Potomac Insurance v. McIntosh

OPINION

JACOBSON, Judge.

The issue on appeal is whether an attorney’s professional liability insurance covers *31his action when dealing in a business context with his clients. The appeal arises from a summary judgment granted in favor of appellees on the basis that no insurance coverage existed for claims made by appellants against appellees’ insured.

FACTS AND PROCEDURAL HISTORY

Sometime during 1982-83, attorney Phillip D. White orchestrated the formation of a limited partnership known as Southwest Arizona Developers Limited Partnership (Southwest). White was the general partner and appellants Frank and Donald McIntosh, Webster Lehmann, Jr. (appellants), and others were limited partners. White and his firm, White, Waddell & Associates, P.A., had previously represented appellants in connection with various legal matters. In July 1983, Southwest was formally created. After Southwest experienced the financial difficulties which gave rise to this litigation, White resigned as general partner in February 1984, and left the country. The Mclntoshes were substituted as general partner of Southwest in White’s place. As a result of their investment in Southwest, appellants lost over $260,000.1

In September 1985, appellants and others filed an amended six count complaint in Maricopa County Superior Court against Phillip White, Seid Waddell, and White, Waddell & Associates, P.A., alleging attorney malpractice, breach of fiduciary duty, fraud, fraudulent sale of unregistered securities, breach of contract, and negligence. (Cause No. C-515255). White’s professional liability insurance carrier, Potomac Insurance Company, and its underwriter, Shand-Morahan Company (appellees), accepted White’s defense under a reservation of rights.

Appellees filed a complaint for declaratory relief which gave rise to this appeal against White and his firm, seeking a declaration that no coverage existed under White’s malpractice insurance policy for either indemnity or defense in connection with appellants’ claims in Cause No. C-515255.

With appellees’ approval, White entered into a settlement agreement with appellants in Cause No. C-515255, assigning White’s rights under the policy, if any, to appellants. In conjunction with the agreement, a second amended complaint was filed by appellants alleging a single count of attorney malpractice with damages of $234,542.69. Appellants were substituted as defendants in the declaratory judgment action. Waddell was dismissed with prejudice.

Appellees moved for summary judgment in November 1987, arguing that attorney White’s activities were excluded from coverage by the terms of the liability policy, which specifically provided that:

1. This policy does not apply:

(b) to any claim made by or against any business enterprise not named in the Declarations ... in which the Insured is a partner ... or which is controlled, operated or managed by the Insured, either individually or in a fiduciary capacity ...
(c) to liability arising out of the Insured’s services and/or capacity as:
(1) an officer, director, [or] partner ... of a business enterprise____

(Emphasis added.) Appellees argued that White was a general partner in Southwest, and that appellants’ claims arose solely in connection with White’s participation in that partnership. Thus, the quoted exclusion applies.

Appellants’ cross-motion for summary judgment and response argued that White “wore two hats” — one as a general partner of Southwest, and the other as attorney for appellants and for the partnership. They argued that they were only seeking recovery for White’s negligence committed in his role as an attorney, and that therefore the “business enterprise” exclusion does not apply.

The trial court granted appellees’ motion for summary judgment and denied appellants’ cross-motion, specifically finding that *32no coverage existed for the matters alleged in Cause No. C-515255:

Although Defendants have sought to cast it otherwise, the test is, or at least should be, the expectations of the client. The policy terms are not vague or ambiguous and require no construction. It is clear that if the liability-incurring event arose out of the business or the insured’s activities as a partner in the business, coverage does not apply.
Defendants have urged that it was White’s failure to disclose potential conflict to which the Court ought to look. That may have been some obligation as either partner or lawyer, but it was not the liability-incurring event. The liability-incurring event was actually the activities more specifically described in the earlier Amended Complaint and not those alleged in the Second Amended Complaint.

Formal judgment in accordance with the trial court’s ruling was entered on April 1, 1988, and appellants timely appealed.

DISCUSSION

Appellants’ argument that the business enterprise exclusion does not apply rests on the contention that White committed acts of malpractice in his capacity as an attorney. In support of this contention, appellants claim that White negligently (1) failed to advise appellants of the risks inherent in an investment in a limited partnership; (2) failed to warn appellants of the existence of possible conflicts of interest; (3) induced appellants to sign the partnership documents without full disclosure of their effect; and (4) induced appellants to sign at least one personal guarantee for a partnership loan without disclosing to them the effect of such guarantee.

Assuming that White may have been liable for negligent acts committed in his capacity as an attorney does not determine the question of whether that negligence falls within the coverage of the policy. See Aragona v. St. Paul Fire & Marine Ins. Co., 281 Md. 371, 378 A.2d 1346, 1350-51 (1977). In order to determine that question, the proper focus of our inquiry is the proximate or direct cause of appellants’ loss: attorney negligence or business reverses. See id.

In support of their cross-motion for summary judgment, appellants admit that “[a]s a result of this investment [appellants] lost $264,201.96.” Although the record on appeal is somewhat unclear, it appears that appellants’ loss was occasioned by two events. First, appellants became liable to various Southwest creditors by virtue of the Mclntoshes’ substitution as general partner of Southwest after White’s resignation. See A.R.S. § 29-319(a). Second, Southwest apparently defaulted on certain partnership loans, resulting in appellants’ ultimate liability on one of these loans which they had personally guaranteed.

