With the economy tanking, experts say the stage is set for a surge in legal malpractice lawsuits, as clients look to recoup their losses from third parties.
Insurance carriers and attorneys haven't seen a tidal wave of legal malpractice suits yet, but they anticipate a spike later in the year and into 2010.
National insurance provider CNA Financial Corp. predicts that legal malpractice claims will be up by 5 percent in 2009, said vice president Shauna Reeder, who oversees the large law firm professional liability group. CNA has already seen an increase in claims related to fee disputes, wherein a firm steps up its collection efforts only to see its client turn around and sue for legal malpractice.
"Legal malpractice is a money-driven area of the law -- more so than other areas," said Andrew Lavoott Bluestone, an attorney who represents plaintiffs in legal malpractice cases and the author of the New York Attorney Malpractice Blog. "It has a very strong connection to the economic situation. In a downturn, you will see more people suing their attorneys over things like estates and divorces. Now, $200,000 is life or death."
Bluestone and others also expect legal malpractice lawsuits to crop up in connection with failed financial deals; foreclosures; fraud, such as the Madoff scandal; and bankruptcy cases.
Legal malpractice claims were on the rise even before the economy hit the skids in 2008.
A 36 PERCENT HIKE
A recent American Bar Association study that looked at legal malpractice claims filed between 2004 and 2007 found that the total number of claims increased by more than 36 percent compared to the previous three-year period. However, the ABA attributes much of that increase to the fact that more law firms and insurers reported malpractice cases to the researchers. Still, the latest ABA numbers don't reflect the current recession.
"Markets go down, deals fall apart and some people look to place blame," said Stephen Novack, a partner and co-founder of Chicago-based Novack and Macey, which defends attorneys in legal malpractice cases. "Scapegoating heightens in bad economic times, and I think there will be a spike as dissatisfied investors and dealmakers look for deep pockets to try to recoup losses."
In a downturn, legal malpractice lawsuits aren't typically filed immediately, said Brad Dantic, vice president and general counsel of ALPS Corp. in Missoula, Mont., which provides legal malpractice coverage to attorneys in 24 states. Instead, historical data suggests that increases in legal malpractice lawsuits occur in the year or two after the economy hits bottom.
"When you look at the downturn we had in 1990 and 1991, the spike in claims started in 1992 and went into 1993," he said.
For one thing, it takes time for a potential attorney error to be discovered and analyzed in advance of filing a claim, Dantic said. Additionally, plaintiffs often choose to wait until the economy has bottomed out and their losses have peaked before they attempt to recover anything through a malpractice lawsuit, he said.
"The client's assets are going down as the economy worsens, so the extent of their damages increases during a recession," Dantic said.
Robert J. Muldoon Jr., a partner at Boston-based Sherin and Lodgen, represents attorneys in malpractices suits. Muldoon said there are two general categories of legal malpractice lawsuits generated in a down economy. One category covers claims that attorneys provided negligent legal advice in financial matters, and clients lost money or assets as a result. For example, an attorney who advised a client to invest with Bernard Madoff could potentially be sued for malpractice, Muldoon said.
The second category includes "groundless claims" filed by clients who would not sue their attorney under better economic circumstances.
"That's kind of a dark scenario, but people might be so pressed for money that they sue," Muldoon said.
Bluestone predicts an increase in legal malpractice suits initiated by bankruptcy trustees that target attorneys who worked for the bankrupt entity. Bankruptcy trustees have a fiduciary responsibility to collect as many assets as possible to distribute to creditors, and that includes funds from a potential legal malpractice suit, Bluestone said.
CNA also is concerned about an increase in bankruptcy-related malpractice claims. "As corporate institutions begin to fail, we expect to see scrutiny from bankruptcy trustees and state-appointed receivers," Reeder said. "They will be investigating the professionals with regard to the advice they provided to their bankrupt client."
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