Rising legal malpractice claims are hitting US law firms hard, with lawyers’ professional liability insurers seeing greater frequency and severity of claims, according to a new study by insurance broker Ames & Gough.
In its 10th annual survey of lawyers’ professional liability claims, the broker polled 10 leading lawyers’ professional liability insurers, which, on a combined basis, provide insurance to about 80% of AmLaw 100 firms. Ames & Gough found that the number of claims resulting in large multimillion-dollar payouts – as well as the dollar amounts involved – spiked for the second straight year. Most of the insurers surveyed had made a claim payout of more than $150 million in the past two years, and at least two settlements exceeded $250 million.
“Yet, according to the survey, the actual large-claims experience may be worse than reported; due to the increased cost to defend claims, a number of matters settled quickly (to avoid the added expense) with the resulting claims above their primary layer of insurance,” Ames & Gough said.
Claims frequency is also on the rise, in ways not seen for more than half a decade, the survey found. Eight of the 10 insurers surveyed said that the number of claims filed in 2019 was either equal to or higher than the number filed the year before; only two reported fewer claims. Three insurers reported double-digit increases in claims. For the first time since 2018, the majority of insurers surveyed reported higher claims frequency year over year.
“Unfortunately, this trend may not be going away anytime soon,” said Eileen Garczynski, senior vice president and partner at Ames & Gough. “The sustained shutdown of the US economy this year due to the COVID-19 pandemic may trigger yet another wave of legal malpractice claims, similar to what we saw in the aftermath of the 2008 recession.”
Conflicts still most common error
Every year, insurers surveyed in the study have cited conflict of interest (including perceived conflicts) as the most common alleged legal malpractice error. This year followed the trend, with five of the 10 insurers surveyed citing conflicts as either the first or second leading cause of legal malpractice claims.
“Law firms should not underestimate the importance of conducting thorough conflict checks, as well as the need to have systems in place to flag and address any situation involving a potential conflict,” Garczynski said. “This calls for an ongoing and robust internal process that goes well beyond conducting a conflict check upon accepting a new engagement or making a lateral hire.”
Business transactions and corporate and securities were identified as the two practice areas with the largest number of legal malpractice claims for the fifth straight year. Seven of the 10 insurers surveyed cited business transactions as one of the top three practice areas for malpractice claims, while five cited corporate and securities.
“With so much riding on the success of any deal, clients inevitably point fingers at their lawyers when things don’t go as planned,” Garczynski said. “Lawyers have to be proactive here. Once a firm accepts this type of engagement, it should immediately identify any potential risks and make sure they have all the resources and capabilities needed to handle the related work effectively.”
Costs on the rise
The cost of defending malpractice claims continued to climb, the survey found. Nine of the 10 insurers surveyed said that defense costs had increased in 2019. The rates insurers paid defense counsel also continued to rise, with 80% reporting an increase in rates paid to defense counsel during the past year.