Business Enterprise Exclusion Bars Coverage for Claim Arising Out of Attorney’s Real Estate Development Company

The United States District Court for the Western District of Michigan, applying Michigan law, has held that a business enterprise exclusion bars coverage for a suit arising out of an attorney’s self-dealing as a member of a real estate development company.  Gomery v. Cont’l Cas. Co., 2014 WL 4209648 (W.D. Mich. Aug. 25, 2014).  Wiley Rein represented the insurer in this matter.

The insured attorney had formed a real estate development company, which used the same address as the attorney’s law firm address, to purchase property with a business partner.  The attorney’s partner later brought suit, asserting claims for: dissolution of the company; fraud arising from the attorney’s representations about his interest in the company; breach of fiduciary duty, fraud, and conversion arising from the attorney’s actions or omissions in developing and managing one of the properties the company had purchased; unjust enrichment, seeking the return of the partner’s initial capital contribution; legal malpractice for the attorney’s breaches of his fiduciary duty to act as a reasonably competent and prudent attorney, counsel, and advisor to his partner; and a vicarious liability claim against the attorney’s law firm.  The attorney and the law firm brought a coverage action against their professional liability insurer, seeking their costs in defending the underlying suit by the attorney’s business partner.

In ruling on the insurer’s motion to dismiss, the court held that the policy’s business enterprise exclusion barred coverage for the entire action.  The business enterprise exclusion precluded coverage for claims based on or arising out of “an Insured’s capacity as … a former, existing or prospective officer, director, shareholder, partner, manager or member (or any equivalent position), of any entity, if such entity is not named in the Declarations” and claims based on or arising out of “legal services performed, directly or indirectly, for any entity not named in the Declarations, if at the time of the act or omission giving rise to the claim, the percentage of ownership interest, direct or indirect, in such entity by any Insured, or an accumulation of Insureds, exceeded 10%.”  The court agreed with the carrier that the exclusion barred coverage for “mixed actions” like the business partner’s suit, where an attorney allegedly “intermingles” the practice of law with his private business activities.