New York’s intermediate appellate court has held that a business enterprise exclusion bars coverage for a legal malpractice claim that is based partly on the insured attorney’s law practice and partly on the attorney’s activities on behalf of a business enterprise he controlled. Lee & Amtzis, LLP v. Am. Guarantee & Liab. Ins. Co., 2015 WL 1526003 (N.Y. App. Div. Apr. 7, 2015).

The insured lawyers were partners in a law firm. One of the lawyers also served as the managing member of a real estate development company that was involved in a condominium project. In 2006, that lawyer drafted and signed a promissory note on behalf of the real estate company, pledging to pay a firm client $25,000 every time a condominium unit closed. In 2010, the same lawyer drafted and signed a second promissory note, representing a personal loan by the client to the lawyer. Later in 2010, the client filed suit against the law firm, both lawyers, and the real estate company, asserting claims for breach of contract and unjust enrichment based on the alleged non-payment of the promissory notes. The client also asserted a claim for legal malpractice based on the law firm’s alleged negligence in failing to advise her sufficiently of the lawyer’s conflict of interest and failing to recommend that she obtain independent counsel.

In the ensuing coverage action, the trial court held that the law firm’s professional liability insurer had a duty to defend the law firm and the lawyers in the underlying action. On appeal, New York’s intermediate appellate court reversed and concluded that the insurer had no duty to defend or indemnify pursuant to two policy exclusions: (1) the insured status exclusion, which barred coverage for claims based upon or arising out of “the Insured’s capacity or status as . . . an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise” and (2) the business enterprise exclusion, which barred coverage for any claim based upon or arising out of “the alleged acts or omissions by any Insured, with or without compensation, for any business enterprise . . . in which any Insured has a controlling interest.” The court reasoned that the record clearly demonstrated that the lawyer’s activities on behalf of the client were of a “hybrid” nature, in that he provided legal advice to the client while simultaneously pursuing his own business interests on behalf of an entity in which he held a controlling interest. The court concluded that this is precisely the type of situation that the business enterprise and insured status exclusions were intended to exclude. The court also noted that the client’s claims for legal malpractice sought to recover the very same losses that she suffered in connection with the nonpayment of the promissory notes.

Because the business enterprise exclusion barred coverage for claims based on the alleged acts and omissions of any insured for a business enterprise in which any insured has a controlling interest, the court also concluded that the exclusion precluded defense and indemnity coverage for the law firm and the second lawyer, neither of which actually held an interest in the real estate company.