Thus, White’s alleged negligent acts, arguably committed in his capacity as an attorney, in inducing appellants to invest as limited partners and to guarantee partnership loans may have indirectly caused appellants’ loss, but they were not the proximate cause. Rather, the proximate and direct cause of appellants’ loss was Southwest's present inability to pay the loan appellants had personally guaranteed, and the loss of statutory protection against partnership creditors after the Mclntoshes’ substitution as general partner of Southwest upon White’s resignation. This loss is directly attributable to Southwest’s business failure — not to White’s actions as an attorney for either appellants or the partnership.

Our analysis of this issue in terms of causation is supported by Aragona v. St. Paul Fire & Marine Ins. Co., in which the Maryland Court of Appeals stated:

Whether a policy covers a loss caused by excluded as well as covered acts has been found by other courts to turn on the proximate, efficient, dominant or direct cause of the loss; if that cause is within the exclusion, the policy does not cover the loss.

378 A.2d at 1350 (citations omitted). The Aragona court found that the dishonest and criminal acts of one insured attorney were the proximate cause of the appellants’ loss, and that, while his partner’s negli*33gence may have been a contributing cause, it was indirect and remote. Id. at 1350-51. Thus, the policy exclusion for losses resulting from dishonest, fraudulent, or criminal acts applied and was “all-encompassing.” Id. at 1351.

The business enterprise exclusion in a professional liability insurance policy prevents an attorney “from being able to sue himself for professional errors that he committed while performing professional services for a business that he owned or controlled.” Continental Cas. Co. v. Cole, 809 F.2d 891, 896 (D.C.Cir.1987). White’s status as attorney for appellants and Southwest does not mandate that there be coverage for acts arising out of his business relationship with clients. We agree with the court in Senger v. Minnesota Lawyers Mutual Ins. Co., 415 N.W.2d 364 (Minn.App.1987), which found that the mere existence of an attorney-client relationship will not be sufficient to bar the application of a relevant policy exclusion. Id. at 368.

There will always be an attorney-client relationship when these exclusions are at issue. Absent an attorney-client relationship, the insuring agreement does not apply and the language of the specific exclusions does not come into play____
The finding that the attorney-client relationship existed brings the transaction, as a threshold matter, within the coverage of the policy. However, the analysis of the claim does not end at this point.. We must determine whether, under the unique facts and circumstances of this case, the relevant exclusions apply.

Id. at 368-69. Cf. General Accident Ins. Co. v. Namesnik, 790 F.2d 1397, 1400 (9th Cir.1986) (fact that insured was at all times pertinent appellants’ attorney was not responsive to uncontroverted evidence which established that, as to the transactions in question, insured acted as a business agent rather than an attorney).

The Senger court found that the insured attorneys’ letter tendering defense of the actions to the insurer constituted an admission that took their claim outside the coverage of the policy.

The policy clearly and unambiguously excludes claims ‘made in connection with any business ... not named in the declarations’ which is owned, directed, or controlled by the insured. An action which admittedly ‘arises out of a business owned’ by the attorneys in this case clearly falls within this policy exclusion.

415 N.W.2d at 369. Similarly, the policy at issue in this case clearly excludes from coverage any losses incurred as a result of White’s participation as a partner in a business enterprise other than White, Waddell & Associates. Appellants admit that their loss of over $260,000 was a result of their investment in Southwest.

For the most part, the cases cited by the dissent do nothing to undercut this rationale, and in fact do not even address the issue presented in this case. See, e.g., Jensen v. Snellings, 841 F.2d 600 (5th Cir.1988) (issue whether attorney’s investment advice was professional legal services covered under policy; business enterprise exclusion not an issue); Continental Cas. Co. v. Burton, 795 F.2d 1187 (4th Cir.1986) (holding that attorney acted as fiduciary or trustee when accepting clients’ funds, and that the policy covered acts of attorney as fiduciary; business enterprise exclusion not an issue); Regas v. Continental Cas. Co., 139 Ill.App.3d 45, 93 Ill.Dec. 661, 487 N.E.2d 105 (1985) (issuance of escrow check by attorneys on behalf of client to close client’s real estate purchase constituted the practice of law; business enterprise exclusion not an issue); Miles v. St. Paul Fire & Marine Ins. Co., 381 So.2d 13 (Ala.1980) (attorney who invested clients’ funds in attorney-client trust fund was covered under policy because attorney was acting in a fiduciary capacity; business enterprise exclusion not an issue).

While Pacific Indem. Co. v. Linn, 766 F.2d 754 (3d Cir.1985) did involve interpretation of a policy with a business enterprise exclusion, the court found that term to be ambiguous, and therefore construed the policy against the insurer.2 Id. at 762. *34However, such is not the case here, as the policy at issue clearly provides that it does not apply to “any claim made by or against any business enterprise not named in the Declarations ... in which the Insured is a partner____” The claimed losses in this case resulted from a business enterprise known as Southwest, in which White was a partner. Southwest was not named in the declarations.

We hold that the language of the business enterprise exclusion in White’s professional liability insurance policy is unambiguous and precludes recovery here. See Travelers Indem. Co. v. State, 140 Ariz. 194, 680 P.2d 1255 (App.1984).

CONCLUSION

The judgment of the trial court is affirmed. We grant appellees’ request for attorneys’ fees on appeal pursuant to A.R.S. § 12-341.01(A), upon compliance with Rule 21, Arizona Rules of Civil Appellate Procedure.

VOSS, P.J., concurs.

. Apparently, Lehmann only lost his initial investment in the partnership. At least the majority of the $260,000 loss is attributable to the Mclntoshes.

. The court also found the terms "operation," "professional service," “Physicians Offices," and *34"manufacturing a product” to be ambiguous. 766 F.2d at 763, 765.