from the desk of Judy Mendoza
A recently reviewed contract contained the following provision: “In any adjudication or claim under this Agreement, reasonable and necessary attorneys’ fees may be awarded to the prevailing party.”
Any agreement on the recovery of legal fees by the prevailing party is a contractual condition a firm is free to assume. Professional liability insurance, however, may not cover the risk of the firm paying prevailing party costs related to a successful claim of negligence. The “Exclusions” section of the CNA professional liability policy specifically pertains to costs “arising out of the liability of others you assume under any oral or written contract or agreement, except that coverage otherwise available to you shall apply to your liability that exists in the absence of such contract or agreement.”
In any professional liability dispute, if the client attempts to recover its legal fees based on the contractual provision, the policy would neither defend the firm against such action nor pay on the firm’s behalf. The firm’s agreement to pay prevailing party legal fees is a contractual obligation chosen by the firm and is therefore its sole responsibility.
With very few exceptions, attorneys’ fees are not generally awarded or recoverable as damages. There are a few statutory causes of action that may permit a prevailing party to recover attorneys’ fees as an element of damages. However, there is no common law entitlement to recover attorneys’ fees. Therefore, professional liability insurance will only cover liability (including liability for the plaintiff’s attorneys’ fees) that would exist in the absence of a contract. There is no coverage for awards that are based on some contractual fee-shifting provision.
Prevailing party provisions often result in the coercion of the weaker party—often the design firm—by the financially stronger client. Even with a professional liability claim there may be pressure to settle, even with minimal liability, to prevent the policyholder from paying the legal fees of the client from the firm’s own assets. Often, a client can find one cause of action such as the breach of a milestone date, a forgotten design detail, or a change order that might be considered negligence on which it could prevail. Then the client can escalate the dispute and exaggerate legal fees. Such a gamble may be too much for the design firm.
While it is not a certainty that a client will use a prevailing party provision to coerce a settlement or that the policy will not cover legal fees, such a provision increases the likelihood of prolonged litigation, the exposure of the design firm’s assets, and the cost of any covered claim.