Business Enterprise Exclusions Bars Outside Entity Conduct

Wiley Rein LLP

An Illinois federal court, applying Illinois law, has held that a lawyers professional liability policy’s business enterprise exclusions barred coverage where most of the conduct giving rise to the claim was alleged to have occurred while the insured attorney was serving as a director, shareholder, and officer of an outside entity. Wesco Ins. Co. v. Zanayed, 2023 WL 1862959 (N.D. Ill. Feb. 9, 2023).

The insured attorney and his nephew were officers of a residential real estate management company. Disgruntled with the business relationship, the attorney filed suit against his nephew alleging conversion and a conspiracy. The nephew counterclaimed and also filed an arbitration demand alleging conversion in the form of sham consulting fees, inflated commissions, legal fees, and accounting fees, while also asserting legal malpractice, fraud, and unjust enrichment (among other claims). The arbitration settled, and the insured tendered a claim under a lawyers professional liability insurance policy.

The policy excluded coverage for claims “based on or arising out of [the attorney’s] capacity … as a former, existing or prospective officer, director, shareholder, partner or manager of [the company],” and claims “based on or arising out of legal services performed for any existing or prospective partnership, organization, corporation, company or other business enterprise” that the attorney controlled, operated, or managed, or of which he was a partner or employee or directly or indirectly owned more than 10%.

In the ensuing coverage litigation, the court sided with the insurer. The attorney contended that his nephew’s counterclaim and arbitration claims did not arise out of legal services he claimed to have performed in his capacity as a shareholder, director, and officer of the company and did not involve legal services for an entity of which he was an officer or director. The court disagreed and found that the “thrust” of the nephew’s allegations depicted the attorney handling all legal matters for the company while acting as a shareholder, director, and officer of the company and the legal services rendered by the insured were in his outside capacity.

The court also found that no retainer agreement was required to establish that the attorney was providing legal services for the outside entity, because it was implicitly understood that all his “legal services were provided in his capacity as a shareholder, director, and officer of [the company].”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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