Lawyers Professional Liability Claims Trends: 2012

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1 Lawyers Professional Liability Claims Trends: 2012 Insurer Survey Introduction & Overview As the U.S. economy continues its gradual recovery from the lingering effects of the global financial crisis, law firms still face a steady stream of malpractice claims. On the plus side, the overall frequency of these claims leveled off over the last year. However, the number of large severity claims increased. The prospect of a large malpractice claim poses an unwelcome and potentially costly challenge for law firms facing a range of other challenges in today s marketplace. To that end, Ames & Gough remains committed to keeping clients informed of insurance market conditions and providing law firms with information that will help them identify the sources of potentially significant claims and manage their professional liability exposure. In the first quarter of 2012, Ames & Gough conducted its second annual survey of senior claim examiners responsible for Lawyers Professional Liability claims. The 2012 survey looks at the volume of claims insurers are experiencing, as well as trends with respect to larger claims. It identifies the types of issues that are most likely to be the cause of malpractice claims and practice areas that have seen the greatest amount of claims activity. We also examine how insurers are managing claims, including their use of outside counsel and rates paid for legal defense. Washington, D.C. (headquarters) 8300 Greensboro Drive Suite 980 McLean, Virginia Phone: (703) Fax: (703) Six of the leading insurance companies that write Lawyers Professional Liability coverage participated in this year s survey, including AXIS, Beazley, CNA, Fireman s Fund, Hartford and Ironshore. Together, they make up more than 75 percent of the overall market for Lawyers Professional Liability Insurance for mid-sized (35 attorneys or more) to large law firms in the U.S. We are grateful for their participation in our study and are pleased to present the findings in this report. Boston 859 Willard Street Suite 320 Quincy, Massachusetts Phone: (617) Fax: (617) Philadelphia 1781 Hunters Circle West Chester, Pennsylvania Phone: (610) Fax: (703)

2 Survey Findings 1) Legal Malpractice Claims Frequency Is Leveling Off. 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 participating in the survey indicated that 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%. Because claims against lawyers can be a lagging indicator of the state of the economy (when a recession hits, insurers expect to see an increase in both frequency and severity of claims against lawyers in the following years) no increase in the number of claims may be yet another bellwether that the U.S. economy is stabilizing. Lawyers Professional Liability Claims Frequency 2012 vs Same for both years Higher in Insurers polled Despite the fact that new claims filed this year are generally about the same as last year, half the insurers in the survey still have a backlog of claims dating to the early months of 2011, when claims frequency peaked. Three of the six insurers have a higher number of open claims than they did in 2011, and all of the insurers polled each have more than 200 open claims as they work their way through the large inventory of claims from 2010 and This suggests claims are staying open longer, which may be tied to the increased complexity of lawsuits and the difficulty in bringing matters to closure quickly. 2

3 2) Legal Malpractice Claim Severity Has Increased Dramatically Year-Over-Year. While the fact that the number claims hasn t increased may appear to be good news, the bad news is that the number of large claims has risen sharply. Nearly all the insurers have seen an increase in the number of claims with a reserve (including loss and expenses) of more than $500,000 in In fact, two of the six estimated the number has risen by more than 21% since last year; two see an increase between 11-20%, and another sees a 6-10% increase. Although it is likely that several insurers may be on the same claim (if, for example, they are providing excess limits or are quota sharing the coverage), this finding still indicates there is a substantial number of large claims working their way through the system. Anecdotal evidence reveals that a large majority of these claims are from the 2009 and 2010 policy years immediately following the height of the economic recession. Estimated Year-Over-Year Percentage Increase in Large Claims (Combined Reserve Exceeding $500,000) 6% - 10% 1 insurer 2 insurers 11% - 20% No increase (0%) 1 insurer 2 insurers 21% + increase Increased severity can be attributed to various factors. An obvious one is the sheer magnitude of the transactions or of the underlying matters law firms are working on. Given the $500,000 or greater yardstick, increased defense costs can also play a role. In any event, it s clear that per claim indemnity and defense costs are on the rise. 3

