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Firm stung by ‘BEE,’ loses malpractice coverage

A legal malpractice carrier does not have to defend a malpractice claim against a lawyer who invested in his client’s business, the 4th U.S. Circuit Court of Appeals held March 29. The appellate panel upheld a November 2010 trial court decision denying coverage to attorney Donald E. Stout and his firm, Antonelli, Terry Stout & Kraus LLP.

The Arlington law firm forfeited its malpractice coverage because of its involvement with various client business entities, which allowed the trial court to apply the malpractice policy’s “business enterprise exclusion” (BEE). The underlying malpractice claim arose from the firm’s alleged refusal to share proceeds from the 2006 settlement of a patent infringement case involving technology used in Research in Motion’s BlackBerry system.

The policy excluded coverage for damages from a claim arising out of professional services rendered by the insured in connection with any “business enterprise” owned, controlled or managed by the insured.

Although the policy did not define “business enterprise,” there was little dispute that it encompassed the various corporations involved in the Stout case, the panel said.

In its unpublished per curiam opinion in MLM v. Antonelli, Terry, Stout & Kraus LLP, the panel said “the defendant attorneys in this case allegedly obtained complete ownership and control of their clients’ assets and exploited those assets for personal benefit. This conduct violates any number of Virginia professional ethics rules.”
–Deborah Elkins

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