On сross-motions' for summary judgment, the trial court held that a lawyer’s *211 malpractice insurance policy covers the insured lawyer and his firm for attorney fees forfeited by the lawyer to his client for breach of a fiduciary duty. We affirm coverage for the law firm but reverse as to coverage for the individual lawyer.
Plaintiff-respondents Norman Perl and his law firm, DeParcq, Anderson, Perl, Hunegs & Rudquist, P.A., commenced this declaratory judgment action against their malpractice carrier, defеndant-appellant St. Paul Fire and Marine Insurance Company, to determine whether St. Paul Fire and Marine’s policy afforded coverage for claims brought against them by a former client, Cecelia Rice.
To best understand the issue presented here, we must first relate the circumstances of Cecelia Rice’s suit. In 1977 Ms. Rice had retained attorney Norman Perl and his firm, DeParcq, Anderson, Perl, Hunegs & Rudquist, P.A., to represent her on a Daikon Shield claim. Perl negotiated with the adjuster fоr the liability insurer and obtained a $50,000 settlement. Ms. Rice subsequently discovered that the insurance adjuster with whom Perl had negotiated at the same time had been employed by Perl’s firm as an investigator. She then sued Perl and his firm, claiming fraud, misrepresentation, negligence, breach of contract, civil conspiracy, violation of the state’s consumer protection statutes, breach of fiduciary duty, and punitive damages. On motion for summary judgment, Judge McRae, the trial judge, dismissed all clаims against Perl and his firm except for breach of fiduciary duty. The dismissal was on the grounds that, even assuming those claims otherwise had merit, Ms. Rice, as a matter of law, had failed to show any actual damages. Judge McRae then held that Perl’s failure to disclose to Ms. Rice his relationship with the insurance adjuster, and the conflicting interests thereby engendered, was a breach of an attorney’s fiduciary duty to his client and that, consequently, “the Perl defendants have forfeited the right to retain the fee they otherwise may have been entitled to * * On August 11, 1980, the trial court ordered judgment in favor of plaintiff Rice and against the defendants “for the sum of $20,000.00 representing a refund of attorneys fees previously paid by plaintiff.” In June 1982, we affirmed Judge McRae’s decision in
Rice v. Perl,
In April 1981, while the appeal in Rice v. Perl was pending, Perl and his firm, as plaintiffs, commenced this declaratory judgment action to determine if St. Paul Fire and Marine was obligated to defend the Perl defendants in the Rice action and in a similar suit brought by another claimant, and whether the insurer had to pay “the money damages awarded Cecelia E. Rice.” On January 22, 1982, the trial judge, Judge Durda, granted partial summary judgment that St. Paul Fire and Marine was required to defend Perl and his firm. On October 13, 1982, the trial court granted further summary judgment holding that the insurance company was obligated to pay the $20,000 damages. 1 From this last summary judgment only, St. Paul Fire and Marine appeals.
There are, as we see it, two main issues: (1) Does the insurance policy, by its terms, cover forfeited attorney fees? (2) If so, is such a policy provision unenforceable as a matter of public policy?
I.
We start, then, with the language in St. Paul Fire and Marine’s insurance policy. The company agrees:
To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as money damages (other than exemplary or punitive damages), because of any claim * * * *212 arising out of professional services rendered or which should hаve been rendered for others * * *.
Coverage is excluded, however—
«* * * jf an(j f0 the extent the claim:
(1) arises out of or in connection with any dishonest, fraudulent, criminal or malicious act or omission of any Insured, or any partner, employee, associate, officer, stockholder or member of any Insured, or any other persons for whose acts any Insured is legally liable.”
1. The first issue is whether the award of $20,000 to Ms. Rice is “money damages,” as that term appears in the coverage portion of the policy. The insurer claims that a forfeiture of attorney fees is not damages, at least not in the sense of making an injured person whole; that here Cecelia Rice, the claimant, has suffered no damages, has borne no loss, and requires no compensation; further, that the forfeiture of attorney fees is only restitution, not an award of money for damages actually sustained. Perl and his law firm counter that the Rice award was for damages, that the award was declared to be such by Judge McRae, and that the fee forfeiture is really the measure of damages for a breach of fiduciary duty where no actual damages need be proven. The Rice award cannot be labeled restitution, Perl argues, because restitution implies restoring a person to a position he or she formerly occupied, as by the return of something the person formerly had, but here Cecelia Rice never has been entitled to anything more than what she received — her net settlement of $50,000 less the $20,000 fee.
Money damages, ordinarily, are awarded as compensation for loss or injury. Usually a person has a legal right that anyone owing that person a duty shall refrain from inflicting actual loss by certain kinds of conduct. If a loss occurs, the law compensates the injured party by an award of money damages; but if the conduct occurs and no loss results, the legal right has not been violated. C. McCormick, McCormick on Damages at 86 (1935). On the other hand, аs McCormick points out, many legal rights are not so conditioned, but are so-called “absolute” rights that the person subject to the duty shall refrain from acting in a given manner under any circumstances, regardless of whether loss or detriment would result. When such an “absolute” right is breached, the law provides a remedy, usually by awarding “nominal” damages.
