Unfortunately, the concepts of right and wrong often may not influence the decision to breach a contract. This is particularly true during difficult economic times when parties to a contract often use the threat of litigation to forcibly renegotiate the terms of their agreements. Needles to say, when asking a party to honor their contract, it is unsettling to hear someone respond with “sue me.”

Though litigation may be a necessary evil in today’s business environment, it is disruptive to business itself. Lawsuits often bring about harmful and potentially devastating side effects, such as damage to reputation, increased costs of production, decreased ability to obtain credit, disruption of growth opportunities, and overall uncertainty.

Typically, the greatest burden of litigation involves attorney’s fees. Many contracts contain a provision stating that the prevailing party in a contract dispute is entitled to have its attorney’s fees paid by the losing party. Similar “fee shifting” or “loser pays” provisions are also found in many state and federal statutes.

Though confident litigants often rely on such provisions to justify their decision to litigate, attorney’s fees are only awarded after victory has been declared by judge or jury. Thus, there remains a significant risk of having to pay an opponent’s attorney’s fees.

However, for those seeking some certainty surrounding legal fees associated with engaging in contract litigation, an insurance product offered by Zurich may be the answer.

Zurich’s Contract Litigation Insurance is designed to insure a plaintiff or defendant in a contract-based lawsuit against the risk of paying their adversary’s attorney’s fees if unsuccessful in prosecuting or defending their contract claim.

Zurich’s Plaintiff Contract Litigation Insurance and Defendant Contract Litigation Insurance can offer various benefits to individuals and businesses, such as:

  • Reducing the financial exposure of litigation;
  • Increasing settlement negotiation power;
  • Providing greater budget certainty;
  • Supporting attorney best practices in litigation;
  • Tiered pricing that is tied directly to the increased level of risk of a lawsuit; and
  • Claims handled by former practicing attorneys who understand an insured’s needs and litigation best practices.

As with any insurance policy, it is important to understand the extent and nature of the coverage, as well as any limitations or exclusions from coverage. Consider the following highlights of Zurich’s Contract Litigation Insurance:

  • For Plaintiff Contract Litigation Insurance, policies must be purchased within 60 days of filing of a contract-based complaint; for Defendant Contract Litigation Insurance, policies must be purchased within 60 days of service of the lawsuit.
  • Upon being deemed the prevailing party in a contract lawsuit, policies will pay reasonable attorney’s fees, as determined by the court. This may also occur in tort or statutory claims provided the court finds they were intertwined with the contract claims for purposes of any award of attorney’s fees.
  • Policies are subject to exclusions and non-coverage caveats, including: (1) “bad boy” fraud; (2) no fees awarded if there is a resolution other than a merits-based prevailing party determination; (3) no fees awarded for post-rejection fees incurred after rejection of an offer of judgment (or similar device) under applicable rules of procedure (although pre-offer fees may be covered); and (4) no fees awarded if they are based on discovery sanctions or bad faith conduct sanctions.
  • The insurance company reserves the right to appoint, at its own expense, counsel to oppose a fee petition or represent the client in an appeal of a fees award.
  • The insurance will follow if the plaintiff is compelled to arbitration by defendant; however, the insurance coverage will not remain if plaintiff compels arbitration or if the defendant under a Defendant Contract Litigation Insurance policy compels arbitration.

The cost of engaging in litigation is oftentimes the determinative factor in deciding whether to enforce or defend one’s contract rights in court. As a result, a party to a contract may elect not to file a breach of contract lawsuit for purely financial reasons despite having a winning case. Moreover, if the loss resulting from a breach of contract is small compared to the costs of filing suit, a party is vulnerable to abuse simply because the other party to the contract knows it is not worth pursuing in court.

When applicable, Contract Litigation Insurance allows a party to a contract dispute to focus on the merits of the case, rather than the attorney’s fees associated with pursuing the case.

If you would like to learn more about Contract Litigation Insurance, or if you would like to discuss how we can help you in identifying and controlling your business risks, please contact us.