Legal Malpractice Claims Costs Are Spiking into the Hundreds of Millions. Here Are Some Reasons Why
After peaking in 2019, legal malpractice claims leveled off in 2020, but cost of legal malpractice claim payouts was the highest ever in the past two years.
The impact of the COVID-19 pandemic going forward is not yet known.
Those are some of the findings of a report by insurance broker Ames and Gough for its 11th annual survey of lawyers’ professional liability claims.
The company surveyed 11 leading lawyer professional liability insurance companies that together provided insurance to approximately 80% of the Am Law 250 firms.
Key Legal Malpractice Claims Findings
The survey found insurers apprehensive about claims that may mature post-pandemic, said Eileen Garczynski, senior vice president and partner at Ames and Gough. Most reported significant volume of claims last year with substantial reserves and large payouts.
Nine of the insurers surveyed participated in a claim payout in excess of $50 million in the past two years, two paid a claim between $150 million and $300 million, and four paid a claim of more than $300 million, the survey found.
Nine of the 11 firms found their claims frequency decreased or stabilized between 2019 and 2020. Of the other two respondents, one saw claims decrease 6% to 10% and the other by 11% to 21%.
The COVID Conundrum
Although the slowdown in frequency may appear to be a silver lining in an otherwise difficult year for legal malpractice claims, this may just be temporary, Garcznski said.
The economic downturn from the pandemic may lead to more claims. In addition, legal malpractice risks are being compounded by adjustments in business practices made by law firms to continue serving clients during COVID-19.
The future for claims remains unknown particularly because the pandemic led to abrupt business closures and an economic downturn unlike any other in term of it cause.
The question is then, what’s going to happen next year, or the year after, or the year after as some of these potential claims work their way through the system”
“We just don’t know,” Garczynski said.
Whatever the cause of an economic slowdown, Garczynski said economic dips tend to correlate with an increase in legal malpractice claims: “When clients feel economic pressure they look for ways to recoup their money.”
The pandemic was unusual in the way it caused business disruptions and law firms and other businesses of all types to close their doors and send employees home to work, which Garczynski said may lead to an increase in errors.
Meeting with colleagues in an online meeting is not the same as ambling down the hall to run a question by a partner or working closely in-person with a team on a contract or other legal matter.
“If you’re working remotely you don’t have someone sitting next to you checking your work,” she said. “If you’re not working in the same context as you would normally, you’re more likely to make errors.”
Another issue that might lead to an increase in claims is the number of new laws that went into effect during the pandemic, of which lawyers may have had difficulty keeping up with.
Garczynski said the failure to know the law was exacerbated during the pandemic by the rapid changes and updates made to numerous laws, including Families First Coronavirus Response Act, updates to OSHA regulations, HIPAA, the Family Medical Leave and Emergency Sick Leave Acts, tax laws and various relief legislation that affected clients in different ways.
Other Survey Responses of Note
Insurers in the survey traced the largest numbers of malpractice claims to three key practice areas: Trusts & Estates, Business Transactions and Corporate & Securities.
This year was the first time that trusts & estates ranked highest among all practices in the number of malpractice claims, which Garczynski attributed to the sheer volume of baby boomers transferring wealth to the next generation.
Another driver of claims in this area may stem from developments in case law that enable third parties, such as a family member, to bring a legal malpractice claim against an attorney for work performed on behalf of an elderly or sick client.
The leading cause of malpractice claims was found to be conflicts of interest, with 7 of 11 insurers ranking it as the first or second cause. The next most common cause is failure to file on time and date-related errors, which were named as first or second by five insurers. The third leading cause was failure to know the law.
Garczynski said law firms should have systems in place to check for conflicts of interest, which may be harder to do in a firm with hundreds of employees rather than one or two.
Reducing the Risk of Legal Malpractice Claims
Despite legal malpractice claims reaching a new height, Garczynski said the insurers highlighted ways to mitigate risk and potentially reduce legal malpractice claims.
Seven of the 11 insurers said a well-crafted engagement letter focused on the scope of the work is essential to avoiding risk.
If you creep outside the scope, that’s often when attorneys get in trouble, she said. If an attorney “screws up,” the client can say, “Oh hey, I didn’t tell you to do this.”
She said the scope should be revisited any time there is a change in the direction of services needed.
In addition, five insurers listed peer review and supervision of work, good client intake, and detailed communication among the most important techniques to avoid legal malpractice claims.
If you know your work is going to be audited, maybe you’ll be a little more conscious about how you do your work, she said.
Good communication with the client can also go a long way to reduce claims. You should be talking to them throughout the case so they feel like that you and they are on the same, Garczynski said. That prevents a lot of ill-will later on.
As one might expect, the survey found the cost of defending malpractice claims continues to increase. Nine of the 11 insurers surveyed indicated defense costs increased in 2020 over the prior year. At the same time, the rates insurers are paying defense counsel are also climbing; 73% of the insurers reported an increase in rates paid to defense counsel in the last year.
The insurers participating in the survey were Argo, AXA XL, Brit, CNA, Crum & Forster, Markel, QBE, Sompo, Swiss Re Corporate Solutions and Travelers. &