Legal Malpractice Claims Continue to Grow: Trends and Predictions for 2022 and Beyond
Law firms and their insurance carriers have experienced a rise in both the frequency and severity of high-exposure legal malpractice claims over the past year. As the global economy remains in a period of high inflation and economic uncertainty, there is a risk that this trend may continue. Experienced insurance-coverage attorneys from Atheria Law P.C. provide insight into recent and potential future legal-malpractice trends and practical tips to mitigate concerns arising from the growing number of malpractice claims.
Recent Trends
2022 Survey Data
In May of 2022, Ames & Gough published its 12th annual Lawyers’ Professional Liability Insurance Survey analyzing the volume of claims that professional-liability insurers have experienced and specific trends observed in connection with larger claims. The survey included eleven of the largest insurance companies, which collectively provide coverage to approximately 80% of law firms ranked in the 2022 Am Law 100.
The survey data indicated that the raw number of claims has generally remained steady over the past several years, but the majority of insurers reported a growing number of large claim payouts. Of the surveyed insurers, all but one had participated in a legal malpractice claim payout in excess of $50 million within the last two years. Four of the eleven insurers have participated in a claim payout over $300 million during the same period.
According to the survey data, insurers observed that lawyers in certain practice areas tend to face a higher frequency of claims. In particular, lawyers practicing in the areas of trusts & estates, business transactions, corporate & securities, and taxation faced the highest frequency of claims among the surveyed insurers. These areas are historically malpractice hotspots, particularly during times of economic uncertainty, and the survey data is consistent with a trend observed over the past several years.
Insurance defense is the practice area with the most notable increase in malpractice claims over the past decade. This is due, in part, to courts in several jurisdictions expanding the ability of insurers to assert claims against defense counsel retained to defend policyholders. See, e.g., Arch Insurance Co. v. Kubicki Draper, LLP, 318 So.3d 1249 (Fla. 2021) (holding that an insurer had standing to assert a malpractice claim against counsel retained to represent an insured when the insurer is contractually subrogated to the insured’s rights under the policy).
Also increasing are claims by clients against lawyers with whom the lawyers have had longstanding relationships. Historically, longstanding clients would very often resolve issues arising from law firm errors amicably and discreetly, usually resulting in the law firm providing a credit for past and/or future legal fees. However, major clients of law firms have increasingly opted to seek full recovery in litigation for alleged malpractice.
Growing Cyber and Technology Risks
Law firms are facing new challenges as cybersecurity risks continue to become a systemic threat. As law firms are frequently custodians of sensitive information as well as large sums of client money, they are often targets for cybercriminals. Ransomware attacks and exploitation of vulnerabilities in funds transfers are among the most frequent cyber risks presented to law firms. Law firms are increasingly conscious of these risks and are taking steps to bolster cybersecurity protections and educate employees to protect themselves from potential cyber-attacks.
Furthermore, the COVID-19 pandemic forced most law firms to undergo large shifts to remote or hybrid working environments, which presented a host of new challenges. Due to the sudden onset of the pandemic, many law firms were forced to rapidly adapt. The adoption of new technology and the increase of remote accessibility for attorneys and staff require increased vigilance against cybersecurity threats.
In addition to cybersecurity threats, lawyers in supervisory positions report that remote work arrangements have, in some cases, created additional challenges in managing and overseeing cases. Reported issues include less collaboration due to a lack of in-person meetings, reduced oversight, and a higher frequency of mistakes and clerical errors. These issues remain at the forefront as many law firms are now making tough decisions regarding the degree to which lawyers are encouraged or required to spend time in the office.
Trend Forecasts
Risk of Financially Distressed Clients
In a period of economic uncertainty, law firms and insurers should be cognizant of the acute risks to law firms. In times of economic distress, claims against lawyers often grow in frequency. Law firms face potential risks when a client is struggling financially and is unable to pay legal bills. Law firms may face malpractice claims as a fee-avoidance tactic, either as a proactive tactic to deter collection or as a counterclaim in response to the firm’s recovery efforts.
The issue can compound when clients face insolvency or bankruptcy. Law firms are frequently targets of claims by bankruptcy trustees and third-party creditors seeking to expand the pool of money available for recovery. As the number of bankruptcy filings generally increases during periods of economic downturn, lawyers should be prepared to face additional claims from parties who often view law firms—and their insurers—as targets with deep pockets.
The effects of economic downturn are more prevalent for lawyers working closely with clients in industries that are most heavily affected. While historical data can be a helpful predictive tool, no two recessions are identical. Generally, small businesses are heavily impacted because they are often less able to absorb successive periods of financial losses. Among larger corporations, the 2008 financial crisis most heavily impacted businesses in the real estate and financial sectors, but the specific industry-specific impacts of the next recession are difficult to predict accurately.
