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It’s getting more expensive for corporate lawyers to defend themselves. A soon-to-be-released study by the American Bar Association shows that the number of big-ticket suits — those with claims of $2 million or more — against firms has risen dramatically since 1996. While the overall volume of cases is still small, the numbers point to a costly, long-term problem for law firms. If claims continue to rise, firms may face much higher malpractice insurance premiums, higher deductibles and insurance carriers that are less willing to provide coverage. In other words, they’ll face a big hit to the bottom line. Corporate firms also must deal with an increasingly aggressive set of plaintiffs firms that are willing to go after high-end cases, usually involving big-money corporate and securities practices. Even a few corporate firms are getting into the act, launching malpractice suits against their competitors. Excerpts of the ABA study were released to Legal Times last week. Comparing two four-year periods, 1996 to 1999 and 2000 to 2003, the ABA found that legal malpractice cases of $2 million or more jumped 60 percent. The study, which compiled data provided by 15 law firm insurers, will be released in June. The growing severity of claims stems in part from the major corporate scandals of the past five years, which have opened law firms up to new liabilities, insurers and law firm managers say. But the fallout goes beyond some of the biggest headlines. In recent months, three major law firms — Sidley Austin Brown & Wood; Pepper Hamilton; and Gunster, Yoakley & Stewart — have each been hit by suits with claims that top $100 million. All three firms decline comment. Other firms have seen eight-figure jury verdicts. In February, a Texas court ordered Baker Botts, along with co-defendant Wells Fargo & Co., which served as executor of an estate, to pay $71 million to the trust of a widow for breach of fiduciary duty while planning her husband’s estate. Last month, Seyfarth Shaw was slapped by a Los Angeles jury with more than $35 million in claims and punitive damages for mishandling a lawsuit for one-time client and Tae Bo creator Billy Blanks. Both firms have said publicly that the claims are baseless, and they are appealing. And that’s just the public cases. In most instances, suits against lawyers are settled behind closed doors. Although firms have faced high-stakes cases in the past — like the wave of suits against firms like O’Melveny & Myers following the savings and loan scandals of the 1980s — malpractice lawyers say that recent lawsuits have become increasingly complex and have expanded the legal theories that can be used against lawyers. In response, insurers have pushed firms to hire general counsel, to tweak their ethics guidelines and to provide greater oversight to identify potential malpractice claims. Firms are hoping the measures will keep insurers from hiking rates. “Without a doubt, everyone is focused and concerned about it,” says Kimball Anderson, general counsel of Chicago-based Winston & Strawn, which is fighting a malpractice claim of more than $30 million by the city of North Hempstead, N.Y., over the firm’s representation of the town in a lawsuit. COTTAGE INDUSTRY When Bennett Wasserman began practicing law 30 years ago, the New Jersey-based attorney never imagined that he’d make his career out of suing other lawyers. After all, legal malpractice was considered a backwater specialty frowned on by other lawyers. These days, though, suing lawyers is exactly what pays Wasserman’s bills as he shuttles between trying cases for his Newark-based firm, Stryker, Tams & Dill, and teaching legal malpractice courses at New York’s Hofstra University School of Law. “Firms are beginning to realize that there is good money in legal malpractice,” Wasserman says. The business can be lucrative. Lawyers, most often working on contingency, can rake in up to 40 percent of verdicts and settlements. As Wasserman sees it, the cases are a way to help self-police the legal profession. “It really is the consumer rights movement arriving at the doorstep of the legal profession,” he says. While the vast majority of malpractice cases are still handled by specialized plaintiffs firms, even some major corporate firms are showing a willingness to take on plaintiffs-side legal malpractice cases. Hunton & Williams, for instance, is representing EarthLink Inc. in a $1 million legal malpractice case against Powell Goldstein in Atlanta. Powell Goldstein has countersued Hunton & Williams, alleging conflict of interest because Hunton & Williams was EarthLink’s general counsel and, Powell Goldstein claims, was itself responsible for the legal mistake that cost EarthLink $1 million. Says Robert Rolfe, general counsel for Hunton & Williams and lead attorney for EarthLink’s case: “No law firm likes to bring a lawsuit against other law firms. But law firms realize that sometimes they have to stick by a good client when a client has a problem.” A NEW WAVE Thirty years ago, the bulk of legal malpractice claims focused on lawyers who missed filing deadlines. Over time, as cases have grown more complex, some of the biggest cases are coming from corporate and securities practices. Plaintiffs lawyers have also begun applying a legal theory — deepening insolvency — that hadn’t previously been used against lawyers, malpractice attorneys say. In such cases, plaintiffs argue that advisers added to the insolvency of a failing financial company through bad advice or by failing to blow the whistle on a company’s wrongdoing. The suits generally stem from company bankruptcies and often claim damages in the tens and hundreds of millions of dollars. “What you’re seeing more and more is the claim being asserted against law firms,” says Kevin Rosen, head of Gibson, Dunn & Crutcher’s legal malpractice defense group. Two Delaware cases filed against Pepper Hamilton in recent months are a prime example. One suit by the bankruptcy trustee and another by the insurer of Pepper Hamilton’s former client, the Student Finance Corp., contend that Pepper Hamilton lawyers contributed to Student Finance’s bankruptcy and its alleged corporate practice of disguising faulty loans. Other factors add to the ballooning size of claims. The increasing size of global business deals has exposed firms to greater risk and potential damages. And as firms grow, the potential for law firms to overlook conflicts of interest has spawned litigation. “Now the struggle is about whether the judgment that the lawyer exercises fell inside or outside the standard of care,” says Thomas Campion, a partner at Drinker Biddle & Reath who defends law firms. So far, the increasing number of high-stakes suits hasn’t translated into higher insurance premiums. Says Douglas Richmond, a senior vice president at Aon Risk Services Inc.: “I just don’t put much stock in the allegations that are made.” Still, some firms are feeling the effects of big malpractice suits. To cut down on the premiums, firms are taking out larger deductibles, which means that they must pay the first $1 million to $5 million of any malpractice claim, say insurers and law firm managers. And Daniel Reed, a vice president with St. Paul Travelers, which insures approximately 70,000 lawyers in the United States, says insurers may be forced at some point to raise rates or cut back on the amount of coverage they offer. “The rate levels at the market are not reflective of what we’re seeing in terms of overall cases. At some point, either rates need to have an aggressive push upward or capacity is going to restrict in some areas,” says Reed, whose company participated in the ABA study. CONTROL ROOM With mounting pressure from insurance companies, firms have centralized ethics procedures, hired in-house general counsel, instituted fresh ethics training and become more persistent about scrutinizing practice group management. A roundtable of law firm general counsel meets regularly through Hildebrandt International, a legal consulting firm, to exchange strategies. James Jones, a consultant with Hildebrandt, says firms are realizing that this is an “important enough area” to stay on top of. Aside from the potential hit to the bottom line, firms are concerned about the cases because they can have a significant impact on a firm’s culture. A big claim can raise overhead and cut into a firm’s profits, potentially sending some rainmakers out the door. It may have a chilling effect on relationships with clients. And lawyers, fearing the rising costs of litigation and legal fees, may become overly cautious in how they practice law. Says Anderson, general counsel of Winston & Strawn: “People are maybe overlawyering, maybe engaging in very defensive lawyering, memorializing all conversations with the client. Over time, that adds expense.” But plaintiffs lawyers like Larry Doherty, a name partner in Texas-based Doherty Long Wagner, dismiss concerns that malpractice cases are having a negative effect on the way lawyers do their jobs. “In Texas parlance, those kind of arguments are just bullshit,” Doherty says.

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