Insurance Defense Counsel a New Target of Legal Malpractice Claims

The size of payouts for legal malpractice claims reached an all-time high last year, and for the first time some of those claims were made by insurers against the defense attorneys they hire to represent their insureds, according to a new report by the Ames & Gough brokerage.

The growing claim severity in the legal professional liability line continues a years-long trend, but malpractice claims made by insurers against their own counsel are something new. Ames & Gough found no concern about claims in the insurance defense area of practice in its annual survey of insurers from 2010 to 2020, but found that 18% of responding insurers reported claims against defense counsel in 2021.

Eileen Garczynski, a senior vice president and Ames & Gough partner, said the same trends that are influencing malpractice claims in general are likely driving the uptick in claims against insurance defense counsel.

“Society in general has become more litigious,” she said. “It’s almost open season on everyone. I think it’s more of a cultural thing.”

Ames & Gough said it surveyed 11 legal liability insurance companies that together insure 80% percent of the top 100 law firms. It found that 10 of those insurers participated in a claim payout that topped $50 million in the past two years, three paid a claim between $150 million to $300,000 million and four paid a claim of over $300 million.

The experience of the insurers surveyed only tells part of the story, Garczynski said. “Anecdotally, we know of five claims that settled north of nine figures, including one over $400 million.”

All 11 insures had claims with reserves of more than $500,000, 10 had claims with reserves over $50 million and four had claims with reserves over $400 million.

Conflict-of-interest complaints remained the leading cause of malpractice claims, with seven of the 11 carriers surveyed ranking such errors as the first or second most common cause of claims. Clerical errors ranked first or second by four insurers.

Garczynski said remote work assignments may be one source of errors. She said young attorneys working from home are not getting direct supervision and miss out on regular communication with more experienced lawyers.

An increasingly competitive marketplace has also prompted law firms to make more “lateral hires;” that is hiring lawyers from other firms instead of promoting from within.

Citing Michael Ellenhorn, founder and chief executive officer of Decipher Investigative Services, the report says lateral hiring of law firm partners and associates increased by 45% since 2019. Ellenhorn said the average cost of paid claims is eight times greater for a lateral hire than for an incumbent attorney.

“One out of every three laterals has a serious red flag,” the report quotes Ellenhorn as saying. Those red flags include an overstated book of business, questionable legal skills and exaggerated credentials, conflicts and outside business interests, unethical behavior, past malpractice claims and tax liens or bankruptcies.

While Ames & Gough said its survey shows claim severity is at an “all-time high,” claim frequency is relatively flat compared to previous annual surveys. Seven liability insurers reported claim frequency in 2021 was similar to 2020, while four reported higher frequency. Of the four that reported increased claim frequency, one indicated the uptick was less than 5%, one reported a 6-10% increase, another an increase of 11 to 20% and one reported an increase of more than 21%.

But Garczynski said that trend may change. Claims frequency typically increases during economic downtowns. Some economists are concerned that there’s an increasing risk of an economic slowdown as the Federal Reserve Bank increases interest rates to combat inflation.

The bulk of the legal malpractice claims stem for three practice areas: 73% of insurers reported claims in the area of trust and estates, 63% reported claims in the area of business transactions and 45% reported claims from the corporate and securities field. Taxation came in fourth, with 27% of insurers reporting claims in that area.

Garczynski said the reported claims against insurance defense counsel is surprising considering that insurers are generally sophisticated purchasers of legal services. They typically use panels of experts when hiring law firms and insist on strict practice standards.

The Ames & Gough report says that insurance companies are holding defense accountable for legal malpractice where they have breached the standard of care.

“Defense firms should know and adhere to outside counsel guidelines they have agreed upon with the insurance companies that hire them,” the report says. “They should also use clear and regular communication with both the insurers and insured clients relying on their advice.”