against the insurer; the insureds’ assignees merely preserved the right to try to enforce the judgment.

Precedents and Authorities

Wilder v Penn R.R. Co.; McMahan & Co. v Bass; Centro Empresarial Cempresa S.A. v America Movil, S.A.B. de C.V.: release vs. covenant not to sue/execute.
Stone v National Bank & Trust Co.; Colton v New York Hosp.: covenants not to execute do not extinguish liability.
Matter of Oak Hill Capital Partners, L.P. v Cuti: reading contemporaneously executed instruments together.
McDonough v Dryden Mut. Ins. Co.; Westervelt v Dryden Mut. Ins. Co.: true releases eliminate indemnity obligations—distinguished here because the settlement did not release “all liability.”
Intelligent Digital Systems, LLC v Beazley Ins. Co., Inc.: majority rule that consent judgments plus covenants not to execute preserve “legal obligation to pay” for coverage purposes.
Isadore Rosen & Sons v Security Mut. Ins. Co. of N.Y.; Atlantic Cement Co. v Fidelity & Cas. Co. of N.Y.: an insurer that breaches the duty to defend can be liable for reasonable settlements even without its consent, underscoring why such structures are appropriate when the insurer declines a defense.
U.S. Fire Ins. Co. v Mikes; Rosen v Florida Ins. Guar. Ass’n: the minority view (not followed).
76 C.J.S., Release § 3: doctrinal articulation of the release/covenant distinction.

IV. Procedural Discretion: “Missing Pleadings” Not Fatal Where Record Is Complete

Lancer’s argument that plaintiffs’ summary judgment motion was procedurally defective for omitting pleadings was rejected. The First Department approved the trial court’s discretion to overlook the defect because the record was “sufficiently complete.”

Washington Realty Owners, LLC v 260 Wash. St., LLC: courts may overlook missing pleadings where the record permits adjudication on the merits.

V. Cross-Claim Mootness

Because Hudson’s policy was void ab initio, Hudson had no duty and no coverage to contribute; accordingly, Lancer’s cross-motion to dismiss Hudson’s cross-claim for contribution was properly granted as moot.

Legal Reasoning: How the Court Reached Its Conclusions

Rescission: The court credited objective, contemporaneous evidence (advertising and social media) contradicting the application, plus underwriting testimony that policy issuance would have been barred. This satisfied the insurer’s burden to show materiality as a matter of law. The insured’s internally inconsistent affidavit could not create an issue of fact.
Duty to Defend: Applying the “four corners” and “arguable coverage” rules, the presence of any potentially covered claim (here, negligence-based allegations within the policy period) triggered Lancer’s duty to defend the entire suit, notwithstanding exclusions that might defeat other claims.
Duty to Indemnify: The court focused on the nature of the settlement instrument. A true release eliminates liability; a covenant not to execute preserves it. Reading the settlement and consent judgment together, the arrangement preserved Vola’s legal obligation to pay, which means indemnity is not barred as a matter of law. Whether indemnity is actually owed remains for further proceedings.

Impact and Practical Implications

For Insurers

Defense decisions are high-stakes: Wrongly declining to defend can expose insurers to liability for reasonable consent judgments where coverage exists—even if insureds assign rights and plaintiffs covenant not to execute.
Exclusions do not eliminate defense if any claims are arguably covered: Mixed allegations (e.g., negligent and knowing) will trigger the defense duty.
Rescission remains a potent remedy: Where application misrepresentations are documented and material, policies can be voided ab initio. Underwriting affidavits and guidelines are critical evidence; public-facing advertising (e.g., social media) can be decisive.
Contribution cross-claims: If a co-insurer’s policy is rescinded, contribution theories may evaporate.

For Policyholders

Settlement architecture validated: In the First Department, insureds can protect themselves when an insurer denies a defense by using consent judgments with assignments and covenants not to execute, without forfeiting potential coverage.
Accuracy at placement is vital: Misstatements about operations (hours, entertainment, promotions, nature of the business) can nullify coverage entirely.
Defense leverage: Allegations of negligence can preserve the defense even when intentional-misconduct exclusions loom.

For Plaintiffs

Assignment pathway strengthened: Plaintiffs can accept covenants not to execute and pursue assigned coverage claims without jeopardizing the insurer’s potential indemnity exposure—now with express First Department support.
Pleading matters: Including negligence-based advertising injury claims can be outcome-determinative for triggering defense obligations.

Sector-Specific Observations (Hospitality/Nightlife)

Operational candor: Nightlife venues often blur lines between restaurant and club; accurately disclosing entertainment, hours, promotions, and smoking devices is essential to avoid rescission.
Social media as evidence: Marketing content will be scrutinized both for coverage (advertising injury) and for underwriting misrepresentation.

