4th Circuit affirms summary judgment based on business enterprise exclusion in LPL policy

In Minnesota Lawyers Mut. Ins. Co. v. Antonelli, Terry, Stout & Kraus, LLP, No. 10-2404 (4th Cir. March 29, 2012)(unpublished), the Court affirmed the District Court's award of summary judgment to the insurer, holding that the insurer does not have a duty to defend the insured law firm because the complaint falls entirely within the insurance policy's Business Enterprise Exclusion.

In the underlying suit, the defendant attorneys were alleged to have advised their clients to transfer the ownership of certain patents for wireless email technology to a shell company, NTP, in which the clients held no interest, in order to protect the patents from creditors. Later, NTP filed a patent infringement action against RIM, alleging that RIM's Blackberry system infringed on the wireless email technology patents.

RIM settled the suit for $612.5 million and received a perpetual license. When the defendant attorneys refused to share the settlement with the plaintiffs, the plaintiffs sued for breach of fiduciary duty, breach of contract, unjust enrichment, and promissory estoppel.

The Business Enterprise Exclusion stated that the policy did not provide coverage to:

any CLAIM arising out of PROFESSIONAL SERVICES rendered by any
INSURED in connection with any business enterprise:
(a) owned in whole or part;
(b) controlled directly or indirectly; or
(c) managed, by any INSURED, and where the claimed DAMAGES resulted from
conflicts of interest with the interest of any client or former client or with the
interest of any person claiming an interest in the same or related business

The Fourth Circuit found that each element of this exclusion was met within the four corners of the Complaint. There was no dispute that the case arose out of professional services that the insureds provided to the plaintiffs. Those services included counseling as to changing the ownership of certain patents in order to avoid their creditors. The Court also found that the professional services were rendered "in connection with" a business enterprise, and that the insureds owned, controlled or managed the business enterprises that were involved. Finally, the Court found that the asserted damages surely resulted from conflicts of interest, because the defendant attorneys allegedly obtained complete ownership and control of their clients' assets and exploited those assets for personal benefit, violating professional ethics rules governing conflicts of interest. See Va. R. Prof. Conduct 1.8(a), (b), and (j).

Business Entreprise Exclusions are discussed in more detail here.