The Impact of COVID-19 and the Potential Economic Downturn on Legal Malpractice Claims

 

  1. Will the economic downturn caused by COVID-19 create an increase in legal malpractice claims?
  2. Will the claims mirror those that we saw from the economic downturn caused by the Great Recession of 2008, or will the COVID-19 economic downturn create its own unique set of claim trends?

These questions were posed to our industry panel of experts during Lemme’s Law Firm Best Practices Webinar on September 9. The panel consisted of two leading LPL Underwriters, Bill Healey from ArgoPro and Brendan Groarke from Huntersure, as well as Melissa Demmon, Vice President and Claims Counsel for Professional Liability at Sompo.

This article summarizes the questions posed to the panel and their responses.

As we look to the past for ways to better prepare for the future, we asked the panel whether they thought the current economic downturn caused by COVID-19 would be different from the 2008 recession or if there were lessons that law firms could learn from the last recession to brace for the impact of the current downturn.

Our panel agreed that after every economic downturn, there is a trailing amount of claims frequency and severity. They expect to see the same results from the current downturn. Specifically, our panel expects to see robust claims activity against law firms stemming from the following:

  • Buyer’s Remorse Claims: The types of claims where clients want to get out of regrettable deals and point the finger at their legal service providers to do so. Firms with real estate practices are especially at risk due to failed transactions as a result of the current pandemic.
  • Unworthy Clients: While Underwriters acknowledge that law firms have done a better job of client intake in recent years, there was concern that some clients that were good clients at the time of intake will become unworthy clients over time, particularly if they are struggling financially from the impact of COVID-19.
  • COVID-19 Losers: The panel expects increased claim activity from certain client sectors that have been particularly hard hit by COVID-19, including the hospitality and travel industries, for example.
  • Human Error: The panel agrees that there has been a significant increase in claims from ‘sloppy’ lawyering in recent years, and that trend is likely to continue with more lawyers working remotely, dabbling in unfamiliar practice areas, and the inability to consult with their colleagues as easily.
  • Wrongful Foreclosure Claims: Banks and their law firms getting sued for wrongful foreclosure claims has increased. Collection firms are seeing an increase in claims.
  • Poor Timing: Labor and employment types of claims have increased as a result of counsel given at time of deciding furloughs, layoffs, etc.
  • PPP Loans: Claims arising out of counsel provided concerning PPP loan application and/or eligibility.
  • Force Majeure Challenges: Deals that closed, or were in the process of closing, had force majeure that wasn’t applicable or didn’t have force majeure. Clients are attempting to sue law firms on the basis that they should have foreseen this and had appropriate force majeure coverage in place.
In response to the current COVID challenges, the panel provided the following points and advice concerning risk management:
  • Regular Communication with Remote Workers | This may include a need to evaluate a firm’s culture and decorum in order to increase the incentive to collaborate and mentor younger lawyers. Law firms need to take command of their operations to mandate effective communication. Supervise all lawyers to ensure productivity and mental wellbeing.
  • Be Prepared | The panel was more concerned with firms than area of practice. Smaller regional firms may face more challenges particularly once PPP money runs out.
  • Take a Close Look Into your Client Intake Process and Clearly Define Scope of Engagements | Firms should take a close look at who they are accepting as a client, clearly define the scope of the engagement, and avoid “engagement creep.” Best practices include clearly defining what services are, and are not, being undertaken. Treat clients differently and consider enhanced risk management procedures for difficult engagements.
  • Consider Additional Quality Control Procedures to Ensure that Engagement Letters are Reviewed and Deadlines are Met | Due to the challenges presented by court shutdowns and remote working, there is an increase in uncertainty regarding deadlines and docketing.
  • Ensure that Account Receivable for Individual Clients are Manageable | Avoid giving clients “too much rope” and obtain consent prior to undertaking expensive or unexpected tasks. Explore alternative payment schedules if a client is having difficulty paying outstanding bills. Elevate A/R issues to management or the firm’s General Counsel.
  • COVID Positives | Partners are spending less time traveling and more time servicing clients. Firms are taking a fresh look at risk management procedures and IT infrastructure.
We ended our panel discussion with a conversation about the Lawyers’ Professional Liability Insurance marketplace and what Underwriters forecast for the rest of 2020 and beyond.
  • The Underwriters on the panel advised that they began to see rates for Lawyers’ Professional Liability Insurance increase in May and June of 2019. Large firms (200+) experienced rate increases in the 10-15% range. Small to mid-sized firms also experienced rate increases, but new capacity and competition in the marketplace has led to more modest rate increases.
  • It is costing more to defend claims. Lawsuits are lasting longer and often proceed through discovery before a motion for summary judgment can be filed.
  • Some Underwriters are now requiring a COVID-19 supplemental application as part of the LPL renewal process going forward.
  • Underwriters are looking for well-run firms with a strong and established culture.

We would like to thank our panel of experts and our attendees for their participation in the Lemme Law Firm Best Practices Webinar. As always, we would be happy to discuss any follow-up questions you have, including how Lemme might be able to help you navigate current market challenges due to the COVID pandemic.

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