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Don't let your contractor clients get stung by hidden “loser pays” exposure
Who requires more specialty insurance solutions than your construction clients? A little-known adversary’s attorneys’ fees clause in surety bonds can create an additional, significant risk when your construction clients enter litigation.

Your subcontractor or contractor clients are always exposed to or threatened by lawsuits from a variety of sources: architects, engineers, owners, other contractors, even the lenders. The traditional insurance policies you provide them cover many, but not all, of the exposures from these lawsuits.

One significant gap in coverage that exists in most traditional insurance policies is the risk of paying an adversary’s attorneys’ fees award after losing in litigation.  This risk quite often stems from a surety bond that is typically integral to any construction project. Because bonds become part of the contract for services, a bond’s provisions generate a new set of potential losses that you must account for when making insurance recommendations to your clients.

"Loser pays" clauses state that if the bond is litigated, the loser of the suit will pay the attorney's costs of the prevailing party. Simply put, if your client loses, they will be held responsible for their adversary’s attorneys’ fees--a risk typically not covered by traditional insurance policies. 

The “loser pays” clause may significantly limit your client’s leverage to effectively negotiate those end-of-the-job payment arguments that so often occur as well as their leverage to negotiate a settlement when litigation is commenced. The owner often uses the “loser pays” clause to withhold money. Your contractor client is then put in a position where he or she must decide how much risk he wants to take in demanding and fighting for money, knowing that if he loses a lawsuit, he will likely be ordered to  reimburse the owner's attorney fees with a loss.

Fortunately, we have a solution to this bond condition that you can offer your construction clients—and it’s another commission opportunity for your agency: The Annual Attorneys’ Fees Edge (AAFE) policy. This affordable annual policy, available to clients not currently in a lawsuit, enhances current coverage by filling in the gap created by the "loser pays" wording in:

Bonds
Contracts
Federal or state statutes
Combination of contracts and statutes
Cases filed in state or federal court, arbitration, or before a regulatory body

AAFE minimum coverage limits are $10,000 and can be provided up to $100,000. Underwriting is flexible. Please fill out the AAFE application and return it to riskmitigation@sonomarisk.com.

Find out how we can help your client—and you. Contact Sonoma Risk today to learn how we can help you add another layer of protection for your construction clients in litigation.

You can also visit our Litigation Insurance Storefront for more information.
Kevin Martin
Other articles by: Kevin Martin
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