Effectiveness of the Business Enterprise Exclusion for Limiting Risk
By Kimberly Ashmore – March 21, 2014
Many lawyers have begun pursuing nontraditional career paths and taking on new roles, including that of business person and entrepreneur. The American Bar Association reported that, in 2010, nine of the Fortune 500 companies had a lawyer as their chief executive, including Bank of America, Home Depot, and Pfizer, up from three just a decade ago. That trend is forecast to continue.
Although the crossover from law to business may be seen as a natural transition, an attorney who wears both lawyer and business person hats simultaneously can present unique risks to the lawyer’s professional liability insurance carrier. For example, an attorney’s pursuit of business opportunities with clients could result in an actual or perceived conflict between the lawyer’s interests and those of his or her client, leading to an increased risk of claims against the attorney.
The Blurry Line
Legal malpractice policies are not typically intended to cover business disputes. That said, where an attorney has provided legal services to a client with whom the attorney also has a business relationship, the line between attorney and business person can be blurred. Accordingly, when a disgruntled business partner/client sues the attorney, the client often will not only raise allegations in connection with the business dispute but also assert claims of legal malpractice. Based on the allegations of legal malpractice, an attorney may seek coverage for these client disputes under his or her malpractice policy, even where the conflict is centered largely, if not entirely, on business activities that were not intended to be covered under the policy. In some instances, there may be cause for concern that a claim is the product of collusion between the lawyer and his or her client, the goal of which could be to shift their business losses to the lawyer’s professional liability carrier. Another concern is that the lawyer’s personal business interests clouded his or her professional judgment and that the legal malpractice claim in fact has significant merit.
To address these concerns, most lawyers’ professional liability policies include an exclusion (or multiple exclusions) precluding coverage for a lawyer’s business pursuits (the “business enterprise exclusion”). The wording of the business enterprise exclusion varies from policy to policy, but there are two primary kinds of exclusions: exclusions pertaining to claims arising from an insured’s capacity at a separate business entity (e.g., as a manager or director of a separate business entity) and exclusions pertaining to claims arising from acts by an insured for an entity that an insured controls or in which an insured has a significant financial interest.
Carriers generally take the position that the business enterprise exclusion should be interpreted broadly to preclude coverage for claims stemming from business losses, even where there are allegations of legal malpractice. As may be expected, the insured lawyer (and, in some cases, the claimant) often contests that position. In this regard, the insured may attempt to segregate conduct by the insured as a business person from that as a lawyer, arguing that the claim stems from negligent conduct taken when the insured was wearing only his or her “lawyer ‘hat’” and, therefore, should be covered under the malpractice policy. The insured may also argue that, although the claim involves a business dispute in part, the legal malpractice claims, at a minimum, are sufficient to trigger the carrier’s duty to defend the insured against the entire suit.
The body of case law interpreting business enterprise exclusions is limited, but growing. There are a number of cases supporting the broad application of the exclusion argued for by carriers and rejecting the arguments that the insureds commonly raise in this context. For example, in LaRocca, a federal district judge rejected the insured attorney’s argument that the business enterprise exclusion did not preclude coverage because he was “wearing his lawyer ‘hat’ at the precise moment” of the malpractice. The court in LaRocca refused to divide the insured’s conduct into separate roles, explaining that
[d]istinguishing with certainty between the roles [the insured] was playing at different moments in his dealings . . . could prove impossible. The broad, inclusive language of the [business enterprise] exclusions, however, makes the drawing of such distinctions unnecessary. The exclusions apply to any claims that “arise out of” situations in which the insured was both a lawyer to a business and an officer in that same business, and because [the insured] played both roles . . . and the malpractice claims arise out of those roles, the exclusions apply to the suits against him.
The court further explained that the business enterprise exclusion applies “to claims that reside in the twilight between business and legal affairs” and certainly applies when the insured is wearing two hats—those of lawyer and business owner.
Likewise, the United States Court of Appeals for the First Circuit rejected the insured’s argument that allegations of legal malpractice are sufficient, in and of themselves, to trigger the insurer’s duty to defend a business dispute, notwithstanding the policy’s business enterprise exclusion. The First Circuit persuasively explained:
[The business enterprise exclusion] does not even come into play unless the allegations charge legal malpractice, because coverage under the policy is limited to malpractice. There will always be an attorney-client relationship when these exclusions are at issue. Absent an attorney-client relationship, the insuring agreement does not apply and the language of the specific exclusions does not come into play. [To hold otherwise] would create an illogical result; the policy exclusions would be rendered entirely meaningless and of no effect.
