Written By Attorney Joshua W. Carden and Lori A. Curtis

“Josh, Lori, I need your help – I’m probably going to be sued.”   Clyde [1] had the glassy-eyed stare common to many potential litigants who have darkened my office door.  Lori Curtis, one of our top transactional partners, scooted her chair to one side and Clyde sat down in the other chair.  “It’s awful,” he began, “I bought an entire container of furniture from this company – when the container got to my warehouse almost every piece was scratched, dinged, or shattered.”   Not hearing the basis for a lawsuit yet, I asked the classic attorney question: “What happened next?”  “Now the seller has sent me a demand letter saying I have to pay for the furniture anyway or he’ll sue me for breach contract – he wants $75,000 to settle!” Clyde waved the letter like a personal ceiling fan – understandable given the heat outside and the heat he clearly felt on the inside.

I grimaced – every Arizona lawyer knows that breach of contract cases are risky to both sides. Arizona law (Arizona Revised Statutes § 12-341.01) allows the court to award attorney’s fees to the “prevailing party” in breach of contract.  “Clyde let’s leave the ‘right and wrong’ out of this case for a minute. There are two issues to consider – if you litigate and win and have to pay zero dollars, you’ll still have had to pay me to defend you.”  It was Clyde’s turn to grimace, “But he’s the seller and I wasn’t supposed to pay until the furniture arrived.”   “I know,” I soothed him, “but it’s impossible to guarantee an outcome of litigation. That leads me to the second issue: if he recovers anything from you, you might have to pay all of his attorney’s fees as he would be the ‘prevailing party’ under the statutes.  That $75,000.00 could turn into $125,000 or more by the end of trial if he won on all counts.”  Clyde slumped back, fanning in earnest now.   I looked at Lori, and thought out loud, “Of course, we could make an early offer of settlement – the same statute will then require measuring our settlement figure against his possible recovery to decide who actually prevailed.”  Lori nodded, but Clyde looked puzzled.  “How does that work?” he asked.  “Let’s say we offer him $10,000.00 to settle the case and, at the trial, the jury only gives him $5,000.00.  The same Arizona statute says that you would be the prevailing party in that case, and the judge could award you all of your attorney’s fees.”  Clyde brightened visibly, “That’s a great idea – go ahead make the offer.”  I wasn’t sure and Lori voiced my concern, “Clyde, that’s not the end of the story; the opposite is still true.”  “So, Lori, what you’re saying is that I could still have to pay his attorney’s fees if I offered $10,000.00 and the jury gave him $15,000.00.”  he asked.  “Exactly,” I replied, “so the risk is still there.  The case doesn’t sound bad; if only we could reduce that risk of paying his attorney’s fees.”

Lori smiled and said “There is a way – I just heard about it last month.”  “Really?!” Clyde and I chorused, “What it is it?”  Lori said three words (new to me at the time) that have changed the game about breach of contract cases: “Contract Litigation Insurance.”   In a nutshell, she went on to explain that some insurance brokers and underwriters are now issuing a specific insurance policy to cover breach of contract attorney’s fees.  Like any other insurance policy, once you pay the premium, the insurance company will pay up to the policy limits for the triggering event – in this case a trial or summary judgment in a breach of contract case where the court orders you to pay the other side’s attorney’s fees.  With such a policy in place, you can confidently litigate the merits of your case, and know that you are protected from any attorney’s fees award up to the amount of your coverage.  Lori told us that the premiums vary based on when you buy the policy, the amount of coverage you ask for, and various other factors.  “The important thing,” she concluded, “is that there is now affordable protection for individuals and small businesses who have a valid case but are fearful of the possibility of losing and having to pay the other side’s fees.

Contract litigation insurance can be a helpful resource if you  are involved in a breach of contract action. For more information on this or any litigation matter please feel free to contact us.

[1]You were first introduced to Clyde in the article about wages paid to outside salesmen.  Clyde is not a real client, but often serves as a good example of how not behave as a client or a business owner.

Joshua Carden and Lori Curtis are both partners with Davis Miles McGuire Gardner, PLLC.  Joshua handles commercial litigation (trials and appeals), including business disputes, employment issues, and real estate, among others.  Lori is a transactional attorney helping individuals and businesses with a wide range of issues including estate planning, business organization, contracts, the sale and purchase of business assets, and advises business owners and professionals in business operations, professional matters and day-to-day legal issues, including advising professionals on how to avoid unfounded complaints and claims in their day-to-day practice. This article is intended to provide general information about the law designed to help users safely cope with their own legal needs. But legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult Davis Miles McGuire Gardner, PLLC (or the law firm of your choice) if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation.