In Texas, if proper presentment of a claim is made pursuant to
Section 38.001 of the Texas Civil Practice and Remedies Code, a party
that sues another for breach of an oral or written contract is entitled
to recover, in addition to the amount of the underlying contract claim,
its reasonable attorney's fees. This statute also extends the ability
to recover attorney's fees to claims for services rendered, labor
performed, and material furnished, among others.
In the past, a
company sued for breach of contract was "on its own." In other words,
the company was responsible for paying any settlement, judgment, and/or
attorney's fees incurred in defending the action. The fact of the
matter is that traditional commercial general liability policies do not
cover insureds for claims for breach of contract. However, it appears
that a new line of coverage is being offered by at least one insurance
carrier that would offer insurance coverage "that pays for attorneys'
fees if the covered party loses at trial or summary judgment." I
understand that it was initially rolled out in California, and is now
expected to be written in several other states, including Texas.
In
commercial/contract disputes, attorney's fees can often far exceed the
amount of the underlying amount in controversy, and it is not uncommon
for an attorney representing a plaintiff in a commercial dispute to
threaten to "run up" the attorney's fees in an effort to squeeze the
defendant business into settling an otherwise tenuous lawsuit to avoid
the uncertainty of potentially facing a considerably larger verdict
following a trial on the merits.
The ability of a business to
have insurance coverage for "loser pays" attorney's fees would offset
the settlement negotiation leverage mentioned above because it would
eliminate uncertainty. With this coverage, a business owner who is sued
for breach of contract would be able to assess the company's risk based
solely on the amount of the contract damages and not based on the
uncertainty of what amount a jury might award for attorney's fees
following a trial on the merits.
I have been unable to date to
obtain an actual insurance policy containing this new line of coverage,
but I suspect that the underwriting guidelines are strict with coverage
being limited to established businesses that have been involved in a
limited number of lawsuits involving contract claims. Moreover, I
suspect that even with breach of contract coverage, substantial
litigation will ensue regarding whether the insured knew or should have
known of the potential that it would either need to sue for breach of
contract or would be sued for breach of contract when the policy
application was completed.
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