Legal Malpractice insurance companies have two big exclusions. One is late notice of a claim and the other is acts outside the policy coverage. Late notice is a constant danger to the insured. Carriers take the position that as soon as the attorney knows there has been a mistake he is obligated to tell the carrier. Insureds take the position that if they tell the carrier as soon as they are served with a complaint, it is early enough. The cases run between the two extremes.

Here, however, inK2 Inv. Group, LLC v American Guar. & Liab. Ins. Co. ; 2012 NY Slip Op 00001 
Appellate Division, First Department we see both bad faith and exclusions. They do not work out to the carrier’s benefit.
 

"Plaintiffs are limited liability companies that made multiple loans totaling approximately $3 million to nonparty Goldan, LLC of which defendant’s insured, Jeffrey Daniels, an attorney, was a member. In the legal malpractice action underlying this action, it was alleged that as attorney for plaintiffs, Daniels undertook to record mortgages in plaintiffs’ favor to secure those loans, and to obtain title insurance, and that he failed to do so, rendering plaintiffs’ investments unsecured. Goldan became insolvent and never made any payments on the loans. The legal malpractice action alleged that as a consequence of Daniels’s negligent failure to record the mortgages or obtain title insurance, plaintiffs did not have security in the mortgaged properties, and the promissory notes evidencing the loans became uncollectible.

Plaintiffs demanded $450,000 from Daniels in full settlement of their claims. This amount was well within the $2 million aggregate and $2 million per-claim limits of the lawyers professional liability insurance policy issued to Daniels by defendant. However, defendant disclaimed its duty to defend or indemnify based upon two exclusions in the policy. One exclusion was for claims based upon or arising out of the insured’s capacity or status as an officer, director, etc., of a business enterprise. The other exclusion was for any claim arising out of the alleged acts or omissions of the insured for any business enterprise in which he had a controlling interest.

After Daniels failed to appear in the malpractice action, a default judgment was entered against him in the amounts of $2,404,378.36 in favor of plaintiff K2 and $688,716.00 in favor of plaintiff ATAS. Daniels then assigned to plaintiffs all his claims against defendant, including bad faith claims. [*2]

Having disclaimed its duty to defend its insured in an action that culminated in a default judgment, defendant "cannot challenge the liability or damages determination underlying the judgment" (Lang v Hanover Ins. Co., 3 NY3d 350, 356 [2004]). Nor can it raise defenses to plaintiffs’ claim against Daniels including the applicability of any asserted policy exclusions (Lang at 356).

"To be relieved of its duty to defend on the basis of a policy exclusion, the insurer bears the burden of demonstrating that the allegations of the complaint in the underlying claim cast the pleadings wholly within that exclusion, that the exclusion is not subject to any other reasonable interpretation, and that there is no possible factual or legal basis upon which the insurer might be eventually obligated to indemnify its insured (citations omitted)" (Utica First Ins. Co. v Star-Brite Painting & Paperhanging, 36 AD3d 794, 796 [2007]). No material issue of fact exists as to whether the allegations of plaintiffs’ legal malpractice claims are based, even in part, upon Daniel’s acts or omissions in his capacity as an officer, director, etc., of a business enterprise or any acts or omissions for a business enterprise in which he had a controlling interest, so as to bring them within either of the exclusions invoked by defendant (id). Rather, the allegations of legal malpractice were focused solely on Daniels’s negligence as plaintiffs’ counsel. "