What you need to be aware of is the distinction that exists between actual fraud and constructive fraud. It is actual fraud that is excluded from coverage under the professional policy; constructive fraud is not.

Actual fraud is defined in Black's Law Dictionary (Fifth Ed.) as a trick or some direct and active operation of the mind with the intentional and successful employment of any deception or artifice used to cheat another; it is something said or done with the intent to deceive. Constructive fraud, on the other hand, is the breach of some legal or equitable duty that the law declares fraudulent because of its tendency to deceive others or violate a confidence; it is a breach of a fiduciary relationship without an actual fraudulent intent wherein the person at fault gains (or might gain) an advantage. The key word in distinguishing between actual and constructive fraud is “intent”; actual fraud requires intent and constructive intent does not.

A legal example of this distinction can be found in the case of Brooks, Tarlton, Gilbert, etc. v. U.S. Fire Insurance Company, 832 F2d 1358 (C.A. 5 1987). The U.S. court of appeals in this case held that the basis of the complaint in the lawsuit was a breach of fiduciary duty owed by the lawyers, and that this involved constructive fraud where a lawyer's intent or state of mind was immaterial. The court went on to state specifically that the insurance policy exclusion did not refer to constructive fraud, but to actual fraud only, which would include an element of wrongful intent. The court said that actual fraud involves dishonesty of purpose or intent to deceive whereas the benchmark of constructive fraud is the existence of a fiduciary relationship; it is the existence of the relationship, apart from any state of mind of the attorney, that casts doubt on a transaction between the attorney and the client.

It is appropriate to distinguish between the two types of fraud based on intent for several reasons. One reason is that the ordinary dictionary meaning and the legal dictionary meaning of fraud manifest the idea that fraud carries with it wrongful intent. And, the exclusion on the professional liability policy uses the words “dishonest”, “criminal”, and “malicious” in describing acts or omissions that will not be covered; these words connote intentional conduct and incorporate intent into their legal definitions. So, it follows that the word “fraudulent”, used as it is in connection with these words, should also be interpreted as a term requiring and encompassing intent. Finally, liability insurance is not generally meant to apply to intentional acts of the insured. It is in keeping with this idea that a professional liability policy would exclude coverage for fraudulent acts that include wrongful intent, but would apply coverage for other acts of fraud.

The bottom line is that, absent a clear definition in the policy, the common meaning of fraudulent act in a professional liability policy should apply only to actual fraud. This would allow the policy to cover acts or omissions of the insured attorney wherein he or she did not have the requisite intent to deceive the client.