“Capacity Exclusion” Bars Coverage for Counterclaim Against Law Firm
The New York Supreme Court, Appellate Division, applying New York law, has held that no coverage was available under a lawyer’s professional liability policy for a counterclaim filed against the insured because of an exclusion barring coverage for claims arising out of the insured’s services and/or capacity as an officer, director, partner, or employee of an organization other than that of the named insured. Law Offices of Zachary R. Greenhill, P.C. v. Liberty Ins. Underwriters, Inc., 2017 WL 439650 (N.Y. App. Div. Feb. 2, 2017).
The insured, a lawyer and his law firm, sued a school, its owner, and its parent company in connection with the insured’s involvement in establishing a venture in China to provide a Chinese-American dual diploma program for students in Chinese high schools. The insured alleged that he was the senior manager of the program, in addition to the president and chief operating officer of the parent company, and as such sought to enforce a consulting agreement. The school, its owner and its parent company asserted two counterclaims against the insured based on allegations that they maintained an attorney-client relationship with the insured. First, they alleged that the insured had breached his fiduciary duty to them with respect to the negotiation and enforcement of the consulting agreement. Second, they asserted that the insured had fraudulently misrepresented that he had provided legal services to the school in connection with its educational partnership in China.
The insured sought coverage under its lawyers professional liability insurance policy. However, the policy contained two relevant exclusions. First, the policy excluded any claims arising out of the insured’s “service and/or capacity as . . . an officer, director, partner, . . . or employee of an organization other than that of the named insured.” Second, the policy barred coverage for any claims that “result[ed] from” legal services that the insured provided to an organization in which he had an equity interest of 10% or more. The insured sought a declaration that the insurer was obligated to provide a defense and pay all defense costs incurred in connection with the counterclaims. The trial court denied the insured’s motion for summary judgment, and instead ruled that the insurer had no duty to defend the insureds against the counterclaims.
On appeal, the court affirmed and held that it was clear from the pleadings in both the instant action and the underlying action that the allegations in the counterclaims fell within the policy’s capacity exclusion. The court explained that the exclusion applied because the counterclaims arose out of the insured’s capacity as the president and chief executive officer of the parent company and senior manager and partner of the program.