Although the frequency of malpractice claims brought against law firms in the U.S. appears to be leveling office, the number of large claims is rising sharply.
A new study by insurance broker Ames & Gough finds a growing number of leading malpractice insurers have paid claims in excess of $50 million.
Ames & Gough polled six insurance companies that on a combined basis work with more than 75 percent of large and midsized U.S. law firms. Four of the six insurers reported their company had paid or had participated in paying a claim of $100 million or greater and another had made a payment of $50 million to $100 million. The insurers participating in the survey were: AXIS, Beazley, CNA, Fireman’s Fund, Hartford and Ironshore.
Similarly, nearly all the insurers said they have seen an increase in the number of claims with a reserve (including loss and expenses) of more than $500,000 in 2012. In fact, two of the six estimated the number of claims that size has risen by more than 21 percent since last year; two see an increase between 11 – 20 percent, and another sees a 6 – 10 percent increase.
“In claims involving multi-million dollar payouts, multiple insurers are likely involved with the same claim given quota share coverage arrangements and excess limits,” said Eileen Garczynski, a vice president of Ames & Gough. “Still, there’s no question the proportion of claims resulting in multi-million dollar payouts has expanded.”
She traced the dramatic increase in large claims to a variety of factors, including the sheer magnitude of the transaction or of the underlying matters on which law firms may be working, as well as the elevated defense costs associated with complex litigation related to the malpractice suits.
The insurers cited “real estate” as the practice area generating the largest number of legal malpractice claims, followed by “corporate and securities” work, which encompasses merger and acquisition activities as well as other corporate finance transactions.
Meanwhile, “conflict of interest” continues to be the most frequent alleged malpractice error, ranked first or second by four of the six insurers. Two insurers listed “failure to calendar or follow-up” as first or second.
According to Garczynski, the increasing severity of legal malpractice claims underscores the need for law firms to consider whether they have adequate insurance limits to cover and defend a case.
“Generally, the amount of insurance coverage a firm purchases and the structure of its insurance program should be guided by the types of risks the law firm face,” she said.
She said that in some practice areas, such as residential real-estate and bankruptcy, the likelihood of a malpractice claim may be higher, but loss payment on any single claim may be lower. In such situations, law firms might consider lower per claim limits and higher aggregate limits.
Alternatively, in practice areas that typically see less frequent but potentially large claims, such as corporate and securities, patent, or entertainment law, firms may need considerable per claim limits. According to Ames & Gough, other factors to consider with respect to the purchase of malpractice insurance include the firm’s financial position and its individual philosophy with respect to risk-taking.
If there’s some good news this year about malpractice suits brought against law firms, it appears to be that claim volume isn’t growing. All but one of the insurers in the survey indicated the number of new claims filed in 2012 is flat compared to last year. This is in stark contrast to 2011 when more than half the insurers polled reported the number of claims had increased by 6 – 10 percent.
Source: Ames & Gough