Complex Concepts Simplified

Void ab initio: The policy is treated as if it never existed, due to material misrepresentation at inception.
Material misrepresentation: A false statement important enough that the insurer would have refused to issue the policy or would have charged more if it knew the truth.
Duty to defend vs. duty to indemnify:
- Duty to defend: Based on allegations; broad. If any claim might be covered, the insurer must defend the whole case.
- Duty to indemnify: Based on facts and coverage; narrower. Determined after liability facts are established.
Consent judgment: A judgment entered by agreement of the parties, often to resolve litigation with a set liability amount.
Assignment of rights: The insured transfers its insurance claims (e.g., for defense/indemnity) to the plaintiff.
Covenant not to execute: The plaintiff agrees not to collect the judgment from the insured’s assets, but the insured’s legal obligation to pay remains and can be pursued from insurance.
Release: An agreement permanently giving up claims and extinguishing liability. Unlike a covenant, it eliminates the obligation and, with it, the insurer’s indemnity exposure.
Feigned issue of fact: An attempted factual dispute created by a contradictory or self-serving affidavit that conflicts with prior statements or the record; insufficient to defeat summary judgment.

Precedents Cited: Roles and Influence

Dwyer v First Unum Life Ins. Co.: Framework for rescission based on material misrepresentation.
Process Plants Corp. v Beneficial Nat’l Life Ins. Co.: Materiality can be decided as a matter of law on clear, uncontradicted evidence.
Interested Underwriters at Lloyd’s v H.D.I. III Assoc. and Arch Specialty v Kam Cheung: Misstatements are material if they would change issuance or pricing.
Bleecker St. Health & Beauty: Summary judgment burden shifting in insurance disputes.
Dixon v Sum Realty: “Feigned issue” doctrine disallowing self-contradictory affidavits to create triable issues.
BP A.C. Corp. v One Beacon; Town of Massena; Frontier Insulation: The expansive duty to defend where claims are arguably covered.
Mendes & Mount: Duty to defend entire action; indemnity can await liability resolution.
Wilder v Penn R.R. Co.; McMahan & Co. v Bass; Centro Empresarial: Defining release; when it bars further claims.
Stone; Colton: Covenants not to sue/execute preserve liability.
Matter of Oak Hill Capital Partners v Cuti: Instruments executed together are construed together.
McDonough; Westervelt: A true general release eliminates the insurer’s indemnity obligations—distinguished here.
Intelligent Digital Systems v Beazley: Persuasive authority for the majority rule adopted by the First Department.
Isadore Rosen & Sons; Atlantic Cement: An insurer that breaches the duty to defend is liable for reasonable settlements without consent.
U.S. Fire v Mikes; Rosen v FIGA: Minority approach (not followed).
Washington Realty Owners: Courts may overlook missing pleadings when the record is complete.

What Remains to Be Decided on Remand

Whether the specific advertising uses triggering liability occurred during Lancer’s policy period (Mar. 31, 2015–Mar. 31, 2016).
Whether any exclusions ultimately bar indemnity for the particular instances proven.
Any other coverage conditions or limits applicable to the remaining claims.

Practice Pointers

For underwriters and brokers: Verify applicant representations against public-facing materials (websites, social media, event flyers). Document underwriting rules to prove materiality.
For coverage counsel: When an insurer declines a defense, counsel should evaluate structured settlements with consent judgments, assignments, and covenants not to execute to preserve coverage pathways.
For litigators: Plead alternative theories (negligence alongside knowing violations) to maximize defense obligations. Carefully draft settlements—avoid language that resembles a “general release” if preserving coverage is intended.

Conclusion

Geiger v. Hudson Excess Ins. Co. breaks important ground in New York insurance law. The First Department expressly adopts the majority rule that a consent judgment paired with an assignment and a covenant not to execute does not operate as a release and therefore does not extinguish the insured’s legal obligation to pay or the insurer’s potential duty to indemnify. This holding clarifies settlement strategy in coverage disputes when an insurer denies a defense, and it aligns New York with a broad consensus nationwide.

The decision also showcases the robust New York duty-to-defend doctrine: mixed allegations (including negligence) will trigger defense responsibilities even amid exclusions for intentional conduct. At the same time, it underscores that rescission remains a powerful remedy where insureds materially misstate their risk profiles; social media and marketing content can decisively prove misrepresentation.

Going forward, insurers must calibrate defense decisions carefully, insureds have a validated path to mitigate exposure amid coverage denials, and parties on all sides must draft settlement instruments with precision, mindful of the critical distinction between a “release” and a “covenant not to execute.”