Risk Management - Contract Litigation Insurance

Clearwater Bar Association    June 1, 2011

Did you know that there is a new type of insurance policy which helps protect plaintiffs and defendants from having to pay their adversary's attorney's fees should they lose a lawsuit based on a contract with an attorney's fees clause? Until now, no such insurance product was ever in existence.

Contract Litigation Insurance (CLI) is incredibly unique and allows litigants in contract litigation to protect against paying the other side's legal fees. This allows issues to be resolved based on the merits as opposed to the financial considerations that often force settlements.

Many types of contracts include an attorney's fees provision which typically requires the losing party to reimburse the prevailing party for reasonable attorney's fees arising out of the litigation. CLI is a product specifically created to help protect parties from the risk of having to pay these attorney's fees. A CLI policy works like other types of insurance policies in that an applicant submits an application, the application is reviewed (in a process called underwriting) and a premium is charged. Once the risk is accepted by the carrier and the premium has been paid, the coverage is in place. Claims are paid out to the insured when a loss materializes (an adverse judgment requiring payment of attorney's fees).

Unlike other types of insurance, there is no complicated adjustment process. The exact amount of the loss is fixed by the court when it imposes an attorney's fees requirement on the insured party. Interestingly, unlike most policies, the policy is not underwritten until such time as a lawsuit is filed. Usually with the spectre of a claim being already present, an applicant cannot obtain insurance for a particular type of risk.

As I understand the mechanics of the policy, applicants should be able to obtain coverage on virtually any kind of contract that has a fee shifting provision. As I further understand, policies must be applied for within 60 days of the initial filing or service of the complaint. However, each carrier writing such coverage will have its own set of rules so these are mere guidelines and you should not rely on them as hard and fast rules.

In terms of risk management, this type of coverage presents a unique challenge to attorneys. Because the coverage is so new, the market has not yet established a reasonable basis for educating a client about the existence of the coverage. However, it is incumbent upon attorneys to stay up with the marketplace and to be able to advise their clients of the existence of certain types of coverage when certain risks are present in order to fulfill fiduciary obligations to clients. Accordingly, I recommend that all attorneys handling commercial or contract based litigation become familiar with this type of coverage to the point that they understand its basics and that they make sure that they educate clients involved in contract-based litigation about the existence of the coverage in order to avoid malpractice claims based on a failure to educate.

For any attorneys who want further information on this type of coverage and which carriers are presently providing the coverage, please feel free to contact me at any time. I am not involved in the sale or distribution of the policies but I do have some fairly extensive information that can help you provide assistance to your clients/

Jeff Albinson is a partner with Daniels, Kashtan, Downs, Robertson & McGirney. His practice is focused on risk and practice management for lawyers and law firms, defending legal malpractice and other professional liability clams and defense of cyber••liability claims. Jeff currently serves as National Co-Chair of the Professional Liability Committee of the Council on Litigation Management and he is a past-president of the Clearwater Bar Association. He is not now and never was much of a philosopher. He is AV rated and can be reached at 813-222-0400 or jalbinson@dkdr.com.