The number of legal malpractice claims resulting in larger multimillion dollar payouts – as well as the dollar amounts involved – has surged in the past year, with at least two settlements exceeding $250 million.
That’s according to the latest study by insurance broker Ames & Gough that says law firms are being pressured to do more with less and are facing greater scrutiny from corporate clients over their fees and performance. It also says more firms also are dealing with a growing number of multimillion dollar legal malpractice claims and their potential impact on their business and reputation.
For its ninth annual survey of lawyers’ professional liability claims, Ames & Gough polled 11 lawyers’ professional liability insurance companies that on a combined basis provide insurance to approximately 80 percent of the Am Law 200 firms.
According to the broker, 2018 became the first year ever in which the majority of insurers surveyed had a claim payout of over $150 million.
“Today, the greater complexity of matters and the higher costs to defend malpractice claims, including rising attorneys’ fees and e-discovery costs, are part of what’s driving the alarming increase in claim severity,” said Eileen Garczynski, senior vice president and partner, Ames & Gough. “It’s also clear the landscape for law firms is shifting; clients are now much more willing to point fingers at lawyers to seek financial redress when outcomes don’t meet their expectations.”
There has been a spike in costs to defend malpractice claims. Among the insurers surveyed, 10 of 11 indicated defense costs increased in 2018 over the prior year. Two indicated the average cost to defend a claim exceeded $500,000; three stated their average defense costs were between $100,000 and $500,000, and the remaining six insurers all had an average cost between $50,000 – $100,000.
At the same time, the rates insurers are paying defense counsel are continuing to rise. Among insurers surveyed, 63 percent saw an increase in rates paid to defense counsel during the past year with four reporting an increase of 2-5 percent and three, up to 2 percent.
Conflicts of interest remain the biggest malpractice error. Year after year, the insurers surveyed have singled out conflict of interest (including perceived conflicts) as the most common alleged legal malpractice error. This year, seven of the 11 insurers surveyed cited conflicts either as the first or second leading cause of legal malpractice claims.
Conflicts are increasingly problematic as more law firms seize opportunities for growth and expansion either through mergers or by bringing in lateral hires, according to the survey, which notes a lawyer changing firms can contaminate the new firm with information learned at the prior firm.
“To get control of this risk more firms are centralizing their conflicts of interest screening and managing the client intake process,” Garczynski said. “While that’s a step in the right direction, law firms still need to do a better job of flagging potential conflicts early and training their legal professionals on this issue.”
As in prior years, the current survey found the largest number of claims stemming from four practice areas: Business Transactions (cited by 63 percent of insurers surveyed), Trust and Estates (55 percent), Corporate & Securities (45 percent), and Real Estate (45 percent).
In business transactions, related malpractice claims are almost always made after the transaction is concluded, when hindsight is perfect. In addition, some attorneys handling business transaction matters face the possibility of claims if they wander outside their area of expertise.
“To reduce the risk of straying outside their expertise, engagement agreements should clearly define the role of the attorney for a particular matter – and the attorney should stick to that role,” Garczynski said. “Attorneys need to know when they may be getting into areas outside the scope of the agreement and continuously document in writing the aspects of the matter they are working on.”
Lawyers performing estate, trust and probate work have become increasingly vulnerable to malpractice claims as more “Baby Boomers” retire and heirs and beneficiaries have disputes over estates, Ames & Gough specialists note. These actions often target attorneys for mis-drafting estate planning documents, failing to appreciate tax consequences, erring in representing their clients during litigation, or failing to act in an acceptable fiduciary capacity over estates and trusts.
The insurers participating in the Ames & Gough survey were: AXA XL, AXIS, Brit, CNA, Crum & Forster, Huntersure, Liberty, Markel, Sompo, Swiss Re, and Travelers.
Source: Ames & Gough: Law Firms Wrestle with Higher Malpractice Claim Severity, Costs, Uptick in Frequency.
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