Lawyers Professional Liability Policy Does Not Cover Non-Insured Construction Management Company; Insurer Justified in Requesting Segregated Invoices

A New York federal court, applying New York law, has held that a lawyers professional liability policy does not provide coverage to a construction management company not named as an “insured” in the policy and that did not provide legal services, even though it serviced a client in conjunction with the named insured law firm.  LePatner & Assocs., LLP v. RSUI Group, Inc., 2022 WL 769614 (S.D.N.Y. Mar. 14, 2022).  The court also held that the policy’s business enterprise exclusion barred coverage for claims against the non-insured entity, and that the insurer did not interfere with the insured’s defense by requesting segregated defense invoices and other information bearing on the insured law firm’s liability and damages.

An individual owned and worked for both a law firm and a construction management company.  The law firm was listed as an insured under a lawyers professional liability policy covering errors and omissions relating to the provision of legal services.  The construction management company was not included as an insured.

The construction management company entered into a contract with homeowners to renovate their house, and the law firm provided related legal services.  The contract between the homeowners and the construction management company expressly stated that the agreement related to “project management services” and did not include the performance of legal services.  Three years after the renovation was completed, the homeowners filed suit against both the construction management company and the law firm, alleging breach of contract because the renovation took longer than agreed.  Although both entities were named as defendants, the complaint focused on alleged construction and project management failures.  Notably, the complaint did not include any allegations of legal malpractice or other deficiencies in the legal services provided.

The law firm and the construction management company sought coverage from the law firm’s professional liability carrier, but the insurer denied coverage as to the construction management company.  The insurer explained that (1) the construction management company was not an insured under the policy; (2) the complaint did not allege that the construction management company had provided legal “professional services,” as required by the policy; and (3) a Business Enterprise Exclusion otherwise barred coverage for the construction management company.  The insurer sought to allocate payment for defense costs incurred by the two entities.

In the subsequent coverage action, the court granted summary judgment in favor of the insurer.  The court held that there was no coverage for the construction management company because it was not an insured under the policy.  The court also held that the policy did not cover errors and omissions stemming from the services offered by the construction management company.  The court noted that the policy only provided coverage for errors and omissions in the rendering of “Professional Services as a Lawyer,” which did not include the construction management services provided by (or allegedly provided by) the construction management company. 

The court also concluded that the claims against the construction management company were barred by the Business Enterprise Exclusion, which precluded coverage for claims arising from entities in which a “Related Individual” of an insured had a certain controlling interest.  The court noted that the exclusion applied because the individual who owned the law firm also held a controlling interest in the construction management company.  The court emphasized that these exclusions “prevent collusive suits that try to use malpractice coverage to shift a lawyer’s business loss onto the malpractice carrier and also avoid circumstances where an insured intermingles his legal practice and business relationships to such an extent that the insurance carrier incurs additional risk and has to cover the insured for claims related to the conduct of the business, rather than out of the professional practice.”

Finally, the court rejected various arguments that the insurer had improperly interfered with the law firm’s defense.  Specifically, the court held that the insurer was justified in asking defense counsel to segregate its invoices to separate costs incurred for the law firm and the construction management company.  The court also held that coverage counsel for the insurer did not act improperly by seeking information about liability, damages and defense strategy in the underlying action.  The court found that the requests were justified and the law firm failed to show that it had been harmed by the requests. 

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