Law Firms Face Increased Liability Risks Warns Marsh

June 16, 2008

A bulletin from Marsh’s London office warns that the economic downturn in the US and many parts of Europe, caused by the contraction of readily available credit in some spheres, may well increase the incidence of professional liability claims against law firms during the next 12 months.

“However, Marsh also indicated that despite the threat, it “believes that the market for Solicitors’ Professional Indemnity (PI) cover remains very soft due to an abundance of available capacity.”

Marsh identifies the following as some of the professional liability claims that may arise from the slow down in the economy:
– Contract scrutiny: Experience shows that contract details are more heavily scrutinized during periods of economic downturn. Law firms are more susceptible to action on drafting errors and discrepancies; poor proof-reading and ambiguous translation of arithmetical formulas into narrative can lead to claims.
– Looking for others to blame: frequently, the scoping of engagement is not sufficiently robust, and formal disengagement is not usually a standard process at major law firms. This means that when things do not work out as a client desires, the client may attempt to seek compensation from the law firm alleging poor advice. These claims gain credibility when the firm has not have made clear to its client the scope of engagement and disengagement on the transaction; i.e. when their duty begins, how far it goes, and when it ends.
– Implications of the economic downturn on staff levels: a knock-on effect of the economic downturn is that incoming work in some areas is starting to slow, for example in the representation of property developers. Redundancies are already being announced in some larger law firms.
– Client selection: will firms be tempted to take on the ‘wrong type’ of client as good work slows down? Firms need to take positive steps to resist the temptation to take on the wrong type of client in the leaner times ahead. With the increase in examples of organized crime backing businesses, firms need to ensure they steer away from taking on work for companies with dubious backgrounds.
– Impact on smaller businesses: Smaller law firms could be affected by an increase in the detection of mortgage fraud. Some insurers have remarked to Marsh that incidences of mortgage fraud backed by organized crime have begun to surface in the claims notifications of some of the smaller law firms involved in, particularly, ‘buy to let’ transactions.

Commenting on the trends, Sandra Neilson-Moore, European Practice Leader for Law Firms’ Professional Indemnity at Marsh, noted: “More claims against law firms, particularly for drafting errors or incongruities, is likely over the next 12 months as the effects of the economic slow down continues to bite.

“Now, more than ever, firms should pay close attention to managing their risks. Risk management among the UK’s largest 100 law firms is generally good, but there are still those that need to implement robust risk management procedures to reduce the causes of claims and increase their ability to successfully defend themselves against professional liability allegations.

“Despite the likelihood of increased claims as a result of the current economic slowdown in some parts of the world, law firms generally can expect the soft market for PI cover to continue. Capacity is plentiful and rates are likely to remain favorable for the immediate future.”

Source: Marsh – www.mmc.com or www.marsh.com

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