Law firms throughout the U.S. continue to face escalating malpractice risks as economic conditions, attorney migration and emerging exposures trigger new lawsuits and social inflation drives up claim costs, according to a new study by insurance broker Ames & Gough.
In its 13th annual survey of lawyers’ professional liability claims, Ames & Gough examined the trend by polling 10 leading lawyers’ professional liability insurance companies that on a combined basis provide insurance to approximately 80 percent of the Am Law 100 firms.
The survey traced rising claim costs to such factors as: higher legal defense costs due to social inflation, aggressive tactics by plaintiffs’ counsel, the swarm of new litigation on top of a backlog of cases that arose during the COVID-19 pandemic, and the increasing complexity of cases – especially those involving corporate transactions, tax, and immigration.
Even though legal malpractice claims frequency has stabilized during the past few years – only two of the 10 insurers surveyed saw an increase in the number of claims last year while six had no change from the prior year and two saw their claims frequency decrease – rising claim severity continues to be a major challenge for law firms.
This year, most insurers again reported significant claims volume in 2022 with substantial reserves and large payouts.
Seven of the 10 insurers surveyed had participated in a claim payout of more than $50 million in the past two years; three paid a claim of more than $100 million; and two paid claims between $150 million - $300 million.
For the third consecutive year, insurers surveyed saw the largest numbers of malpractice claims related to three practice areas: Trust & Estate; Business Transactions, and Corporate & Securities. In addition, insurers cited increasing cases arising from Insurance Defense and Tax work/matters; they also expressed growing concerns about Immigration law.
“We’re seeing the largest generational transfer of wealth in history, so in terms of sheer volume alone it’s not surprising that Trust & Estate has become a significant source of lawsuits,” said Eileen Garczynski, senior vice president and partner, Ames & Gough. “Among a lengthy list of best practices for managing potential exposures, law firms need to be diligent in documenting their communication with clients, adhere to confidentiality requirements, and make absolutely clear whom they’re representing in family matters and who is not their client.”
With respect to other practice areas, insurers foresee a potential groundswell of litigation surrounding immigration cases. Accordingly, law firms need to ensure they’re qualified to handle these matters.
“Given rapidly changing laws and high stakes associated with immigration cases where an error might result in deportation, law firms need to appreciate the complexity involved along with the specialized knowledge required to handle these matters,” Garczynski warned.
“In their quest for growth, there’s a risk some law firms might try expanding into immigration law without acquiring the requisite expertise, which could spell disaster.”
Among legal malpractice errors, conflicts of interest continue to be the most significant cause of malpractice claims; eight of the 10 insurers surveyed ranked it the first or second cause. Next is failure to know or properly apply the law, ranked either first or second by three insurers.
“Even though large numbers of conflicts arise from inappropriate handling of lateral hires, certain practice areas such as Trust & Estate are seeing more of these suits,” Garczynski noted. “In fact, there are no shortcuts for addressing conflicts; firms should be proactive in their efforts to anticipate, avoid and manage potential conflicts, including implementing sound procedures for recruiting, interviewing, engaging, and training lateral hires; flagging any issues, and communicating effectively – both internally and with clients.”
Meanwhile, the cost of defending malpractice claims continues to increase. Among the 10 insurers surveyed, nine indicated defense costs increased in 2022 over the prior year. The same number saw rates they pay defense counsel also increase during the past year.
When asked what issues were keeping them up at night, 80 percent listed the war for talent as their top concern, followed by cyber risk, economic uncertainty, attorney well-being, and the increased size of deals and transactions.
“If these insurer concerns aren’t a wake-up call for law firms, they should be,” said Garczynski. “The good news is that most law firms have tools at the ready for anticipating and managing their risks. It often comes down to maintaining a focus on risk management that engages all the firm’s partners, associates, and staff; encompasses all areas of a firm’s operations; and includes a careful assessment of their professional liability insurance requirements.”
The insurers participating in the Ames & Gough survey were ARGO, AXA XL, BRIT, Crum & Forster, Ironshore, Markel, QBE, Sompo, Swiss Re Corporate Solutions, and Travelers. Copies of the survey – “Malpractice Claims Unremitting as Law Firms Grapple with Economic Woes, Social Inflation, and Attorney Migration” – may be obtained free by emailing: info@amesgough.com.
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