The legal practice areas most at risk for malpractice claims
Most insurers surveyed indicated that defense costs increased in 2021, leading to projected premium increases.
The legal industry has a problem, and it is not just bad news for insurance companies.
Law firms will likely feel the hit on their bottom lines when insurers raise rates for malpractice coverage.
According to new intel, 11 insurance companies, who provide coverage to about 80% of the Am Law 100 firms, expressed concern over the surge in cost to cover legal malpractice claims, despite the frequency of these lawsuits remaining flat in recent years.
For instance, nearly every insurer has paid more than $50 million on a claim, with nearly five cases that settled for more than nine figures, the report from Ames & Gough shows.
But Eileen Garczynski, a partner at the McLean, Virginia, law firm advised that law firms could avoid higher premiums for legal malpractice insurance by taking immediate action on what they can control.
“As we continue to the work more remotely, and go into an economic downturn, we can expect potentially more malpractice claims,” Garczynski said. “No matter how many years a law firm has been in business or the experience their attorneys have, they still need to focus on the basics, like communication, documentation and supervision.”
The 12th annual Lawyers’ Professional Liability Insurance Survey looked at the volume of claims insurers have experienced, along with specific trends related to larger claims. Garczynski, who led the survey, identified practice areas and corresponding types of errors that triggered malpractice claims.
Most vulnerable
For instance, the largest number of malpractice claims in 2021 stemmed from lawyers practicing in the areas of trusts and estates, business transactions, and corporate and securities.
These practice areas are followed by matters involving insurance defense, taxation and general litigation, according to the Ames & Gough data.
Conflicts of interest reigned supreme, as five insurers ranked that error as the most frequent cause of malpractice claims, while two others placed it second.
“Some of these law firms have more than 700 lawyers and it is hard to figure out who the conflict might be with,” Garczynski said. “Most law firms try and have a system in place, but it is hard to shake down everyone when you have that many lawyers working for you and so many clients working with you.”
Garczynski added that attorneys should also focus on clerical or scrivener’s errors, by “double- and triple-checking their work,” placing “multiple eyes on the same document to ensure accuracy.”
These errors, which 11 insurers ranked as the leading or second-leading cause of malpractice claims, would seem like easy mistakes to catch, such as documenting that one party agreed to pay $40 million in a settlement instead of $4 million.
Now, nine of the 11 insurers surveyed indicated that defense costs increased in 2021 over the previous year, leading to projected premium increases in 2022.
Rising attorney fees
Insurers who were surveyed reported an 81% increase in average hourly rates paid to defense counsel, according to the data.
About 55% saw a 2% to 5% increase in defense counsel hourly fees, while 9% saw a 5% to 10% increase.
To counteract the increased severity of legal malpractice claim payouts, two insurers project rate increases of 0% to 2%; four are planning rate increases between 3% to 5%; three are projecting rate increases of 6% to 10%; and one is projecting rate increases between 11% to 20%, according to the data.
Garczynski said malpractice insurance companies had changed their litigation defense strategy as some defense counsel average hourly rates that have risen to over $550 an hour, and the size of the deals have left law firm dealmakers exposed to large malpractice claims.
“In more cases,” Garczynski added, “defense counsel are settling before lawsuits are being filed if they know it is not worth the cost to defend them.”
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