Law Firms or individual attorneys for many reasons either own or help manage other businesses that they do legal work for.  While the relationship is likely mutually beneficial to the law firm and the business there are minefields that law firms and their ‘clients’ need to be aware for this common attorney malpractice insurance policy exclusion.  In general malpractice insurance companies have language in their policies that exclude coverage for entities that are owned or controlled by the law firm.

The US 11th Circuit just issued a ruling that upheld a lower court ruling that Twin City Insurance (Subsidiarity of The Hartford), malpractice insurance policy did not have to pay for the insured bankrupt law firm (Able Band Charted) $7 Million in legal expenses because the law firm was being sued by an investment company (Coast Investment Group) whose manager was a partner at Able Band.

The underlying suit involved $25 million Coast Investment lost on an investment deal.  The ruling leaves Coast Investment on the hook for $7 million on assigned legal expenses from Able Band.

Attorney professional liability insurance policies are not standard.  Making the assumption that every Attorney Malpractice Insurance policy is the same; as the saying goes will make an “Ass out of You”.   Worse yet, if a claim is reported on an excluded item, you will get a response from the malpractice insurance carrier’s claims department that there is ‘no’ coverage.  This is the worse time to find out about a policy exclusion.  An insurance policy is nothing more than a contract, so for an attorney to go to court and argue that they did not read the contract and/or did not understand the contract will not go very far.

A thorough reading of the Twin City Lawyer Professional Liability Insurance policy would have pointed out a couple of very common exclusions:

1.       Officer and directorship exclusions-Most policies have some sort of exclusion for attorneys that serve on clients boards or are offices of a client entity.  It is important to carefully read this common exclusion.  Some policies exclude any work done for a client that an attorney is an officer or director.  Others malpractice polices may only exclude coverage if the attorney is actively involved with managing the business.  In some cases the coverage exclusion is just for the one attorney.  In other cases it is for the entire firm.  Even if the exclusion does not exclude the work the firm does for the client, it is no substitute for having an Officers and Directors Policy (D&O Insurance).  A malpractice policy will only cover legal work.  Many liability issues that could come up with an attorney being and officer or director are not legal work and not covered under the attorney malpractice policy.

2.       Closely held entities or attorney owned entities may be excluded-Most policies have some exclusion for owned entities.  It can be a percentage of ownership either individually or collectively with the firm’s attorneys and/or family.  Or might be an exclusion for managing the business.  Given these variables, one attorney malpractice policy could provide coverage where another malpractice policy will exclude coverage.


In addition to the policy exclusion section of the Attorney Malpractice policy, insureds need looked for exclusions in the insuring agreement, policy definitions, additional coverages, endorsements, and/or policy sub limits:

1.       The Insuring agreement likely will not specifically “exclude” coverage but can carve out certain perils from coverage. 

2.       Additional Coverages may sound like it is providing additional policy coverages, and while this may be true.  It is also the section where malpractice carriers will “sublimit” certain exposures to very low limits.  It effectively limits coverage.

3.       The policy definitions are another area where policy “exclusions” are found by defining what something is or is not.

4.       Endorsements attached to policies are another place where an underwriter can easily restrict coverage.  Specific entity exclusions, attorney exclusions, and fee suit exclusions are common examples of policy exclusions endorsements.   “Top Sheeting” an endorsements by assuming that the heading contains the actual meaning of the endorsement is a big mistake.  Thoroughly read all policy endorsements.

5.       Finally some policies will have specific sub limit sections.  Again not quite an exclusion, but it may restrict coverage to a much lower limit.  An example of this would be a “class action” sublimit that may restrict coverage to $100,000 limit, even though the policy limits are $5,000,000.

For those law firms that frequently shop their coverage for the best price, there is no standard attorney malpractice policy.  Before moving from one malpractice insurance carrier to another, if you have entity relationships, make sure that these relationships are covered as intended.  You do not know what is covered, until you have found all of the policy exclusions.  Do not wait until you report an attorney malpractice claim to find out that coverage was excluded.  

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