Many courts around the country likewise have adopted a broad interpretation and enforced business enterprise exclusions where the attorney acted as both lawyer and business person. Other courts, however, have reached a different conclusion. Courts in these cases have focused both on policy language (e.g.,applying a narrower interpretation to the lead-in language of the business enterprise exclusion) and on the specific facts presented. For example, in Jeffer v. National Union Fire Insurance Co., the court, applying New Jersey law, concluded that the business enterprise exclusion did not preclude coverage as a matter of law. In reaching this conclusion, the court focused on the meaning of the exclusion lead-in phrase “in connection with” and concluded that the undisputed material facts did not establish, as a matter of law, that the underlying claims for legal malpractice brought by individuals who were both clients of the insured law firm and business partners with some of the firm’s attorneys arose “in connection with” the insured attorneys’ ownership interest in the outside business entity. Arguably, the result in Jeffer may have been different had the lead-in language also included the broad “arising out of” phrase that some policies contain.
In addition, in a recent New York case, K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., the court focused on the specific facts presented, and concluded that the undisputed facts did not trigger the business enterprise exclusion because the insured’s conduct in furthering the business enterprise and his interest in the business were entirely separate from the legal malpractice claim: “Because neither [the insured lawyer’s] actions in furtherance of [the business enterprise] nor his financial interest in [the business enterprise] are part of the legal malpractice claim made by plaintiffs for malpractice committed by [the lawyer], the legal malpractice claim is not excluded from coverage.”
The lesson to be taken from these cases is not unique, and it is one that is echoed throughout the entire body of insurance case law: Specific policy language and facts matter. Accordingly, if a carrier wants to minimize the risk of having to cover business disputes involving insured attorneys, the carrier should endeavor to draft the language of the malpractice policy’s business enterprise exclusion as broadly as possible, including with respect to the lead-in language of the exclusion and the substantive scope of the business activities encompassed by the exclusion. Moreover, in evaluating coverage for a claim involving an attorney’s business dispute, a carrier should be mindful of the specific facts presented and undertake a careful analysis before reaching any determination.
Keywords: litigation, insurance, coverage, attorney malpractice insurance, business enterprise exclusion
Kimberly Ashmore is a partner with Wiley Rein LLP in Washington, D.C.
 Kimberly Ashmore is a partner in the Insurance Practice Group of Wiley Rein LLP, Washington, D.C., where she represents professional liability insurers in complex coverage matters and related litigation. The views expressed in this article are Ms. Ashmore’s and do not necessarily represent the views of Wiley Rein LLP or its clients.
 Mark Curriden, “CEO, Esq.: Why Lawyers Are Being Asked to Lead Some of the Nation’s Largest Corporations,” A.B.A. J. (May 1, 2010).
 See Curriden, supra note 2.
 See Minn. Lawyers Mut. Ins. Co. v. Antonelli, Terry, Stout & Kraus, LLP, No. 1:08-CV-1020, 2010 U.S. Dist. LEXIS 122836, at *25–28 (E.D. Va. Nov. 18, 2010), aff’d, 472 F. App’x 219 (4th Cir. 2012).
 See Corbello v. Moore, No. C-10-5357-BHS, 2011 U.S. Dist. LEXIS 42763, at *16–18 (W.D. Wash. Apr. 20, 2011).
 See Susan Saab Fortney, “Legal Malpractice Insurance: Surviving the Perfect Storm,” 28 J. Legal Prof. 41 (2003–2004). See also Antonelli, Terry, Stout & Kraus, LLP, 2010 U.S. Dist. LEXIS 122836, at *26–27 (“Professional liability insurers frequently include business enterprise exclusions in their policies in order to avoid liability for an insured’s business activities. Insurers calculate liability insurance rates on the assumption that insured attorneys act solely in a legal capacity, and that their professional judgment is unaffected by personal interest. Business enterprise exclusions diminish risk associated with an insured’s decision to pursue business opportunities that may result in conflicts between the lawyers’ best interests and those of his client.”).
 Compare, e.g., Am. Guar. & Liab. Ins. Co. v. Falk, No. 10cv02165, 2011 U.S. Dist. LEXIS 109747 (D.N.J. Sept. 27, 2011) (interpreting exclusion stating that the policy did not apply to any claim based on or arising from, in whole or in part, the insured’s capacity or status as “an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise”), with Am. Zurich Ins. Co. v. Wilcox & Christopoulous, L.L.C., 982 N.E.2d 82, 92 (Ill. App. Ct. 2013) (construing exclusion for “any Claim based upon or arising out of, in whole or in part . . . [t]he alleged acts or omissions by any Insured . . . for any business enterprise . . . in which any Insured has a Controlling Interest.”).
