Insurers Say Legal Malpractice Claims Hold Steady But Defense Costs Rise

Most leading legal malpractice insurers saw claims level off in 2016 although their cost to defend claims continued to escalate.

A study by insurance broker Ames & Gough finds while the number of malpractice claims brought against law firms is stabilizing, it remains above historical experience in years preceding the 2007 – 2009 recession.

In its seventh annual survey, Ames & Gough examined the trend by polling nine leading lawyers’ professional liability insurance carriers that provide insurance to approximately 80 percent of the top 100 firms on a combined basis. Among the findings:

• Claim severity high. In 2016, all nine insurers surveyed had claims with reserves over $500,000. For the third consecutive year, six of the insurers reported having 21 or more such claims. And in the past two years, the same number participated in paying a claim of $50 million or more, including one with a claim exceeding $100 million.
• Conflicts trigger most claims. In every year the survey has been conducted, insurers have cited conflicts of interest (including perceived conflicts) as the most common alleged legal mal-practice error. This year was no exception; eight of the nine insurers surveyed cited conflicts as the first or second biggest leading cause of legal malpractice claims.
• Costs to defend claims rising. This year, the nine insurers surveyed unanimously experienced an increase in the cost to defend legal mal-practice claims. Eight insurers indicated the average costs to defend a typical malpractice claim exceed $50,000; three saw costs between $100,000 and $500,000, and two indicated average costs are more than $500,000. Claim complexity and e-discovery are two clear drivers of this trend.

“Too often, conflicts are an afterthought when attorneys move from firm to firm, and even when conflicts surface, they are often ignored or overlooked. And that’s when they become costly,” said Eileen Garczynski, senior vice president and partner at Ames & Gough.

Nearly half the insurers polled cited an uptick in claims from lateral hires. Half of these firms traced claims to law firms not adequately resolving a conflict of interest. One insurer pointed to a lateral hire or “merged” attorney not being trained or supervised properly, and another to the attorney continuing work for a client of their prior firm.

“It pays to be smart about the hiring process altogether and extra cautious in deciding whether to bring in an attorney whose conflicts might result in disqualification of the firm,” Garczynski said.

Cyber events trigger more malpractice claims. Five of the insurers polled saw more cyber-related legal malpractice claims this year than in prior years. Four indicated most claims involved hackers.

“Besides providing key coverages not included in the typical lawyers’ professional liability insurance policy, cyber-liability insurance policies tailored to law firms can be structured to protect the firm’s professional liability policy limits,” said Garczynski.

Among individual practice areas, surveyed insurers cited business transactions as the source of most legal malpractice claims for the second consecutive year, followed by corporate and securities and trusts and estates.

Along with the volume of company mergers and acquisitions, causes of business transaction claims center around improper preparation, filing and/or transmittal of documents, failure to provide appropriate legal advice, and conflicts. The large number of claims stemming from corporate and securities work and trusts and estates is consistent with previous year findings.

Along with increased cost to defend legal malpractice claims, hourly rates insurers pay defense counsel also rose. Six of the nine insurers saw rates rise by up to 2 percent. Four saw rates increase between 2 to 5 percent, and one saw rates increase more than 5 percent.

While rates vary by location and other factors, the average rate insurers pay defense counsel continues to increase. Five of the nine insurers polled pay hourly rates between $200 to $300. Two pay between $300 to $500, and two pay, on average, more than $550 per hour.

The insurers participating in the Ames & Gough survey were: AXIS, BRIT, CNA, Catlin, Huntersure, Ironshore, Markel, Swiss Re Corporate Solutions and QBE.

Editor’s Note: For a copy of the survey: info@amesgough.com. State “LPL Claims Survey 2017” in the subject line.