Minimizing the Risk of Legal Malpractice Claims Amid a Pandemic

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As the COVID-19 pandemic continues, law firms are adjusting to changing circumstances and client expectations. However, it remains unknown how the pandemic will impact claims against attorneys going forward. Will there be a surge of legal malpractice claims as clients experience economic pressure? Will there be claims specifically relating to how attorneys navigated their clients’ responses to COVID-19?

In the face of the unknown, it can be helpful to ground any risk assessment in quantified data. One such source is insurance broker Ames & Gough, which recently released the results of its 10th annual survey of lawyer’s professional liability claims. The report summarizes the legal malpractice claims reviewed or insured by 10 leading lawyer’s professional liability insurers in 2019. Collectively, these insurers cover about 80% of the Am Law 100 firms.

The Ames & Gough survey data provides attorneys and law firms with critical information about claims and settlements. Now, the data takes on even greater import as the COVID-19 pandemic continues to transform the legal profession.

Here are some lessons from the latest survey results, both in anticipating known risks and preparing for the unexpected.

The Number of Claims is Increasing

The annual survey confirmed that the number of legal malpractice claims is growing at a record pace. Indeed, according to Ames & Gough, “the claim frequency is rising in ways not seen for more than half a decade.”

If the past is any indicator of the future, the COVID-19 pandemic may result in an increased number of legal malpractice claims, like the aftermath of the 2008 Great Recession. Indeed, historically, economic pressures have led to a greater number of claims against lawyers as clients look to “point fingers” for commercial or other setbacks—whether warranted or not.

The upward trend in claims, when combined with the COVID-19 pandemic, may give rise to even more claims in the coming years. Accordingly, law firms might consider whether the firm has adequate lawyer’s professional liability insurance to provide the necessary protection. Law firms can also seek to tailor their professional liability coverage to the firm’s unique practices, risks, and vulnerabilities.

Cases Are Expensive to Defend and Settle

The Ames & Gough survey found that the number of claims resulting in large multimillion-dollar payouts increased for the second consecutive year. The majority of insurers surveyed had a claim payout of over $150 million, including at least two settlements exceeding $250 million. In addition, the survey indicated that, for 9 out of 10 insurers, defense costs increased in 2019 from the prior year. It is well-known that malpractice lawsuits are expensive to litigate because they tend to be highly complex and because they involve the “case-within-a-case” analysis. Legal malpractice cases often also rely on expert testimony, which can be expensive.

These risks may influence the amount and type of insurance coverage a law firm decides to purchase. For example, firms can review whether they have appropriate limits of coverage; the data suggests that settlement and verdicts can be significant. It also is helpful for firms to consider whether they want to obtain coverage that includes defense fees within the policy limit, which is more common, or pays them separately, which is far more expensive.

Conflicts of Interest and Missed Deadlines Continue to Pose Risks

The survey data confirmed that conflicts of interest continue to be the most commonly alleged legal malpractice error. Legal malpractice cases alleging a conflict of interest can be expensive to defend and can create significant risk. That is because the underlying theory of a conflict of interest—that a lawyer or firm did not maintain loyalty to clients—is typically easily digestible by a jury. In some jurisdictions, punitive damages can be awarded in a legal malpractice action based on a conflict of interest. Juries sometimes find in favor of plaintiffs even where law firms have followed the requirements of the Rules of Professional Conduct and where they handled potential or actual conflicts in accordance with those rules.

Although many law firms have systems dedicated to identifying conflicts and resolutions, those systems are typically only as good as the information provided. Thus, when opening a new matter or running a conflicts check, it can be helpful to be thorough in identifying parties and their roles, and to update conflicts information during the representation if there are new parties or changes in the corporate status.

Another commonly alleged error is that an attorney missed a deadline. This is an error that can be preventable but, where it occurs, can create significant risk of liability, depending on the circumstances. This also may be a basis for claims going forward as parties continue to navigate COVID-19 closures and court deadlines. Thus, investing in technology—and staying abreast of the evolving orders of courts regarding closures, remote appearances and other developments–can help reduce the likelihood of these errors.

Risks for Transactional Attorneys

Some regulations and transactions have been in flux as the nation responds to the pandemic. This constant change creates opportunity for human error. Given the implementation of resiliency planning at various companies, it is possible that disputes will arise as a result of unfinished business deals.

The risks are particularly acute for transactional attorneys: for the fifth year in a row, “business transactions” and “corporate and securities” were the two practice areas that experienced the largest number of legal malpractice claims.

Given the high incidence of claims for these practice areas, firms might consider providing training to avoid commonly-litigated errors and/or ensuring that their professional liability coverage is tailored to the unique risks of a corporate practice. Engagement letters can also be used to help tailor the scope and nature of the services being provided in the event of a subsequent dispute.

Taking proactive steps to avoid the common pitfalls and unique factors of the current situation can help mitigate exposure to future claims.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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