Law Firms and Their Insurers Feel the Pain of Bigger Malpractice Claims

Even as law firms made adjustments to sustain their operations through the COVID-19 pandemic, they were unable to avoid the rising costs of malpractice claims. Indeed, the time period beginning in 2019 through mid-2020 marked the worst two years on record for legal malpractice claim payouts, according to a new survey by insurance broker Ames & Gough.

The survey also found insurers apprehensive about claims that may mature post pandemic; most reported a significant volume of claims last year with substantial reserves and large payouts.

Nine of the 11 insurers surveyed had participated in a claim payout in excess of $50 million in the past two years; two paid a claim between $150 million – $300 million and four paid a claim over $300 million. Altogether, the survey found the number of claims resulting in larger multi-million dollar payouts, and the amounts of these payouts, had increased year over year.

In its 11th annual survey, Ames & Gough examined the trend by polling 11 lawyers’ professional liability insurance companies that on a combined basis provide insurance to approximately 80 percent of the American Lawyer 250 firms. The insurers participating in the Ames & Gough survey were: ARGO, AXA XL, Brit, CNA, Crum & Forster, Liberty, Markel, QBE, Sompo, Swiss Re Corporate Solutions and Travelers.

While claim severity is continuing to trend upward, frequency was flat last year. Nine of the 11 insurers indicated their claims frequency decrease or stabilize between 2019 and 2020. Of the remaining insurers, one saw claims increase by 6-10% and the other, by 11-21%. By contrast, in 2019, 80 percent of the insurers surveyed indicated their claim frequency was the same or higher than the previous year, the first time since 2013 that frequency rose.

“Although the slowdown in frequency may appear to be a silver lining in an otherwise difficult year for legal malpractice claims, it may just be temporary,” said Eileen Garczynski, senior vice president and partner, Ames & Gough. “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.”

Practice Areas

Insurers surveyed traced the largest numbers of malpractice claims to three key practice areas: Trust & Estates; Business Transactions, and Corporate & Securities.

For the first time, Trust & Estates ranked highest among all practices in the number of malpractice claims, which Ames & Gough said is mainly due to the “sheer volume of engagements involving the baby boomer generation as they continue the largest transfer of wealth in U.S. history.”

Another driver of claims activity in this practice may stem from developments in case law that enable third parties, such as a relative or family member, to bring a legal malpractice claim against an attorney for work performed on behalf of an elderly or sick client, according to the broker.

The survey findings also underscored the value of effective communication. Ten of the 11 insurers polled indicated that poor communication – such as not getting client consent, poor documentation of a file, not using or updating an engagement agreement, or saying something derogatory about a client or colleague – was a contributing factor in malpractice claims.

Conflicts of Interest

Among the most common legal malpractice errors, conflicts of interest remains the leading cause of malpractice claims with seven of the 11 insurers surveyed ranking it the first or second cause. Next is failure to file timely and date-related errors, cited as first or second by five insurers. The third leading cause of malpractice claims is failure to know the law, which Ames & Gough said was “exacerbated during COVID-19 given the rapid changes made and updates to numerous laws,” including the Families First Coronavirus Response Act, updates to OSHA regulations, HIPAA, the Family Medical Leave and Emergency Sick Leave Acts, tax laws, and relief legislation.

“Unfortunately, those dusty old legal guides were probably not very helpful to attorneys working in such rapidly evolving situations,” Garczynski noted. “So, in all likelihood, we’ll start seeing additional legal malpractice claims resulting from errors made.”

The survey found the cost of defending malpractice claims continues to increase. Among the insurers surveyed, nine of 11 indicated defense costs increased in 2020 over the prior year. At the same time, the rates insurers pay defense counsel are also climbing; 73% of the insurers reported an increase in rates paid to defense counsel during the past year.