E.g., Larson v. Chase,
The law treats a client’s right to an attorney’s loyalty as a kind of “absolute” right in the sense that if the attorney breaches his or her fiduciary duty to the client, the client is deemed injured even if no actual loss results. But instead of awarding the injured client nominal money damages for the breach, the law, in this instance, says that the attorney is nоt entitled to compensation for services rendered, and the client is entitled to recover, as damages, the compensation paid.
In re Estate of Lee,
We hold, therefore, that the forfeiture of an insured attorney’s fees for breach of a fiduciary duty owed the client is “money damages” within the meaning of St. Paul Fire and Marine’s policy.
2. Appellant St. Paul Fire and Marine next argues that, if the Rice judgment constitutes “monеy damages” under the policy, coverage is nevertheless absent because the policy exclusion for a “fraudulent” act or omission then applies. The insurer concedes that the $20,000 Rice award is not for actual fraud; Judge McRae dismissed the cause of action for fraud, it will be remembered, because Ms. Rice could not prove any actual loss. The insurer argues, however, that because Perl was found to have breached a fiduciary duty and such a breach is constructive fraud, the policy exclusion for fraud therefore applies. We think not.
Constructive fraud is, by definition, not actual fraud but conduct that the law treats as fraud, irrespective of the actor’s intent or motive. “Constructive fraud reposes exclusively in the context of fiduciary obligations and is simply a characterization of a breach of such a duty.” R. Mallen & V. Levit, Legal Malpractice § 108 at 188 (1981). These two authors, in discussing the “fraudulent act” policy еxclusion in a lawyer’s malpractice policy, state:
Fraudulent acts are recognizable under the well-established rules defining fraud, but should not include constructive fraud, or acts or omissions which are deemed fraudulent only because they constitute a breach of the fiduciary obligations. The mere breach of an ethical rule should not fall within the exclusion unless accompanied by “dishonesty” or “fraud.”
R. Mallen & V. Levit, Legal Malpractice § 718 at 900 (1981). Breach of a fiduciary duty, suсh as disclosure of a client’s confidence or representation of adverse or competing interests, may also be characterized as breach by an attorney of a standard of conduct, as distinguished from breach of a standard of care (which encompasses negligent performance of professional services, similar to malpractice liability in other professions). Id. at 3-4. Since much of an attorney’s practice involves fiduciary duties, to exclude such conduct from an attorney’s liability pоlicy would eviscerate the policy coverage. We hold, therefore, that the policy exclusion for “fraudulent” acts or omissions does not encompass constructive fraud for breach of a fiduciary duty.
As a variation of its argument, St. Paul Fire and Marine quotes from
Bituminous Casualty Corp. v. Bartlett,
3. While St. Paul Fire and Marine agrees in its policy to pay “money damages,” the policy expressly adds the qualifi *214 cation of “other than exemplary or punitive damages.” We hold that damages measured by the forfeit of attorney fees for breach of a fiduciary duty are not “exemplary or punitive damages,” as that phrase is used in the policy, and, therefore, that the exclusion is not applicable to the Rice judgment.
The fee forfeiture serves to provide the injured client with a remedy, but it also has the effect of punishing the attorney for the breach of a fiduciary duty and deterring further lapses in professional conduct. Judge McRae, in his trial memorandum, observed that the client’s recovery of the attorney fees “is itself punitive in form and in purpose.” On appeal, in affirming the forfeit, we said, “[T]he law has traditionally been unyielding in its
assessment of •penalties
when a fiduciary, or trustee, or agent has breached any of his obligations.”
Rice v. Perl,
Nevertheless, though similar, we do not think forfeiture damages and punitive damages are generally considered to be the same thing. While a forfeiture may punish, the aim is to make amends to the client — to “put right” the attorney-client relationship that has been tainted. Forfeiture of a fee may occur irrespective of the intent and motives оf the attorney,
Rice v. Perl,
At the very least, there is an ambiguity as to whether “exemplary or punitive damages,” as stated in the insurance policy, includes a forfeiture of attorney fees. This ambiguity must be construed against the insurer which drafted the language.
Farmers Home Mutual Insurance Co. v. Lill,
II.
We now reach the most troublesome issue. Having found that St. Paul *215 Fire and Marine’s policy provisions do cover payment of the Cecelia Rice judgment, is this policy coverage contrary to public policy and, therefore, unenforceable? 6 In discussing this question, it must be kept in mind that we are not talking about insurance coverage for actual, compensatory damages to a client flowing from an attorney’s constructive fraud or breach of a fiduciary duty. Coverage in such a case would lie. We are talking, rather, about coverage for only those damages to the client consisting of forfeiture of the attorney’s earned fee.
1. Appellant’s public policy argument can be simply stated. If forfeiture of attorney fees is to punish and deter, that purpose is defeated when the attorney’s insurance carrier pays. The counter arguments are several. Because public policy also favors freedom of contract, if private parties agree to insure forfeiture of attorney fees, particularly for claims arising from constructive fraud, they should be permitted to do so.
