Information concerning the frequency and severity of legal malpractice claims submitted to insurers in 2014 is out, and the news is generally good.
In its yearly survey, Ames & Gough, a trusted risk and insurance adviser to law firms, provided data relating to legal malpractice claims submitted in 2014. The survey included information from nine leading insurance companies that provide insurance to approximately 80 percent of the Am Law 100 firms. Notably, six of those nine insurance companies insure between 40 percent to 80 percent of both the Am Law 100 and the NLJ 250 firms.
The frequency of legal malpractice claims has remained constant on a year-over-year basis, although it still continues to be higher than it was in the years preceding the recession. Not all news is good news, however. Although claim frequency has stabilized, claim severity continues to be an issue. The data shows that legal malpractice claims are becoming more expensive, both in the potential damages and in the defense.
Although the likelihood of receiving a claim is a constant high, the chance that a single claim could have devastating financial impact is growing.
Here are a few lessons that can be learned from the claims survey:
Trusts and Estates Law Tops the List as Largest Source of Claims
In 2014, trusts and estates was the leading practice area for legal malpractice claims. This is a big change because, in the past, real estate claims were often the single largest source of legal malpractice claims. Now, trust and estates claims account for 67 percent of legal malpractice claims, an increase of 17 percentage points (from 50 percent in 2013). Real estate claims now come in fourth place, behind corporate business organization and securities claims and business transactions-commercial law claims.
Because trusts and estates provides a broad range of client services, from estate planning to tax advice, estate administration and other related service, it inherently involves sensitive matters and is thus susceptible to the potential for client dissatisfaction. These are personal matters that clients take very seriously, which increases the likelihood that they will bring a claim.
Trusts and estates also is an area that attorneys expand to when they are short on work. Sometimes attorneys faced with tough economic realities “dabble” in areas of law that are new to them. Attorneys dabbling in trusts and estates are more likely to make an error or fail to achieve a client objective, which can result in increased claims in this area. In the end, it is better to leave specialized work to those attorneys who have the requisite expertise.
Moreover, the potential group of plaintiffs for a trusts and estates claim is broader than in some other areas of law. While some states permit the beneficiary of an estate, in addition to the client, to sue an attorney whose negligence caused the testator’s intended disposition of the bequest to the beneficiary to fail, California does not follow this standard. Paul v. Patton, 235 Cal. App. 4th 1088, 1100, 185 Cal. Rptr. 3d 830, 839 (2015)(explaining “successor [trustees], but not beneficiaries, [have] the same rights as predecessor [trustees], including the power to sue for malpractice causing loss to the estate.”)(emphasis added, citations omitted).
Thus, the number of trusts and estates claims can be greater than other legal specialties because an attorney can be sued both by a direct client as well as by a nonclient beneficiary. A good way to guard against a claim brought by a dissatisfied beneficiary is to clearly prove the testator’s wishes in a document generated by the testator.
Practitioners should also be conscientious in documenting exactly who their client is as well as the scope of the representation. In this area of law, a family member of a client may contact the lawyer to request services on behalf of that client. It is critical that the attorney clearly documents that her or his obligations are owed only to the client, not the family member who contacted the attorney.
Conflict of Interest as the Leading Source of Malpractice Error
Conflicts of interest continue to be the most common alleged malpractice error, year after year. Representing a client in the face of a conflict of interest is taken seriously by clients and by courts, mostly because such an error indicates a breach of the duty of loyalty.
Six of the nine insurers surveyed cite conflicts as the leading cause of legal malpractice claims. Such conflicts often arise between multiple current or past clients represented by the same lawyer or firm. Six of the nine insurers cited an increase in claims arising from lateral hires or merged attorneys continuing to work for a client of her or his old firm while already at the new firm.
This shows the importance of thorough conflict checks, using established systems and data, before beginning a representation. Attorneys and firms can also benefit from ensuring that, when they check for conflicts, they are providing thorough information to the system.
The system is only as good as the information it has. If an attorney is not thorough about which parties are actually involved in a litigation, a conflict of interest may result. This is particularly so in actions involving corporations with unnamed parents or related or interested parties.
Further, attorneys and law firms need to do their homework when hiring lateral attorneys or moving practices. Attorneys and firms need to give conflict checks the appropriate level of attention to prevent such claims. In recruiting laterals or pursuing mergers, consider the potential for conflicts and take appropriate measures to protect the firm against their consequences. Address any conflict issue that may arise as soon as possible.
The Ames & Gough study noted that, as in years past, other sources of errors include procedural errors, providing inadequate advice, failing to file timely, and failing to calendar or follow-up with the client. The vast majority of those errors are preventable.
There are numerous methods by which an attorney can ensure that deadlines never get missed or that follow-up communications with a client are scheduled. By failing to take advantage of those systems, attorneys are risking potential claims unnecessarily.
Cyber-Related Malpractice Claims Are on the Rise
Cyber-related malpractice claims is an emerging area. Three insurers indicated that they have had a lawyer’s professional liability insurance claim arising from a cyber or network security event. Two such events were the result of stolen laptops, while the other involved employee error.
The typical lawyer’s professional liability insurance policy will cover a firm for a breach to a third party’s data if the breach results in a malpractice claim by the client. However, more firms are turning to broader coverage (to include first-party coverage) offered by a stand-alone cyber policy as costs to satisfy regulatory reporting requirements, internal costs to repair the firm’s systems, reputational costs, business interruption, and any damage to first-party data would not be covered under a professional liability policy.
Many law firms erroneously believe that their traditional malpractice policy will cover any number of cyber-related claims. Typically, however, broadest coverage is provided by purchasing a policy that is specific to cyber-related issues, which are often unrelated to traditional legal malpractice claims.
But there are solutions. Firms can invest in technology and tools to help prevent unauthorized access to client information. Consider purchasing “Network Security/ Cyber Liability Insurance” to provide asset protection in the event of a hack.
By incorporating some of these small changes, law practices can lower the likelihood of receiving a claim with a potentially devastating impact.