Contract Litigation

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Courtesy of Sonoma Risk
Used with permission

The issue of attorneys’ fees is high on the list of  concerns for both the average litigant involved in a local business dispute as well as the sophisticated conglomerate involved in a “bet your company” matter. A party’s own escalating attorneys’ fees is enough to keep even the toughest litigants up at night. But a party at least retains some modicum of control over the rates charged and hours expended by its own counsel. There are litigation budgets and the ability to make certain cost-saving decisions. It may result in less extensive discovery or depositions, but at least the client can control the direction of his dollars.

The same can’t be said for an adversary’s fees. A party has no control over how his opponent litigates but can nevertheless be stuck holding the bill after the dust settles at trial or summary judgment. When this risk of paying an adversary’s attorneys’ fees is injected into any litigation, the stakes undoubtedly become even higher.

In California and most states, the prevailing party in a contract dispute can be entitled to have his attorneys’ fees paid by the losing party. These “loser pays” provisions are common in many forms of contracts and are routinely enforced by the courts across the country. The amount of attorneys’ fee awards range from tens of thousands to millions depending on the matter.

Contract Litigation Insurance (CLI) provides insurance protection for litigants exposed to the risk of paying their adversary’s attorneys’ fees in a contract dispute. CLI covers the amount of attorneys’ fees awarded up to policy limits by a court to the prevailing party, after trial or summary judgment. Pricing (not including certain fees and taxes) is usually a percentage of the limits purchased.  For example, a plaintiff may pay 7% to 8.5% of the limit purchased.  $250,000 of coverage would cost about $20,000. For defendants, 9% to 10.5% is more common.

CLI is purchased after a lawsuit is filed.  There are several benefits to this coverage. The obvious benefit is the coverage.  If a party loses at trial or summary judgment and fees are awarded to the other side, those fees will be covered.  Note that most liability policies would not cover the court awarded fees. Recognize as well that the fee award will arrive at the worst possible time, after the case is lost – when resources are the most depleted and financial pressure is the most extreme.

Another crucial benefit of Contract Litigation Insurance is that it effectively disarms the other side of one of its most important weapons, leverage.  A well healed adversary might ramp up their legal fees which they will recoup if they lose.  This potentially significant uninsured exposure causes some parties to settle earlier than they might otherwise.  This leverage is effectively eliminated with the purchase of CLI.

Summary

Litigation is a lousy way to resolve disputes. It is expensive, time consuming and emotionally devastating.  19 out of 20 litigated cases don’t end up being decided by a judge or a jury, so one wonders why certain disputes were litigated to begin with.  Regardless, when cooler heads don’t prevail, some form of adjudicated dispute resolution is inevitable. In those situations you need every advantage you can get, and Contract Litigation Insurance is one option that can be considered.

Frequently Asked Questions About Contract Litigation Insurance

What Does The Policy Protect Against?

CLI protects the insured from an attorneys’ fee award issued by a court, pursuant to a prevailing party provision in a contract or an applicable statute.

How Long Does The Coverage Last?

CLI policies match the duration of the covered litigation. When the covered litigation terminates, the policy expires.

Do I Already Have Coverage on any of my Existing Insurance Policies?

No. Clients may already have a commercial general liability policy (CGL), errors and omission professional liability (E&O), or other insurance that can cover certain defense costs. However, these coverages do not protect against the financial exposure of having to pay an adversary’s attorneys’ fees. Only Contract Litigation Insurance does.

When is Contract Litigation Insurance Available for Purchase?

CLI is available for purchase upon the filing of a
contract action. CLI policies are offered through a tiered pricing structure that is tied directly to the increased level of risk reflected in key stages of a lawsuit. Thus, as a litigation progresses, the cost of coverage may increase and the ability to obtain coverage may decrease (maximum of 1 year from filing/service date).

Is CLI Underwritten by a Global Leader?

CLI is underwritten by individual member companies of Zurich in North America, a leading global insurance carrier rated “A+” by A.M. Best. Zurich is an insurance provider for the majority of Fortune 100 global companies and offers programs to reduce risk exposure in more than 170 countries.

What is Needed to Apply for a Policy?

The application process is easy and quick. Each application for insurance is evaluated on an individual basis and must include the following:

A file stamped copy of the complaint

A copy of the underlying contract

A completed one page CLI policy application

Will  Zurich Play a Role in How I Prosecute or Defend my Case?

No. You are free to prepare your case without any interference from Zurich.

How is the Policy Triggered?

The opposing party must be found to be the prevailing party after a contested trial or summary judgment. The court must then order the CLI policyholder to pay the opposing party’s attorneys’ fees.