Insurer Not Liable for Coverage for Attorney Malpractice Claim Due to Business Enterprise and Status Exclusions

Insurance Law Alert

May 7, 2015

Charles W. Stotter

Charles W. Stotter

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New York Court Finds No Coverage Because Claim Arose Partly From The Attorney's Activities On Behalf of a Business Enterprise He Controlled

In Lee & Amtzis, LLP v. American Guar. & Liab. Ins. Co., 2015 NY Slip Op. 02919 (N.Y. App. Div. 1st Dep’t April 7, 2015), an intermediate New York appellate court held that the insured status exclusion and business enterprise exclusion in a law firm’s professional liability policy barred coverage for claims of legal malpractice against the attorney, his partner, and the law firm. The court found that the attorney, the “managing member” and principal of Astoria Station, a real estate company with whom his client engaged in certain transactions, was “simultaneously serving two masters, … his client, and [Astoria Station],” and that those dual roles placed him squarely within the policy exclusions.

In a separate action, the client had sued the attorney, his partner, and their law firm for the non-payment of certain promissory notes, personally guaranteed by the attorney, on which Astoria Station was the obligor and the client was the obligee. Besides claims for breach of contract with respect to the promissory notes, the client alleged claims of legal malpractice and negligence, asserting that the attorney defendants had provided legal services in connection with the promissory notes, knew that their interests were adverse to hers, induced her to proceed with the transactions, and had failed to recommend that she obtain separate legal counsel. The client prevailed on her claims in that action.

Here, the attorneys and their law firm sought coverage under their professional liability policy for the defense of the client’s separate action. The policy contained an exclusion barring coverage for any claim arising out of the insured’s status as “an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise,” and an exclusion barring coverage for any “alleged acts or omissions … for any business enterprise … in which any Insured has a Controlling Interest.” Citing to the recent Court of Appeals decision in K2 Inv. Group, LLC v. American Guar. & Liab. Ins. Co., 22 N.Y.3d 578, 587-88 (2014), which had applied those types of exclusions to “hybrid malpractice claims that arise partly out of an attorney’s law practice and partly out of a business enterprise in which the attorney has a controlling interest,” the First Department found that here the “[attorney’s] activities on [the client’s] behalf are of a hybrid nature and, therefore, excluded from coverage.” The Court noted that it was undisputed that the attorney plaintiffs here “prepared the legal documents necessary to effectuate the loans, including the promissory notes,” and that the individual attorney was the managing member of Astoria Station and obligor on one note, and the guarantor on another note, and that the proceeds of the loans underlying the promissory notes were used in Astoria Station’s real estate projects, which benefited the individual attorney. The Court concluded that since the client’s claims in the separate action “partly arise from the legal services the attorneys provided her with, but also from [the attorney’s] status or activity for his company, Astoria Station, they are of a hybrid nature, and are not covered” under the professional liability policy.

The First Department further ruled that coverage for the attorney’s partner and the law firm was also barred by the same business enterprise exclusion, stating that the attorney, “by assuming dual roles of providing legal advice to the client, while simultaneously pursuing his own business interests, … placed himself, his law partner and the law firm within the exclusions in the professional policy [they] seek protection under.” The Court stated that “it is immaterial that [the partner] did not have an interest in Astoria Station; [the insurer] still has no duty to provide him with a defense….” The business enterprise exclusion thus also barred coverage for the partner and the law firm, even though neither had an interest in the attorney’s business enterprise.