Coverage Denials for Mixing Business and Legal Advice

Lawyers wear many hats; the key is not to wear them all simultaneously.   Many lawyers are well versed in areas outside of the law and can be sources of non-legal knowledge for clients.  However, lawyers need to be mindful when their services extend beyond the traditional landscape of legal advice.  Mixing business interests and legal advice can easily get you in hot water if the transaction goes awry.  Take, for example, the case of Burk & Reedy, LLP v. Am. Guarantee & Liab. Ins. which a professional liability insurer denied coverage for an attorney involved in both the legal and business aspects of a transaction.

The case stemmed from a failed business transaction.  Plaintiff (an attorney) was a co-managing member with an ownership interest in a Company.   Plaintiff executed an agreement with an outside investor (Investor), whereby Investor was to secure collateral for a loan to the Company in exchange for a percentage of ownership in the Company.  The investor ultimately used his personal property as collateral and secured the loan for the Company.   The Company, however, defaulted on the loan, and the lender foreclosed on Investor’s real property to repay the loan.

The investor sued Plaintiff to recover the money and real property he lost in the business venture, alleging, among other things, that Plaintiff committed legal malpractice.  Investor alleged that Plaintiff provided legal advice in connection with the decision to invest; Plaintiff communicated his consent to act as counsel for Investor concerning obtaining the loan; Plaintiff breached the Rules of Professional Conduct by acting as counsel to the Company while maintaining ownership in the Company, and Plaintiff conducted business with his client, Investor.

Plaintiff was insured under a professional liability insurance policy. The insurance policy specified that the insurer would pay claims “based on an act or omission in the Insured’s rendering or failing to render Legal Services for others.”  However, the policy also contained two important exclusions.  These exclusions precluded coverage for any claims based upon or arising out of 1) the insured’s capacity or status as an officer, director, partner, trustee, shareholder, manager, or employee of a business enterprise and 2) the alleged acts or omissions by any insured for any business enterprise in which any insured has a controlling interest.  The insurance company refused to defend Plaintiff because of these two policy exclusions.

Plaintiff then filed a separate action against his insurance company.  The court found that the malpractice claim clearly fell within the policy exclusions.  As the court stated, the “allegations demonstrate that [Plaintiff] simultaneously wore two hats while advising [Investor] to invest in [the Company]—that of an attorney and that of a managing member of [the Company].”  The court further found that Plaintiff not only provided legal assistance to Investor during the loan application process but also simultaneously engaged in conduct that advanced the business interests of [the Company].  The court concluded the insurer did not have a duty to defend or indemnify the Plaintiff in the underlying action.

This case serves as a good reminder that attorneys need to be cognizant of their ethical obligations at all times.  Failure to recognize when the lines are becoming blurred can not only be an ethical violation but, as in this case, result in a lack of malpractice coverage.

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