With very few exceptions, attorneys' fees generally are not awarded or recoverable as damages in adjudication of a dispute between two parties to a contract. Typically, under the “American Rule” in civil litigation, there is no entitlement at common law to recover attorneys’ fees as damages.
Therefore, the issue as to whether a professional liability insurance policy would cover attorneys’ fees awarded as damages focuses almost exclusively on the basis for the award. That is, professional liability insurance will only cover liability, including liability for attorneys’ fees that would exist in the absence of a contract. There is no coverage for awards based on a contractual fee-shifting provision.
Professional liability insurance policies uniformly exclude coverage for 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.” Therefore, when a client adds a prevailing party legal fees provision to a contract, the uninsured exposure should change the compensation demanded by the design firm since the provision creates an additional level of risk for the firm.