BOSTON, Mass. — The number of big-figure malpractice claims against law firms has increased, according to a new insurance industry survey.
“Claims severity has increased significantly in the last year,” said Eileen Garczynski, author of Lawyers’ Professional Liability Claims Trends: 2012. Garczynski is a vice president for insurance broker Ames & Gough, which released the new survey.
The good news for lawyers from the Ames & Gough study is that the actual frequency of claims has leveled off. 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. Last year’s Ames & Gough survey reported a surge in the frequency of malpractice suits.
Of the six professional liability insurers that participated in the 2012 study, five reported an increase in the number of claims with a reserve (including loss and expenses) of more than $500,000. Two of the insurers estimated the increase in the number of large claims to be over 21 percent.
Four of the six insurers indicated that they had paid or had participated in paying a legal malpractice claim of $100 million or more. Garczynski explained that the big legal malpractice claims generally relate to corporate and securities work, citing lawsuits arising from the Ponzi scheme run by the infamous Bernie Madoff.
“The sizes of the transactions are getting bigger, and the costs of defending them are getting bigger,” Garczynski said
However, the Ames & Gough study listed the corporate and securities practice area as only the second most frequent source of malpractice claims. In line with the historical trend, four of the six insurers polled identified real estate as the practice area continuing to see the largest number of legal malpractice suits.
Because of the liability exposure, Garczynski agreed that small and midsized firms should be more wary of lawsuits arising from their handling of a transactional case than, say, a personal injury case.
The report compiled information provided by six of the leading writers of professional liability coverage in the U.S. The insurance companies that participated in the survey include AXIS, Beazley, CNA, Fireman’s Fund, Hartford and Ironshore. Combined, those insurers handle 75 percent of the liability insurance market for mid-sized (35 attorneys or more) to large law firms.
While small and mid-sized firms may not have to fear $100 million malpractice suits, Garczynski said that the study should serve as a wakeup call for those firms that tend to renew their policies without much thought.
“Law firms need to do a benchmarking to make sure they have enough to pay not just for a very large loss, but for the defense costs that go along with that,” Garczynski said. She explained that far too often firms forget to factor in defense costs when assessing their coverage needs.
“If you have a $100 million claim, you’ll probably have at least $500,000 in defense costs,” she said.
The Ames & Gough study also showed that conflict of interest is the number one reason that law firms get into trouble. Five of the six insurers cited conflict of interest as either the first or second most frequent cause of malpractice claims.
Garczynski explained that the conflict-of-interest problem has been exacerbated by the mass movement of attorneys in the wake of the recession.
“With the economic downturn, there were so many attorneys that jumped from firm to firm,” Garczynski said. “Any time that happens, it creates a potential conflict of interest, so firms really need to make sure that they screen their lateral hires properly.”
The Ames & Gough survey can be obtained for free by e-mailing a request to [email protected].