Uptick in Lawyers’ Liability Claims; Business Transactions Top Claim: Study

July 22, 2016

Law firms have seen an increase in the frequency of malpractice claims, which are becoming more costly to defend and could cause lasting reputational damage, according to a new study by insurance broker Ames & Gough. The study found that most legal malpractice insurers saw an increase in the frequency of new claims in 2015, including larger claims with costs in excess of $50 million.

In its sixth annual survey of lawyers’ professional liability claims, Ames & Gough examined the trend by polling nine lawyers’ professional liability insurance companies that on a combined basis provide insurance to more than 60 percent of the AM Law 100 firms.

Five of the insurers reported greater malpractice claim activity in 2015 compared to the prior year; four reported seeing a similar number of claims both years. Overall claim volume had been stable in 2013 and 2014, even as the number of larger claims continued to rise.

In the past two years, eight of the insurers surveyed participated in paying a claim of $50 million or more, including two that participated in a claim exceeding $100 million. Six of the nine insurers surveyed reported they had 21 or more claims with reserves of $500,000 or greater (combined indemnity and defense costs), the same number as in 2014.

Business transactions appear to be triggering the largest amount of claims. With the U.S. economy performing well and record-setting merger-and-acquisition activity, business transactions, cited by 67 percent of the insurers, accounted for the largest source of legal malpractice claims in 2015. In addition, the real estate and trust and estates areas of practice – each cited by 56 percent of the insurers surveyed – continue to be thorny areas for law firms.

“Even though business transactions may be a staple practice for a large number of law firms, many often underestimate the related risks,” said Eileen Garczynski, partner and senior vice president of Ames & Gough. “This area of law typically requires diverse skills and activities, including complex contract drafting, review and analysis; it may also involve different practice areas or industries where an attorney or firm may have limited experience. As a result, firms must make sure they’re qualified to handle these assignments, provide appropriate documentation and work to avoid potential conflicts.”

Conflicts remain top cause of claims, the survey revealed. In each of the six years the survey has been conducted, insurers cited conflict of interest as the most common alleged legal malpractice error. This year, five of the nine insurers surveyed ranked conflicts the single biggest leading cause of legal malpractice claims; one other insurer considered it the second leading cause. Further, among the nine insurers surveyed, five reported an increase in claims resulting from lateral hires or firm mergers.

“Conflicts typically come into play as law firms seek to grow either through mergers or by bringing in lateral hires,” Garczynski noted. “Besides having these hires provide a complete list of their current and past clients, firms should conduct comprehensive cross-checks and validation sessions to enhance their chances of catching conflicts before there’s a claim. Too often, law firms don’t act quickly enough to address potential conflicts.”

Cyber Risk

The survey found cyber risks to be a looming threat. Even though cyber risks don’t appear to be triggering many malpractice claims for law firms, they have been susceptible to these exposures. For the second consecutive year, three of the insurers surveyed reported having a lawyers’ professional liability insurance claim arise from a cyber or network security event.

“We’ve seen some high-profile incidents involving law firms, so it’s clearly an area of increasing risk,” said Garczynski. “Firms need to make sure they have taken measures needed to secure all client information and their own to reduce the chances of disclosing any confidential information. They also should assess their needs for specialized cyber insurance to protect themselves against the financial consequences of a breach or related loss.”

The insurers participating in the Ames & Gough survey were: AIG/Lexington, AXIS, BRIT, CNA, XL Catlin, Huntersure, Ironshore, Markel, and Swiss Re Corporate Solutions.

Ames & Gough is a specialty insurance brokerage founded in 1992 serving law firms, design professionals, and other consulting firms and professional organizations and associations. The firm has offices in Boston, Philadelphia, and Washington, DC. Visit the Ames & Gough Website at www.amesgough.com.

Source: Ames & Gough

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