Business Pursuits Exclusion Bars Coverage for Activities after Alleged Ponzi Schemer Left Law Firm

A federal magistrate judge has determined that legal malpractice insurers need not defend an attorney for claims arising from his activities as manager of a fraudulent investment fund after settling allegations covering the time period he worked as a lawyer at the insured firm.  Duckson v. Cont'l Cas. Co., No. 14-cv-1465 (D. Minn. Dec. 8, 2014).

Investors sued an attorney for drafting materially misleading private placement memoranda for an investment fund.  The attorney drafted the memoranda while employed by the insured law firm as the fund’s outside counsel and later also as a member and manager of the fund and its investment manager.  The alleged fraud continued after the attorney left the insured law firm.  The law firm settled with the claimants, who released all claims against the attorney arising during the time he was employed by the insured law firm.   Thereafter, the firm’s legal malpractice insurers withdrew the defense of the attorney based on the policy’s exclusion for claims “based on or arising out of an Insured’s capacity as . . . a former, existing or prospective officer, director, shareholder, partner, manager, member or trustee of any entity including . . . investment fund or trust, if such entity is not named in the Declarations.”

The attorney contended that his activity constituted covered legal work and that coverage extended beyond the termination of his employment by the insured law firm under the policy’s “related claims” provision.  Under that provision, claims “arising out of a single act or omission or arising out of ‘related acts or omissions’ in the rendering of ‘legal services’” were considered to be a single claim.  The attorney argued that his conduct in drafting a fraudulent private placement memorandum after he left the insured firm was sufficiently connected to legal services performed at the firm when he drafted earlier memoranda.

Applying the laws of Illinois and Minnesota—found not to be in conflict—the court determined that the insurers had no duty to defend.  The court rejected the attorney’s “related claims” argument, reasoning that the purpose of the “related claims” provision “is to accumulate and determine the number and amount of deductibles and per claim policy limits that apply to a legal malpractice claim or lawsuit.”  According to the court, the “related claims provision does not provide coverage for activities that would otherwise not be covered by the policy, such as [the attorney’s] Fund related business activity for his own profit.”

The attorney also contended that the insurers breached fiduciary duties to him by approving a settlement with the claimants without the attorney’s participation or consent that settled covered claims but left uncovered claims for the attorney to defend.   Although the uncovered claims were left in the case, the court reasoned, the attorney never had coverage for those claims, so he was better off after than the settlement than he was before.  Accordingly, the insurers did not breach any duty to the insured by failing to settle uncovered claims.

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