Professional liability policies are designed to cover errors and omissions committed by professional while providing or failing to provide services on behalf of their firms. Sounds simple enough. Problems arise when attorneys -or other professionals – act in different capacities, sometimes providing legal advice while at others offering business judgments or acting as “deal makers” for fledgling businesses.
In Abrams, Fensterman, et al. v. Underwriters At Lloyd’s, London, a partner and his law firm found themselves in a real pickle over some business transactions that went bad. The underlying complaint alleged that the partner committed legal malpractice and engaged in fraudulent conduct when he induced the underlying plaintiffs to invest in a business formed to underwrite and sell insurance products. According to the disgruntled investors, when their seed money went missing, the law firm defendants falsely claimed that it was stolen by members of a royal family in the United Arab Emirates.
Given the allegations of legal malpractice, the law firm defendants sought a defense and indemnification from their malpractice insurer. After some initial fact gathering, the insurer denied coverage citing two key policy exclusions commonly called the “business pursuits” and “business enterprise” exclusions. Closely aligned, these exclusions bar coverage for any claims arising out of or in connection with (1) a business “controlled, operated or managed by any insured” or (2) an insured’s activities as “a trustee, partner, officer, director or employee of a business ” other than his law firm. Given the attorneys’ alleged involvement in the formation, capitalization and management of the business venture, the court upheld the insurer’s denial of coverage.
Abrams, Fensterman reinforces that most professional liability policies seek to avoid assuming additional risk where an attorney “so intermingles his business relationships with his law practice” that the line between the two is blurred. When timely invoked, the courts will uphold those exclusions.
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Disclaimer: This post is not intended to express any opinion on the merits of the allegations in the underlying lawsuit, which may or may not have any merit.