Cf. Harris v. County of Racine,
The professional conduct of attorneys has always been a matter of prime public policy concern to this court. Thus it is a basic rule that an attorney must represent the client with undivided loyalty and must disclose to the client any material matter which might impair that loyalty or affect the client’s interests.
Rice v. Perl,
In view of these concerns, so strongly expressed and felt by this court, we believe that insurance coverage which purports to cover a fee forfeiture by an attorney for his or her own breach of a fiduciary duty, such as the one here, should
*216
not bе enforceable as a matter of public policy. Our closest case is
Wojciak v. Northern Package Corp.,
We hold that the provisions of St. Paul Fire and Marine’s liаbility policy, to the extent they purport to insure an attorney for forfeiture of his or her attorney fees for breach of a fiduciary duty consisting of nondisclosure of matters material to the client’s interests and trust, are contrary to public policy and of no validity. We further hold, therefore, that St. Paul Fire and Marine’s policy does not afford coverage to respondent Perl for payment of the Rice judgment.
2. Our inquiry is not yet at an end. If policy coverage is unenforceable for defendant Perl, who committed the breach of fiduciary duty, is it also unenforceable against the defendant law firm, which is a named insured under the policy, and which is liable for the client’s judgment of $20,000 only derivatively or vicariously? We conclude that there is coverage for the law firm.
It seems to us that the policy considerations which deny coverage to the individual offending lawyer do not apply with equal force to the law firm. While the law firm, quite properly, is held liable tо the client for the misconduct of one of its partners or members, we see no reason why the law firm should not be free to acquire insurance, if it can, protecting itself from vicarious liability for the misconduct. The fee forfeiture is primarily to penalize the offending attorney, not the attorney’s colleagues who have not participated in the misconduct. It is interesting to note that some courts which prohibit insurance coverage for punitive damages as а matter of public policy make an exception and allow insurance coverage for an employer who is only vicariously liable for the wrongdoing of a servant or agent.
See Dayton Hudson Corp. v. American Mutual Liability Ins. Co.,
We hold, therefore, that St. Paul Fire and Marine’s policy provides valid, enforceable coverage for the professional corporation, DeParcq, Anderson, Perl, Hunegs & Rudquist, P.A., for the money damages awarded Cecelia Rice by reason of defendant Perl’s breach of a fiduciary duty owed the client.
This does not necessarily mean that one effect of the forfeiture, to penalize the individual attorney who did the wrong, has been defeated because the insurer has paid the judgment, albeit on behalf of Perl’s professional corporation rather than Perl himself. St. Paul Fire and Marine may have a right of indemnity against Perl. With respect to damages for breach of a fiduciary duty meаsured by forfeiture of attorney fees, Perl has no coverage and is not an insured under St. Paul Fire and Marine’s policy, but his professional corporation does have coverage and is an insured.
See Arenson v. National Auto. & Cas. Ins. Co.,
Affirmed in part and reversed in part.
Notes
. Judge McRae’s order in Rice v. Perl, dated August 11, 1980, as we have noted, ordered judgment entered against the Perl defendants for $20,000 "representing a refund of attorneys fees.” Subsequently, on December 11, 1980, on Perl’s motion, Judge McRae amended his order to delete the quoted phrase and substitute the words “as damages.”
We see no particular significance in this language change. Judge McRae left his memorandum accompanying his August 11 order unchanged.
. St. Paul Fire and Marine cites several cases where it has been held that liability policies covering money damages do not cover restitution or restoration of money or property.
Haines v. St. Paul Fire and Marine Insurance Co.,
. See footnote 5, infra.
. Judge McRae, for purposes of his summary judgment rulings, assumed that "with respect to Perl’s state of mind, I take it that he honestly believed he could, and attempted to, negotiate a settlement of plaintiff's claim with defendant Browne [the adjuster] at arm’s length and with no concern other than the best interests of plaintiff. Also, for the purposes of this motion I assume that defendant Browne was being paid for services entirely unrelated to any matters involving Daikon Shield claims."
. In
Rice v. Perl,
Ordinarily it would seem breach of the fiduciary duty results in complete forfeiture damages, but it is unclear if there may be exceptions in some situations where actual fraud is absent, where no actual damages are sustained, and where there are multiplе client claims. If forfeiture of fees for breach of a fiduciary duty are damages, as we here hold, and if these damages have a punitive content, as we here declare, it is at least arguable that the trier of fact in awarding such damages might consider much the same factors as the trier of fact considers in making a standard punitive damages award. See Minn.Stat. § 549.20, subd. 3 (1983).
. Respondents contend the public policy issue was not argued to the trial court and so is not before us nоw. We disagree. Although the trial court did not discuss public policy in its decision, St. Paul Fire and Marine did raise the issue prominently in its brief, although perhaps more in the context of interpreting policy language than in terms of the validity or enforceability of the policy provision itself. We think public policy considerations more properly bear on the issue of contract validity than contract interpretation. Because the invalidation issue was implicit in the public рolicy arguments below and since the issue is not dependent on any new or controverted facts, we will consider it.
. There is considerable case law and comment on the insurability of punitive damages, and the authorities are split.
See
cases collected in Annot.,
.
Meagher v. Kavli,