Associated Industries Insurance Company, Inc. v. Wachtel Missry LLP

Background

Associated Industries Insurance Company, Inc. (AIIC) issued a professional-liability policy to Wachtel Missry LLP (the Firm) covering October 19, 2018, through October 19, 2019. The policy covered damages and legal expenses resulting from claims against an insured for a wrongful act in providing professional services. It defined an insured to include a Firm partner acting within the scope of the partner’s duties for the Firm.

The policy excluded claims based on or arising from an insured’s activities as an officer, director, partner, trustee, or employee of a corporation or business enterprise other than the Firm. The policy defined damages to include compensatory sums such as judgments and settlements, and claims expenses to include reasonable and necessary attorney fees.

The underlying lawsuit, brought by representatives of Allan Applestein and the Diatomite Corporation of America, asserted legal malpractice, breach of fiduciary duty, elder abuse, and fraud against Howard Kleinhendler and the Firm. The allegations concerned Kleinhendler’s representation of Applestein while Kleinhendler also pursued transactions involving Virginia True Corporation, which he organized, and HK Consulting Group, LLC, which borrowed $500,000 from Applestein. The allegations included the sale of land to Virginia True, unsecured financing, a conflicting agreement that resulted in a lien on the property, and alleged conflicts of interest.

AIIC initially agreed to defend the Firm under a reservation of rights after the Firm’s self-insured retention was exhausted. AIIC then filed this action seeking declarations that the policy did not provide coverage and did not require it to defend the Firm or Kleinhendler. AIIC moved for judgment on the pleadings on Count III and moved to dismiss the Firm’s counterclaims.

The Court’s Analysis

The court applied New York law and treated the policy’s language according to its plain meaning because the relevant provisions were unambiguous. The court concluded that the business-enterprise exclusion applied because Kleinhendler’s activities for Virginia True and HK Consulting were a but-for cause of the losses alleged in the underlying lawsuit.

The court rejected the defendants’ argument that the exclusion could not apply because the underlying complaint included legal-malpractice allegations or allegations predating the conflict involving Virginia True. The exclusion applied to any claim arising from Kleinhendler’s business activities, including malpractice claims based on the alleged mixing of his legal practice with his business interests. The court found that all four underlying claims were based on Kleinhendler’s dual and conflicting roles.

The court also rejected the argument that indemnification was premature. Because the exclusion was triggered by the underlying complaint’s claim and did not depend on an ultimate judgment in that lawsuit, the court held that the exclusion could be applied at this stage. It therefore ruled that AIIC had no obligation under the policy to defend or indemnify either the Firm or Kleinhendler in the underlying lawsuit.

Disposition

AIIC’s motion for judgment on the pleadings as to the Third Claim for Relief was granted, subject to the defendants’ affirmative defenses. The court stated that the policy did not provide coverage for, or require AIIC to defend, the Firm or Kleinhendler because of the business-enterprise exclusion.

The court dismissed AIIC’s First, Second, Fourth, and Fifth Claims for Relief as moot. The Firm’s counterclaims were also dismissed as moot. The court determined that several affirmative defenses were not viable in light of its rulings, but identified defenses based on limitations, laches, waiver or equitable estoppel, wrongful conduct, unclean hands, and subject-matter jurisdiction as potentially remaining. The defendants were directed to identify any such defenses that they believed had a good-faith factual and legal basis.