4 3) Most Insurers Have Paid a Claim of $100 million or more. The share of claims resulting in multi-million dollar payouts has grown exponentially. Four of the six insurers indicated their company had paid or had participated in paying a claim of $100 million or greater and another had a payment between $50 million - $100 million. As mentioned, multiple insurers are likely involved with the same claim(s) given quota share coverage arrangements and excess limits. Nonetheless, there s no question the proportion of claims resulting in multi-million dollar payouts has expanded. Single Largest Lawyers' Professional Liability Claim Payouts by Your Company $50 million to $100 million $100 million Insurers polled The increasing severity of legal malpractice claims underscores the need for law firms to carefully consider whether or not they have adequate insurance limits to cover and defend a case. The amount of insurance coverage a firm purchases generally should be guided by the types of risks it faces. For example, in some areas of practice (e.g. residential real estate or bankruptcy) the likelihood of a malpractice claim is higher than in other practice areas, but the loss payment on any single claim may be lower. Lawyers in practices where claims frequency may be high but the severity of claims is low may consider lower per claim limits and higher aggregate limits. In areas of practice where claim activity may be less frequent but with a greater potential for significant loss dollars (e.g., corporate and securities, patent, or entertainment law), firms may well need considerable per claim limits. Other factors to consider include the firm s financial wherewithal and its individual philosophy with respect to risk-taking. Consultation with a specialized Lawyers Professional Liability insurance broker can help a firm determine the appropriate limits it may need. 4

5 4) The Largest Number of Malpractice Claims Are Still Coming from Real Estate. Four of the six insurers polled identified Real Estate as the practice area continuing to see the largest number of legal malpractice claims. This is consistent with the findings of last year s survey. However, as predicted in 2011, legal malpractice claims stemming from real estate matters have started to level off, a possible indicator that the real estate market might be on the cusp of a post-recession rebound. In contrast to last year s survey, half of the insurers polled indicated the number of new real estate claims filed this year is flat from the previous year. Corporate and Securities work was the second area of practice insurers listed as experiencing the most claims. Although many claims arise out of work on mergers and acquisitions, and other corporate finance transactions, a large number of malpractice claims stem from Ponzi schemes. When a Ponzi scheme fails, the trustees (to recover funds for the investors in the scheme) often bring claims against the professionals (including lawyers) who assisted (whether knowingly or unwittingly) the Ponzi perpetrator. Practice Areas Generating Largest Number of LPL Claims* Rank 1 Rank 2 Rank 3 Insurer 1 Real Estate Corporate & Securities Business Transactions/ Commercial Law Insurer 2 Real Estate Corporate & Securities Business Transactions/ Commercial Law Insurer 3 Corporate & Securities Collection & Bankruptcy Business Transactions/ Commercial Law Insurer 4 Real Estate Personal Injury Plaintiff Collection & Bankruptcy Insurer 5 Real Estate Personal Injury Plaintiff Family Law Insurer 6 Corporate & Securities Business Transactions/ Commercial Law General Litigation *Note: Survey participants were asked to rank the top three practices generating claims and the chart reflects their multiple responses. Of insurers that listed real estate as the area of legal practice generating the most claims, all but one listed closing errors or contract drafting mistakes as the main reason for claims. Drafting errors can be made for a variety of reasons, including: Lack of attention by the lawyer; A misuse of technology (dropping phrases between drafts or cannibalizing on previous documents); Mistakes in formulas or payment provisions; Misuse of defined terms; Failing to reconcile documents when the deal changes mid-stream; Failing to identify all the parties or investors; or Failing to provide for real estate tax payments in a lease or deal. 5

6 5) The Most Frequent Alleged Malpractice Error Continues to Be Conflict of Interest. Five of the six insurers cited conflict of interest as either the first or second most frequent cause of malpractice claims. Two listed failure to calendar or follow-up as first or second. First and Second Most Frequent Alleged Malpractice Error Largest Second Conflict of Interest Failure to Calendar/Follow-up Failure to Know the Law Failure to File Timely Breach of Fiduciary Duty Fee Disputes Negligent Drafting Litigation Errors Insurers polled A conflict of interest occurs whenever an attorney s loyalties and duties to the client are divided due to the attorney s desire to protect the interests of another client, a third party or even his or her own interests. The potential for conflict exists in many settings and can be extremely problematic for the attorney, as conflicted representation is presumptively poisoned representation. Conflict of interest cases tend to be the most serious type of legal malpractice claims. The severity occurs not only as a result of the profound violation of the duties owed to clients (often present in the cases), but because of the negative impact of such claims on the overall image of the legal profession and the administration of justice. All attorneys have an affirmative duty to identify and address conflicts of interest. This responsibility exists in every phase of client representation, beginning with the initial client meeting and extending beyond conclusion of the representation. Attorneys owe undivided loyalty to their clients. 6

