Bail bond concept. Gavel and dollar banknotes.

A Worrying Trend? Legal Malpractice Payouts Soar

Uh oh. Surveyed legal malpractice insurance carriers pointed to sympathetic jurors and aversion to trying cases as possible explanations for an “all-time high” in claims payouts despite similar year-over-year volume. According to data compiled by Ames & Gough, factors such as runaway verdicts and litigation financing have contributed to the rise in settlements. Those factors are among several accounting for a concept most readers are undoubtedly all too familiar with: social inflation, the increase of claims costs beyond the economic inflation so often in the news these days.

Opportunities to Mitigate Risk

The survey report also cautioned that conflicts of interest and drafting errors lead to the largest settlements. While these two claim categories are a major concern, they also present opportunities for minimizing your firm’s exposure.

Nearly half of the carriers responding to the survey said conflicts were the most common cause of malpractice claims. While it’s true that larger firms face a broader and deeper attack surface for identifying and addressing potential conflicts, those firms also have greater resources, and often collective centuries of practice among their partner ranks. Conversely, smaller firms should avoid informality in the conflicts evaluation process, which may be tempting for firms with fewer attorneys or a lower intake volume.

Regardless, a robust conflicts protocol might include periodic review of each active matter to determine whether any new parties or facts have arisen that increase the potential for conflicts. This is especially important where there are many parties, a mingling of substantive and coverage issues, and a web of cross- and counter-claims.

And, when it comes to drafting errors, a combination of clearly defined scope of representation, straightforward client communications, long lead time on discussion drafts, and contemporaneous documentation of client buy-in are all time-tested approaches to minimizing problems later.

Specialized Claims, General Policies

Insurers expressed growing concern about the effect of claims more appropriate to cyber risk policies instead being covered under general professional liability policies. While many professional liability policies include coverage for third-party claims arising from privacy breaches, the circumstances that give rise to those breaches are almost always really questions of cyber risk, and the exposure can push against the limits of more generalized policies.

Liability by Association

The survey also noted an increase in claims arising from the alleged frauds of an attorney’s clients, pointing to the lawsuit by cryptocurrency exchange FTX against one of the company’s former attorneys. While the FTX example is extreme, much smaller claims may still pose an existential threat to some practices.

Engagement letters are a valuable tool in defining the scope of representation and should carefully set out exactly what the attorney will and, sometimes more importantly, will not do as part of the representation. A malpractice claim alleging failure to take some action or address some aspect of a client’s circumstances will be far more defensible if you can point to a clear and concise but thorough engagement letter.

And where the scope of the representation is intentionally more capacious, careful documentation of client communication is even more vital. An email or letter detailing exactly why an attorney advises a course of action, or advises against a course of action, can mean the difference between a strong dispositive motion and one of the large payouts at the center of the Ames & Gough survey.

Ultimately, while the trend of rising claim costs in legal malpractice actions is concerning, there isn’t much mystery about what should be done to put downward pressure on those costs: careful conflicts evaluation, clear communication, contemporaneous documentation, security best practices, and consideration for the potential reliance of third parties can all help minimize the potential for legal malpractice claims. After all, the best way to contain claim costs is to prevent the claim in the first place, and the second-best way is to ensure legal malpractice defense attorneys have everything they need to put up a robust defense.