December 11, 2012 Articles

Business Interests Outside Law Practice May Preclude Duty to Defend

The business enterprise exclusion in lawyers' professional liability policies may absolve the carrier of both its duty to defend and its duty to indemnify.

By Anthony Corleto and Samuel Reich

Attorneys frequently enter business ventures that have some connection to their practice of law and that may be co-located at their law offices. It is not uncommon to find real-estate attorneys with interests in a mortgage company, a title company, or a real-estate brokerage. However, when the attorney fails to make clear his or her role in a transaction, he or she risks ethical complaints, charges of malpractice, and charges under state “unfair business practice” laws. Real-estate transactions are particularly problematic: Over-leveraged and under-qualified borrowers faced with foreclosure and loss of investment opportunity may sue those involved in the transaction to recover their actual or perceived loss. Patterns of conduct also may give rise to claims under state unfair-business-practice laws. In any event, if the complaint alleges that an individual participating in a transaction is an attorney, the legal-malpractice carrier may be called on to defend at substantial cost. However, depending on the underlying circumstances, the carrier may have no obligation to defend.

The “business enterprise exclusion” issued with many lawyers’ professional-liability policies is designed to avoid the transfer of loss from an attorney’s companion business to his or her professional liability policy.

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