7 6) Most Insurers Increased Defense Counsel Rates in In step with the steadily increasing severity of individual claims has been an escalation of the cost to defend those cases. In 2012, five of the six insurers increased the rates they pay defense counsel. One of the five increased their rates by 5-10%; two increased them by 2-5% and two, by 2% or less. Negotiated rates between insurers and their defense counsel generally vary by jurisdiction and by the type of claim. However, of the insurers polled, two paid between $201 - $250 an hour; one insurer paid $251 - $300 per hour; one paid $301 - $400 per hour; and two paid $401 per hour or more for defense counsel. Average Hourly Rate Insurers Pay Defense Counsel (2012 vs. 2011) $401 + $301 - $ $251 - $300 $201 - $ Insurers polled Working with experienced, capable defense counsel is one way insurers can control ultimate claim costs. Defense counsel need to carefully maneuver the increased complexities of litigation, aggressive plaintiff s counsel, and the rising cost of e-discovery, all while managing the possibility of a large claim payout. 7

8 Conclusion: Facing Larger Claims, Law Firms Need To Shore Up Risk Processes With the severity of malpractice claims increasing, law firms should stay focused on their risk management and proactive claims management efforts; ultimately, these efforts will help save firms premium dollars, loss and defense expenses. The manner in which a malpractice claim is handled in the initial stages (including how and when such a claim is reported) often goes a long way in determining whether the resolution of the claim will be satisfactory. Although all of the insurers polled indicated that most (75% - 99%) of their law firm insureds are compliant with the policy provisions regarding claim and potential claim reporting, they also unanimously reported that the main reason for noncompliance is lack of timely reporting of claims or circumstances. Law firms should keep in mind that failure to report claims and potential claims on a timely basis could jeopardize coverage. Understanding the claim-reporting requirements of your Lawyers Professional Liability Insurance (LPLI) policy is essential. Failing to report a claim, or failing to do so on a timely basis can lead to a possible disclaimer of coverage by your malpractice insurer. Although malpractice insurance policies vary in their definition of what constitutes a circumstance, courts will typically look to whether a reasonable person would believe that a matter, at a given stage, could result in a claim. Key indicators that a claim may be made against the firm, and therefore should be reported immediately to the insurance company as a potential claim, include: ABOUT AMES & GOUGH Ames & Gough, founded in 1992, has established itself as a committed, superior resource for law firms, design professionals, and other consulting firms and professional organizations in need of professional liability insurance and risk management assistance. In recent years, the firm has expanded its capabilities to include management liability, employment practices liability, kidnap & ransom and related insurances; as well as more typical property and casualty insurances. The firm has offices in Boston, Philadelphia, and Washington, DC. Visit the Ames & Gough website at A client questions the actions of counsel after the case has concluded; or after a motion has been lost. An attorney discovers an error in legal work. There is an unexpected jury verdict against the client; or after the attorney has advised against accepting a settlement offer. A default judgment is entered against the client due to a missed filing deadline. The client changes counsel. The firm sues a client for fees. The client files a grievance against one or more of the attorneys at the firm. Be proactive: Understand your policy s reporting requirements, and team with an experienced professional liability insurance broker. These measures can go a long way to reducing the magnitude of an individual claim and its potential financial consequences. Ames & Gough, Marking 20 Years of Client-First Focus Ames & Gough, which officially marks its 20th anniversary this year, is a leading provider of insurance brokerage and risk management consulting services for law firms, architects, engineers, construction and other professionals throughout the U.S. As part of our client first focus, Ames & Gough is committed to keeping clients informed of insurance market conditions as well as key developments in the risk landscape that may influence their potential exposures and ability to manage them. We trust you will find the information in this report helpful in your risk and insurance planning, and we look forward to assisting with your risk and insurance needs in 2012 and beyond Ames & Gough. All Rights Reserved Celebrating 20 years of putting clients first!