If the global economy continues declining, the risks presented by financially distressed clients will grow. Law firms and their insurers should be conscious of these risks and be prepared to mitigate them as much as possible.
Rising Trend of Early Settlement
Attorneys at Atheria Law have noted an increase in the number of settlements that are reached in the early stages of malpractice disputes, often prior to the filing of a complaint. Plaintiffs’ attorneys appear increasingly motivated to settle early, and many law firms are willing to explore these early settlement opportunities before the parties have engaged in full discovery.
In considering the reasons for this trend, one possible explanation is that law firms are conscious of the reputational risks arising from large-scale malpractice lawsuits and would prefer to settle quickly in order to avoid negative headlines. However, Atheria Law attorneys generally have not observed large law firms making settlement decisions based on the risk of bad publicity. While many firms are conscious of potential reputational risks, news cycles are rapid, and today’s headlines often go out of view quickly.
Instead, large law firms appear to be primarily motivated by a desire to mitigate ever-increasing costs of defending claims and the burden of handling ongoing claims administration. In many cases, the cost of defending a claim through trial will exceed the amount that may be paid to settle early. Experienced malpractice-defense lawyers do not come cheaply. As defense attorneys’ hourly rates continue to rise, the prospect of defending a lawsuit becomes even more expensive. Furthermore, ongoing litigation requires dedication of a significant amount of internal time and resources for law-firm defendants. For these reasons, early settlement of claims that appear to have merit likely will continue to become an increasingly attractive option.
Mitigating the Risks and Impact
So, what can law firms do to mitigate their risks in periods of economic uncertainty?
(1) Client Selection: Law firms should be diligent in their client intake and vetting process. Further, law firms should consider additional vetting of clients that are particularly impacted by an economic downturn.
(2) Carefully Documenting Scope of Representation: If a firm determines it will move forward with representing a client, the firm should carefully craft its engagement agreements to clearly define the scope of representation. If the scope of representation changes over time, law firms should consider amending the engagement agreement or, at a minimum, ensure that the change in scope is documented in writing. Issues often arise when attorneys provide guidance or advice in areas that may be outside their respective areas of specialty, and if there is ambiguity over the scope of representation, a court is more likely to side with the client in a future dispute. For example, we often see issues arise involving advice on taxes or insurance, when the attorney was not retained to advise on tax or insurance issues.
(3) Staying Cognizant of Risks When Dealing with Long-Term Clients: Long-standing relationships may make clients less inclined to pursue litigation, but they do not make a law firm immune to malpractice claims. Lawyers may be tempted to relax risk-management procedures for clients that they have served for a long period of time, but this may present new risks. One issue that has become more common is communication with clients via text messaging. This practice can make it more difficult for a law firm to maintain a full and complete file, and furthermore, text message communications are often brief and informal, which makes it difficult to appropriately convey any necessary caveats. Ultimately, it is prudent to ensure that friendly relationships with clients do not lead to cutting corners in risk management.
(4) Considering Higher Retainers: We often see the commencement of legal malpractice actions when law firms are seeking to recover unpaid fees for services rendered. Larger retainers can ameliorate this risk, providing a buffer so that firms can draw down on retainers when necessary, instead of seeking payment from clients in dire financial straits. Of course, firms should seek to replenish the retainers as soon as possible if ongoing work for the clients is foreseen.
(5) Documentation of Advice: Often, attorneys have conversations with their clients in which strategy is discussed, advice is given, risks are identified, and/or instructions are given. Attorneys should carefully document discussions with their clients to ensure there is a mutual understanding of that which was discussed. While the most prudent course of action may be to send an email to the client with detailed notes summarizing the discussion, any contemporaneous writing will often prove useful in a future dispute.
(6) Oversight of Junior Attorneys: The Covid-19 pandemic brought the end to a traditional, full-time in-office work environment for many companies and law firms. As firms develop policies for a more permanent hybrid work environment, law firm partners and managers should put policies and procedures in place that will ensure proper oversight of attorneys and staff working remotely. This is particularly critical for those attorneys who have never worked in a traditional law firm environment and may be less familiar with the formalities, rules, and procedures intrinsic to providing legal advice.
Conclusion
Risk management is an ever-present concern for law firms, as well as their insurers. In a constantly evolving environment, law firms should regularly evaluate their immediate risks as well as developments in the legal marketplace. Law firms that stay informed regarding the issues that present the highest frequency of claims and the most severe exposure will be better prepared.
Lawyers’ professional-liability insurers also stand to benefit significantly from keeping a close eye on claim trends and best practices in law firm risk-management procedures. In setting insurance premiums and policy terms, insurers may be able to reduce their exposure and create a competitive edge by accounting for law firms’ aptitude in managing risk as well as potential vulnerability to claims that are growing in frequency.
