We recently posted a blog concerning often overlooked coverage exclusions entitled, "Beware of the Directors & Officers/Closely Held Entity Exclusions(s)". This analysis of a court case posted on
February 21, 2017 by Andrew P Carroll, Emilio F Grillo and Seth L Laver highlights this issue. The originally blog can be found on Professional Liability Matters
Attorney? Check. CEO? Check. Coverage? Unlikely. Some attorneys wear multiple hats. We have other interests, other business ventures, other opportunities to make a buck. Attorneys are often exposed to other areas of business depending on the nature of their practice. Through their role as counsel, or through other opportunities, some attorneys become more directly involved in non-legal businesses. The more traditional route is to switch to in-house counsel, but sometimes attorneys will go so far as to start a new company. While both are commonplace and not inherently problematic, issues begin to arise when an attorney is both practicing law and working for a company. The blurring of the line between lawyer and business executive not only creates potential conflicts of interest, but may have coverage consequences.
In a recent case in New York, the Appellate Division ruled that a “capacity exclusion” clearly applied to an attorney involved in litigation regarding a company for which he served as president and chief executive. In 2009, this attorney decided to start a new entity through which a private American school could partner with a Chinese school and offer a dual diploma program. The operating agreement for the entity included the attorney as president and chief executive, with a third-party acting as board chairman. A second consulting agreement was also prepared that provided for the attorney to obtain semiannual fees for business development, sales, marketing, legal and other services related to the venture.
The attorney’s relationship with the board chairman eventually went south and he brought suit seeking to enforce the consulting agreement. The board chairman and entity both replied and counterclaimed, including a claim for legal malpractice. The attorney sought coverage from his malpractice carrier, who offered to defend under a reservation of rights. The attorney rejected the offer and after the underlying case settled, the attorney brought suit against his liability carrier for over $1 million in legal costs and other damages.
Both the state court and appellate division ruled that the matter clearly fell within the “capacity exclusion”, which bars coverage when a claim arises out of the attorney’s services as an officer or director of an organization besides his law firm. The court rejected the attorney’s claims that he was actually acting as an attorney, referring to it as a “feigned issue of fact” that did not reflect reality. The Appellate Division affirmed, holding that the attorney’s malpractice insurance did not cover the action despite the existence of a legal malpractice counterclaim. Rather than rely on this counterclaim alone, the court found that the allegations were clearly related only to the attorney’s actions in his capacity as the president and chief executive of the company.
Attorneys who operate both legal and non-legal businesses should therefore be careful to keep in mind for whom they are acting. Oftentimes, the non-legal business can complement the law firm or vice versa, making it difficult to tell which hat the attorney is wearing. However, this distinction is vital not only because of the differing standards, but also because of the implication on insurance coverage. Maintaining this separation is therefore helpful in both avoiding potential liability and retaining the necessary coverage should litigation eventually arise.
To see the original blog click on Professional Liability Matters