Activities of Lawyer in the Capacity of an Officer of Another Business Excluded

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No Defense for Lawyer/Business Owner

Post 4788

Associated Industries Insurance Company (AIIC) sued Howard Kleinhendler and his former law firm, Wachtel Missry LLP, seeking a declaration that it need not provide insurance coverage for either defendant in a lawsuit brought by Allan Applestein. Applestein sought damages for legal malpractice, breach of fiduciary duty, elder abuse, and fraud related to the 2017 sale of land in Virginia, known as the Fones Cliffs Land, to Kleinhendler’s company, the Virginia True Corporation.

In Associated Industries Insurance Company, Inc. v. Howard Kleinhendler, Defendant-Appellant, Wachtel Missry LLP, No. 23-57, United States Court of Appeals, Second Circuit (December 7, 2023) the Second Circuit resolved the dispute.

THE POLICY EXCLUSION

The insurance policy contained an explicit exclusion for activities undertaken in the capacity of an officer of another business enterprise. The district court granted judgment on the pleadings to AIIC because it determined the policy exclusion unambiguously excluded coverage due to Kleinhendler’s position with Virginia True.

CONTENTIONS

Kleinhendler contended that AIIC has a duty to defend him in the Applestein lawsuit because the lawsuit alleges some acts that could give rise to claims covered by the insurance policy, namely acts that occurred before the formation of Virgina True and acts related to the Fones Cliffs Land transaction that were unrelated to Kleinhendler’s position with Virginia True.

AIIC responded that it does not have a duty to defend him because the Applestein complaint squarely centers on the conflicted sale of the Fones Cliffs Land to Kleinhendler’s company, and its claims thus arise from Kleinhendler’s position with that company.

ANALYSIS

Under New York law, an insurer’s duty to defend is exceedingly broad. To be relieved of its duty based on a policy exclusion, an insurer has a heavy burden of demonstrating that the allegations of the complaint cast the pleadings wholly within that exclusion.

The Second Circuit noted that the issue to be resolved is whether the Applestein complaint brings claims that could potentially result in liability not arising out of Kleinhendler’s position with Virginia True and concluded that it does not. The complaint does not state any claim for liability that does not arise out of Kleinhendler’s position with his company.

Therefore, the Second Circuit concluded that AIIC carried its burden to demonstrate the exclusion applied and it has no duty to defend Kleinhendler in the Applestein suit.

That each and every claim arises from the sale of the Fones Cliffs Land to Virginia True is confirmed by the damages Applestein seeks-$7,724,200.36, apparently corresponding to the amount he lost as a result of the transaction and a loan he made to HK Consulting Group LLC (another Kleinhendler company) in connection with it, plus interest.

In short, all of Kleinhendler’s potential liability in the Applestein suit stems at least in part from his position with that company.

Therefore, the district court properly concluded that AIIC’s policy exclusion applied.

AIIC does not have a duty to defend Kleinhendler in the Applestein action.

ZALMA OPINION

There is no reason why a lawyer cannot be involved in a business outside the practice of law. It only becomes a problem if the business is involved with a client of the lawyer owner. Insurers of lawyers limit the liability coverage to the practice of law and most, like AIIC exclude coverage for actions between a lawyer owner of a non-law business and a client of the lawyer.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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