New York Court Addresses Business Enterprise Exclusions

In its recent decision in Admiral Ins. Co. v. Adges, 2012 U.S. Dist. LEXIS 89355 (S.D.N.Y. June 27, 2012), the United States District for the Southern District of New York had occasion to consider whether a business enterprise exclusion in a legal malpractice policy applied to bar coverage for an underlying lawsuit.

Admiral Insurance Company insured Michael Adges under a lawyers’ professional liability policy.  Adges sought coverage under the policy for an underlying lawsuit naming him as a defendant individually and under his trade name Silver Lining Realty.  The lawsuit alleged several causes of action, including conversion, misappropriation, fraud, and deceptive trade practices, relating solely to Silver Lining Realty’s business.

Admiral’s policy contained two relevant exclusions.  The first barred coverage for any claim:

E.   based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any Insured’s activities or their capacity as:

1.   an officer, director, partner, trustee, or employee of a business enterprise, not named in Item 1 of the Declarations …

This exclusion E. applies whether or not the Insured’s activities or capacity also constitute or involve Professional Services.

The second relevant exclusion applied to claims:

F.   by or in connection with any pre or post formation business enterprise, not named in Item 1. of the Declarations, in which any Insured owns or owned, or controls or controlled, more than a 10 percent interest, or in which any Insured is or was an owner, partner, or employee, or which is directly or indirectly controlled, operated, or managed by an Insured …

This exclusion F. applies whether or not the Insured’s activities also constitute or involve Professional Services.

The court observed that courts in New York, as well as other jurisdictions such as Pennsylvania, Louisiana, Ohio and Arizona routinely enforce business enterprise exclusions.  The relevant consideration is whether the insured is being sued in connection with a business enterprise other than the entity specifically insured under the policy.  Finding that the underlying suit related solely to Silver Lining Realty, and not the insured law practice, the court concluded that both policy exclusions applied to bar coverage.