 See Coregis Ins. Co. v. LaRocca, 80 F. Supp. 2d 452, 458–59 (E.D. Pa. 1999); Dukart v. Nat’l Union Fire Ins. Co., Civ. A. No. 92C-04-105, 1993 Del. Super. LEXIS 244, at *4–6 (Del. Super. Ct. July 13, 1993).
 See, e.g., Cont’l Cas. Co. v. Smith, 243 F. Supp. 2d 576, 579, 583 (E.D. La. 2003).
 LaRocca, 80 F. Supp. 2d at 458–59.
 LaRocca, 80 F. Supp. 2d at 459.
 LaRocca, 80 F. Supp. 2d at 459.
 Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 20 (1st Cir. 1997) (quotations and citations omitted); see also Darwin Nat’l Assurance Co. v. Hellyer, No. 10 C 50224, 2011 U.S. Dist. LEXIS 60592, at *8–11, *15 (N.D. Ill. June 7, 2011) (refusing to read any particular allegation in isolation, rejecting claimants’ argument that the business enterprise exclusion was inapplicable because certain allegations could constitute professional negligence regardless of the insured’s business, and concluding that “it is clear that the thrust of the allegations of negligence stem from the conflict of interest” that the insured had as a result of his interest in the limited liability corporation.); LaRocca, 80 F. Supp. 2d at 459 n.12 (“If . . . the exclusions do not operate whenever the underlying claims charge legal malpractice, then the exclusions would never operate at all, because they are only relevant when the underlying claims are legal malpractice claims. The only conceivable claim to which the exclusions would apply under [the insured’s] theory would be a legal malpractice claim based solely on an attorney’s acts as the principal of a business; a claim that would not survive judicial scrutiny. No lawyer worth his salt would bring a legal malpractice claim based solely on an attorney’s conduct as a business owner or director; a lawyer who did could end up defending a legal malpractice suit of his own.”).
 See, e.g., Corbello, U.S. Dist. LEXIS 42763, at *16–23 (W.D. Wash. Apr. 20, 2011) (client’s malpractice claim excluded from coverage based on business enterprise exclusion “because it arises out of [the insured attorney’s] capacity as a prospective and existing shareholder in [a non-insured business entity]”); Smith, 243 F. Supp. 2d at 582–83 (business enterprise exclusion precluded coverage for legal malpractice claim against lawyer and law firm because activities arose out of insured attorney’s “activities as president of the corporations (or in anticipation of that role), or out of legal services that [the attorney] or his firm performed for companies that [the attorney] controlled or intended to control.”); Coregis Ins. Co. v. Bartos, Broughal & DeVito, LLP, 37 F. Supp. 2d 391, 392–94 (E.D. Pa. 1999) (no coverage when insured attorney who promoted and sold limited partnerships also became a general and limited partner, despite the fact that the alleged malpractice occurred prior to the partnerships’ legal formation); Dukart v. Nat’l Union Fire Ins. Co., Civ. A. No. 92C-04-105, 1993 Del. Super. LEXIS 244, at *1–7 (Del. Super. Ct. July 13, 1993) (no coverage when insured attorney performed legal services for a partnership of which he was a partner, even though the alleged malpractice may have occurred prior to the formation of the partnership).
 703 A.2d 316, 319 (N.J. Super. Ct. App. Div. 1997).
 See also Niagara Fire Ins. Co. v. Pepicelli, Pepicelli, Watts & Youngs, P.C.,821 F.2d 216, 221 (3d Cir. 1987) (construing the “in connection with” lead-in language of a business enterprise exclusion narrowly and concluding that the exclusion did not bar coverage).
 See Smith, 243 F. Supp. 2d at 581 (the phrase “arising out of” in an exclusion “is given a broad, general, and comprehensive interpretation”).
 936 N.Y.S.2d 139, 142 (N.Y. App. Div. 2012), aff’d, No. 106, 2013 N.Y. LEXIS 1461 (N.Y. June 11, 2013), vacated and reargument granted, 2013 N.Y. LEXIS 2142, 2013 N.Y. Slip Op. 84038 (N.Y. Sept. 3, 2013), rev'd on reargument, No. 6, Slip Op. (N.Y. Feb. 18, 2014).