Insurer writing 'loser pays' policies to defendants

By Jessica M. Karmasek | Aug 5, 2010


LOS ANGELES (Legal Newsline) - One of the country's leading writers of insurance policies for businesses is partnering up to launch a first-of-its-kind contract litigation insurance policy to protect defendants from "loser pays" provisions.

Zurich, in partnership with Sonoma Risk Insurance Agency, announced the expansion of its contract litigation insurance program earlier this week. The program already covered plaintiffs.

Sonoma Risk Founder and CEO Kevin Martin said the new Defendant Contract Litigation Insurance program is designed to insure a defendant in a contractual lawsuit against the risk of paying their adversary's attorneys' fees if unsuccessful in defending a breach of contract claim.

"Loser Pays" provisions and statutes are on the rise, Martin said, with many states having adopted a mandatory statutory right to recover attorneys fees in contract disputes. More contracts between businesses, and individuals, are including such provisions.

And litigation, he admits, is becoming increasingly expensive.

"For litigants, it's a big risk. And it comes at the worst possible time," Martin said of having to pay an adversary's attorneys fees.

Craig Fundum, president of programs and direct markets for Zurich North America Commercial, agreed.

"The financial liability of paying your adversary's legal fees is a serious concern for many today, and we are excited to now offer defendants the opportunity to better manage this financial risk," he said in a statement.

"Indeed, the Bureau of Justice Statistics recently reported that, on average, two out of three defendants in contract cases lose at trial."

Martin said the insurance program is designed to address that risk, and, in some cases, help level the playing field for some litigants. He points to those David vs. Goliath cases.

"You may have one litigant who is of lesser means than the other," he said.

Those with lesser means might not be able to prosecute or defend their case as vigorously because the risk of paying an adversary's fees is too high, he said.

Both the defendant and plaintiff contract litigation insurance offers reduced financial risk exposure; enables companies or individuals to pursue strong claims; and allows general counsels and business owners to budget litigation costs more effectively.

Another benefit: The company doesn't get involved in how clients defend or prosecute their cases. This is unique in the legal field, Martin said.

There's also not a lot of subjectivity, like with most insurance companies. Martin points to the claims process.

"A lot of times, you submit a claim through your carrier and they look at if it's reasonable or not reasonable," he said. "Ours is very, very straightforward."

The insurance program also helps attorneys to avoid any "Monday morning quarterbacking," he said.

Martin said there's already been a tremendous response in the legal community to the insurance program.

"Lawyers love it," he said. "They believe it can help their clients."

Fundum agreed, "Because the professional and ethical responsibilities of attorneys demand that they thoroughly assess the strengths, weaknesses and uncertainties of their clients' cases, many in the legal community have quickly adopted discussing the benefits of contract litigation insurance as a best practice.

"There is simply a greater necessity today for attorneys to be sensitive to the financial risk exposure of their clients," he said in his statement.

Martin said they've made the suggestion that the insurance program is a best practice in retainer agreements. Several attorneys, he said, have already updated their retainer agreements.

As far as cost, Martin said it's all relative.

"Let's face it, litigation is extraordinarily expensive. Everyone hates litigation because it is so expensive. Our premiums, compared to the cost of litigation, is considerably less," he said.

"We feel it's well worth it. It's a small fraction compared to what they've already committed to spending on litigation."

To provide the maximum amount of flexibility to businesses and individuals, the defendant contract insurance can be applied for within 60 days from the date a defendant is served with a complaint. The policy coverage period matches the duration of the litigation and is triggered when the plaintiff prevails at trial or summary judgment.

Martin said the insurance program, which launched in California, is available in every state.

For Legal Newsline: Reach Jessica Karmasek by e-mail at jessica@legalnewsline.com.

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