Law firms continue to face professional liability suits for common errors, but the resulting costs have risen dramatically in recent years.
Comparing 2014-2018 to 2019-2023, Sompo claims data shows average settlements have increased by nearly 135%, with maximum settlements surging by over 170%. This data is consistent with other reports on industry trends.
Given this growing exposure, it’s important for law firms, especially small to middle-market firms, to reexamine – and potentially update – their risk management strategies.
A number of factors are contributing to increasing liability for law firms. Foremost, social inflation and unpredictable jury outcomes are resulting in outsized losses. Juries are penalizing defendants well beyond the actual costs of the damage.
Other factors driving growing liability risk include increasing defense costs and third-party litigation funding. Defense costs have escalated as attorney rates rise and e-discovery, data review and other litigation-related expenses continue to climb. The overall value of transactions – particularly high-value mergers and acquisitions, also increases the potential for substantial losses. For example, the liability risk for a drafting error in a US $5 million transaction is very different from the risk for the same drafting error if the deal is valued at US $500 million.
As the result of the above and the uncertainty of trial outcomes, combined with reputational risk, defense teams are increasingly recommending early settlements – even in cases where liability is not certain. Simply put, the risk of a massive jury award is incentivizing certain but still high-dollar settlements driving loss up.
Missed court deadlines, conflicts of interest, inadequate investigation or discovery, misapplication of the law, and deficient communications can all result in liability claims. Law firms should consider taking a number of steps to limit these errors and mitigate their overall exposure, including the following:
As a first step in addressing growing liability risks, law firms should consider contacting their insurance broker to review their coverage and the risk management services provided by their insurer. Depending on the scope of the firm’s work, it may be appropriate to increase coverage.
Remember that lawyers professional liability coverage is just one part of a broader risk strategy for law firms. In addition, work with a broker to evaluate coverage for cyber, employment practices liability and other risks.
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