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Those that follow the legal-liability landscape are reporting a marked uptick in the severity of settlements and claims involving law firms.

According to the Attorneys' Liability Assurance Society (Bermuda) Ltd. -- an insurer that provides underwriting and other services to nearly 60,000 lawyers in 230 law firms -- the annual gross claims expense in 2011 was "significantly higher than the year before and well above what the organization had been experiencing over the last decade or more," due to severity of claims, rather than frequency.

Doug Richmond, managing director of Aon Risk Solutions' Professional Services Practice in Chicago, said a review of publicly reported settlements or verdicts against law firms shows four claim losses of $20 million or more in 2012, up from two in 2011 and 2010 and three in 2009.

Although he doesn't see the increase as statistically significant, he noted that "most insurers will tell you they have seen a deterioration in their claims experience."

Richmond pointed to continued economic weakness as another factor in law firms' claims experiences."I think most of them would tell you they are having to reserve more claims at higher levels than in the last few years and most insurers would tell you they attribute that to the recession that began in 2008 and supposedly ended whenever it ended," he said.

One of the "most troubling risks" to law firms, he said, are claims by bankruptcy trustees, who are apt to file lawsuits against lawyers and other professional advisers as they seek to maximize the value of the estate.

But even more challenging to the legal profession, he said, are "dishonest client claims" resulting from having clients who perpetrate Ponzi, illegal real estate investments or other schemes. When that happens, outraged and defrauded individuals or organizations will often pursue claims alleging that the law firm aided and abetted the misconduct.

"The allegations are very easily made and you can spend huge money to defend them," Richmond said.

Eileen Garczynski, vice president and co-leader of the law firm group at Ames & Gough in Washington, D.C., said a survey by her brokerage firm found that claims frequency has been flat over the past year, but that severity -- and the number of large claims -- has risen sharply.

While the survey found that the largest number of legal malpractice claims stemmed from real estate transactions, second was corporate and securities work, which includes "a large number of malpractice claims [stemming] from Ponzi schemes," according to the report.

Along with increased claims severity came increased costs for defense counsel, Garczynski said.

--By Anne Freedman

September 15, 2012

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