Perl v. St. Paul Fire and Marine Ins. Co.

Citation345 N.W.2d 209
Decision Date17 February 1984
Docket NumberNo. C9-83-125,C9-83-125
CourtSupreme Court of Minnesota (US)
PartiesNorman PERL, Richard Hunegs, and DeParcq, Anderson, Perl, Hunegs, & Rudquist, P.A., Respondents, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Appellant, and Cecelia E. Rice and Margaret R. Dunlevy, Defendants.

Syllabus by the Court

1. Forfeiture of attorney fees to a client is an award of "money damages" against the attorney within the meaning of the attorney's liability policy.

2. A coverage exclusion in an attorney's liability policy for a "fraudulent" act or omission of the attorney does not apply to constructive fraud for breach of a fiduciary duty.

3. A coverage exclusion in an attorney's liability policy for "exemplary or punitive damages" does not apply to forfeiture of attorney fees for breach of a fiduciary duty.

4. Provisions of an attorney's liability policy, to the extent they purport to insure an attorney for forfeiture of his or her attorney fees for breach of a fiduciary duty, are contrary to public policy and of no validity; however, insofar as they afford coverage to the offending attorney's employer or partnership for vicarious liability, such provisions are not contrary to public policy and do afford valid coverage for the vicarious liability.

Gislason, Dosland, Hunter & Malecki by Donald F. Hunter, P.A., Minneapolis, for appellant.

Austin, Roth & Associates, P.A. by Robert M. Austin, Jerome B. Abrams, Minneapolis, for respondents.

Post, Syrios & Bradshaw by Arden J. Bradshaw, Wichita, Kan., for other parties.

Heard, considered and decided by the court en banc.

SIMONETT, Justice.

On cross-motions for summary judgment, the trial court held that a lawyer's 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, defendant-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 Dalkon Shield claim. Perl negotiated with the adjuster for 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 claims 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, 320 N.W.2d 407 (Minn.1982).

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 * * * arising out of professional services rendered or which should have been rendered for others * * *.

Coverage is excluded, however--

"* * * if and to 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, as 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, 47 Minn. 307, 311, 50 N.W. 238, 239 (1891) (widow's action for dissection of deceased husband's body. "Every injury imports a damage."); Sime v. Jensen, 213 Minn. 476, 7 N.W.2d 325 (1942) (trespass). The allowance of nominal damages is really a fiction to satisfy the legal maxim that every right has a remedy, and so it is that "the law in certain instances gives damages though no loss is shown." McCormick, id. at 86.

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 not entitled to compensation for services rendered, and the client is entitled to recover, as damages, the compensation paid. In re Estate of Lee, 214 Minn. 448, 9 N.W.2d 245 (1943). Consequently, when St. Paul Fire and Marine uses the unqualified term "money damages" in its policy, we think it refers to all money damages whether or not awarded to compensate for actual harm. The fee forfeiture in this situation is not restitution. 2 A sum usually equivalent to the fee is awarded to the client, 3 not to restore the client to any status quo because of any unjust enrichment, but because the client has been injured. The injury lies in the client's justifiable perception that he or she has or may have received less than the honest advice and zealous performance to which a client is entitled.

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 "money 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...

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