Litigation Insurance in the United States
Litigation Insurance Cover: Contract Litigation Insurance (CLI)
by Mike Rosen
California Court of Appeal Justice Edward J. Wallin once famously described attorneys fees as “the tail that wags the dog” because the prospect of writing a check to an opponent’s lawyer can encourage even people with meritorious contract disputes to settle out of court. A new safeguard–contract litigation insurance (CLI)–offered by a Los Angeles agency could change the way business gets done.
As with other forms of insurance, CLI policyholders pay a premium to financially inoculate themselves from legal disaster, such as having to pay an adversary’s attorneys fees after losing at trial. “This is something that we think will level the playing field and help strong cases move forward,” says Kevin Martin, CEO of Sonoma Risk Insurance Agency, the only American company to provide such coverage.
Sonoma Risk began selling CLI about 2010, and so far 95 percent of its clients–which include real estate and construction companies–are based in California. Collectively, they have bought more than $9 million in policies to cover specific contract cases, paying one-time premiums, ranging from less than $1,500 to about $230,000 (policies are typically purchased soon after a complaint is served or received). But not everyone qualifies; the provider decides whether to award a policy based on information such as the prospective client’s litigation history.
Similar insurance products are already common in England and Canada, where courts routinely order losing parties to pay their opponent’s legal costs. American courts generally avoid awarding attorneys fees, under the theory that it discourages people from pursuing meritorious cases. Contract law, however, is a notable exception, and “loser pays” provisions are routinely folded into contracts in an attempt to discourage lawsuits. Of the roughly 4 million contract disputes filed annually in U.S. courts, as many as 70 percent involve covenants with fee-shifting provisions.
Experts speculate that the option to buy contract litigation insurance could significantly alter the calculus for taking a case to trial. “Attorneys fees are very significant in deciding whether to go to court,” says Marc Alexander, a business litigator at AlvaradoSmith in Santa Ana and a contributor to the blog California Attorney’s Fees. “It’s possible for fee-shifting provisions to greatly add to the risks of litigation, and many lawyers and clients are risk averse.”
Sonoma Risk makes a point of offering new coverage even as litigation of a particular matter heats up, although at that point, premiums increase. “Attorneys fees hit a client just when their assets are most depleted,” Sonoma Risk’s Martin explains. “You can apply for this insurance when the proverbial house is on fire.”
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See Also
- Transnational Litigation
- Life Insurance
- Umbrella Insurance
- Institutional Litigation
- Constitutional Litigation
- Interest Group Litigation
- Workers Compensation Litigation Procedures
- Title Insurance
- Liability Insurance
- Litigation
- Lawsuit