Contract Litigation Insurance Version .2 – An Upgrade.
In our August 3 and 6, 2010 posts and our March 8, 2011 post, we have followed a particularly intriguing insurance product geared directly to the issue of attorneys fees -- Contract Litigation Insurance offered by Sonoma Risk Insurance Agency. We described the coverage in depth in those prior posts -- but again, it is a new form of insurance coverage for an adversary's attorney's fee award after trial or summary judgment, subject to certain conditions, exclusions, and underwriting standards.
We had the opportunity to recently speak with Sonoma Risk CEO, Kevin B. Martin, who offered up some valuable new information regarding their innovative product.
Having started sales only since 2010, Sonoma Risk has sold now nearly $15 million in policies to litigants in states across the country, with the majority of sales from California. The growing number of policies and amounts of coverage tells us one thing we have always said -- paying an adversary's lawyers is one of the main risks worrying plaintiffs and defendants in contract litigation. And it is a bitter pill to swallow when that court awarded fee award arrives after trial or summary judgment and a litigant has to shell out large sums of money to their opponent's lawyer at a time when resources are most depleted. We can see why litigants want to insure against that looming risk.
As reported before, Sonoma's Contract Litigation Insurance product (which, by the way, is available to both plaintiffs and defendants in contract actions) has only relatively few and simple exclusions, as far as insurance policies go. As of our last post, the three exclusions were: (1) "bad boy" fraud; (2) no fees awarded if there is a resolution other than a merits-based prevailing party determination (if you settle, default judgment, voluntary dismissal, stipulation); and (3) no fees awarded for post-rejection fees incurred after rejection of a Code of Civil Procedure section 998 offer (although pre-offer fees are covered).
Mr. Martin told us that Sonoma received some important feedback and input from us, insureds and other counsel regarding the third exclusion. Sonoma heard the concerns and worked with Zurich to significantly refine the exclusion language and provide insureds with more comfort. Here is the new policy language:
"The amount of attorneys’ fees incurred by the Named Insured’s “adversary” up to the time when the Named Insured rejects an “Offer of Compromise”, if we have withheld consent to the rejection of the “Offer of Compromise”. For purposes of this provision, consent to the Named Insured’s rejection of an “Offer of Compromise” shall not be unreasonably withheld. Any information or materials provided to us by the Named Insured pursuant to this section shall be made in accordance with any applicable common interest privilege shared by us and our Named Insured and shall not be a waiver of the privilege."
With this change, we believe an already beneficial policy is even that much stronger for insureds. Now, as long as the rejection was not unreasonable, Zurich won't stop paying after a 998 rejection. We always thought one of the drawbacks of the old policy form was that if an insured received a 998 offer, the coverage stopped after the rejection of the offer (regardless of whether rejection of the offer was reasonable etc.). Insureds then would not get the full benefit of the coverage. This is no longer a concern. Given this change, obtaining coverage should you face the risk of paying an adversary's fees is a smart decision. It will enable litigants to handle their case on the merits without operating under duress or simply responding from the fear of potentially paying their opponent's lawyers.
As we've tracked this program since its launch, we have seen just how much the legal community has embraced and positively responded to this "game changer" in contract litigation. It has been the subject of legal periodicals, as well as conferences and panels we have attended. There is a buzz about it because, among other things, it evens the playing field (something definitely needed in these economic times) and offers hope to many litigants who previously shyed away from pursuing valid claims.
And, as a practitioner in this area and someone who has worked in attorney malpractice world as well, we believe standard of care requires that attorneys advise on coverage and document that discussion. We have spoken to experts in California regarding fee arrangements, and several have advised that retainer agreements should be changed to reflect a discussion of CLI with clients. We agree.
For more information regarding Contract Litigation Insurance, contact us or go towww.sonomarisk.com. Mr. Martin can be reached at their Los Angeles, California offices at 310-954-1522.
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