Insurance for Attorneys’ Fees Awards?

Attorneys’ fees are often referred to as the “tail that wags the dog” of civil litigation.  Court cases often end up being so costly that the legal fees and expenses dwarf the amount originally at stake in the dispute; this often forces the parties to gamble on the outcome of a trial, rather than accept a settlement that will benefit the lawyers more than it does either party.  The civil justice system has not yet found a satisfactory way to avoid this vexing problem.  However, a new insurance product on the market presents an interesting solution.

It’s called “Contract Litigation Insurance,” and it was unveiled to the public in July 2012 after a two-year, limited trial period.  The unusual part about it is that you do not need to buy the insurance until after you have been sued.  If you are named as a defendant in a contract case that presents the possibility of a fee award against you, you can sign up for insurance that will pay the legal fees that a judge says (after you have lost the case) that you have to pay the plaintiff.  Naturally, the insurance will only pay up to the limits of the policy, but the policy premiums appear reasonable:  the cost of the insurance is a one-time payment that, for the most part, will be well under 10% of the coverage limits (so, a $100,000 policy might cost in the range of $6500).

The insurance is helpful to defendants in contract cases because it removes from the plaintiff’s arsenal the threat that the defendant will have to pay the plaintiff’s legal fees, in addition to possibly losing the case and paying damages.  Simply stated, the insurance forces plaintiffs to do a better job of evaluating their cases on the merits, while allowing defendants the benefit of knowing that their potential losses will be capped at the amount of damages awarded, without an added element of legal fees.

As of now, only one insurance company, Zurich, has these policies, with Sonoma Risk Insurance Agency acting as underwriter and national program administrator.  Time will tell how the legal market reacts to these policies, and whether other insurers join in offering this product.  Because it always benefits litigants to have someone else pay their legal fees (or legal fees awarded against them), this new insurance product should be carefully considered by any defendant in a contract case that has the potential for an adverse fee award.