These clauses represent a real and potentially significant exposure for AEC firms for which there’s no insurance protection.
Owners and their attorneys have found a new wrinkle in their efforts to transfer risk to design firms: many are now inserting prevailing party clauses in contracts.
In many instances, these clauses might be hidden in innocuous places where they may be easily overlooked. However, they represent a real and potentially significant exposure for architecture and engineering firms – for which there’s no insurance protection. What’s also worrisome is that once a clause becomes more widely used in the industry, more clients and their lawyers begin to insert them in their standard design contracts.
Design firms need to be especially concerned about the lack of protection. Indeed, no insurance policy covers legal fees awarded under a prevailing party clause. And, make no mistake, these fees can be substantial. In construction litigation, attorney fees can rival – or even exceed – an award of damages, so the uninsured exposure can be huge.
Professional liability policies contain a contractual liability exclusion which typically reads something such as the following: “This policy does not apply to any Claim based upon or arising out of liability assumed by an Insured under any contract or agreement, whether oral or written, except to the extent that the Insured would have been liable in the absence of such contract or agreement.”
Even though the risk might appear to be minimal because in fact only a few cases these days actually go to trial, the potential of this huge uninsured exposure can dramatically alter the dynamics of any settlement discussions.
For example, if such a clause exists, there is an automatic wedge driven between the design professionals and their insurance carriers. The latter may expect a contribution from their insured in addition to the policy deductible to settle the case. In effect, the clause enables the party making the claim to legitimately include their legal fees expended to date into their damage model – and that is the “damage” your carrier will not consider.
Another issue is that most contracts lack a clear definition of a prevailing party. For instance, if your client sues you for $5 million and is ultimately awarded $50,000, have they prevailed? Some courts would say yes – and the attorney fees in such cases will most likely far exceed the actual award.
Even in situations where the prevailing party clause is mutually agreed upon, the risk to the design professional far outweighs the risk to their client. The design professional may have a fee claim, which is generally modest and inexpensive to pursue. Should the designer make a fee claim, and a counterclaim is filed, the inequity of the potential result is enormous.
In the United States, parties pay their own legal fees by law, whether they win or lose. There are other countries where that is not the case; however, in these instances, if you agree to something in your contract that exceeds your common law liability, then you are on your own with respect to the awards associated with those provisions.
So, watch out for any clauses that state: “... if any action at law or equity or other proceeding is brought to enforce or interpret the terms of this Agreement, the prevailing party in such action or proceeding shall be entitled to reasonable attorneys’ fees and costs which the court or other decision maker may award....”
Beware as well a more simplified version of that language, such as: “The prevailing party in any court proceedings shall be reimbursed by the other party for all costs, expenses, and charges, including reasonable attorneys’ fees, incurred by said prevailing party ....”
Be sure to strike these clauses from the contract. In any negotiations, make the point that your fee structure does not take into consideration what ultimately may be a substantial uninsured exposure. That’s not to mention the fact that the perils and anxiety inclusion of these types of clauses will bring to you and your firm should a claim be pursued on a project are simply not worth whatever fees you may earn.
Lauren Martin is a risk manager and claims specialist at Ames & Gough. She can be reached at firstname.lastname@example.org.