Analysis

Malpractice Insurance Bills To Climb Even Higher After Virus

By Andrew Strickler
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Law360 (May 21, 2020, 9:11 PM EDT) -- The BigLaw bill for legal malpractice insurance, already riding an upward trend in commercial coverage rates, is expected to head even higher amid an expected onslaught of pandemic-era disputes with attorneys.

While some top-of-market firms will likely dodge the hardest financial blows, insurance experts say the pain of big increases will continue to be felt across most sectors of the legal industry.

If elite firms with solid claims histories "can demonstrate they're still managing their risk really well, they will be able to get better terms than some others," said Ed Pickard of U.K.-based broker Miller Insurance, whose client list includes about 1,000 U.K. and international law firms.

"But they'll likely still see a 10-to-15% increase in premiums for the year, which we saw in April [policy] renewals and which we're forecasting for October renewals as well," he said. 

With the financial pressures of the economic slowdown still weighing on many U.S. firms, higher rates for malpractice coverage will be particularly unwelcome in the coming months and years. The expense already ranks among large law firms' largest, after rent and salaries.

Eileen Garczynski, senior vice president at insurance broker Ames & Gough, said a significant bump in malpractice claims last year and more mega-payouts from insurers have already helped push up premiums for some large U.S. firms as much as 30%, representing millions of dollars in additional overhead this year.

Many smaller and midsize firms are seeing lower, but still significant, rate jumps of 2% to 10%, she estimated, with the exact increase varying by a firm's practice areas, claims history and location. A recent Miller Insurance analysis found the average rate increase of its insured firms hit 25% during April policy renewals.

Garczynski said an increasingly skittish insurance market has also forced some large firms to scramble to get hundreds of millions of dollars of coverage in place in "stacked" policies that may include scores of underwriters that split up levels of policy coverage and risk.

In some instances, insurers are insisting on "ventilating" — either limiting their overall commitment to a particular firm's coverage or putting more distance between their piece of a firm's primary coverage layers and any excess layers in which they participate.

Others have simply exited the legal malpractice insurance business altogether.

"Some insurers are saying they're just not going to write large firms. It's too risky, that they're going to lose their entire $10 million or whatever it may be," Garczynski said.

An Ames & Gough survey of 10 legal malpractice insurers released this week found that seven had paid a claim of over $150 million in the last two years. Eight of 10 also reported that the overall number of claims filed in 2019 was the same or higher than the volume from 2018, marking a turnaround after a long period of relatively flat reported claims.

In light of that recent surge, the historical data about the high volume of malpractice claims coming out of the 2008 recession and a "bad start" to 2020, Garczynski said the malpractice insurance market will continue to harden.

"There has been such a quick switch in laws and regulations from COVID ... and firms doing that work are doing well, but it also means more opportunity for errors," she said.

Other disputes will inevitably arise from unconsummated business deals, shelved litigations and a "rapport breakdown" between socially distanced lawyers and clients.

"Any time anyone is losing money, they tend to look for someone to blame, and the lawyers are going to be in that mix," she said.

In terms of higher insurance rates, the legal industry has plenty of company.

Earlier this month, broker and risk management biggie Marsh, a unit of Marsh & McLennan Companies, issued a report saying commercial insurance prices globally rose 14% on average in the first three months of the year compared with last year's Q1.

Leading that spike, which is part of an accelerating global rate trend that began in late 2017, was a 26% jump in rates for financial and professional liability coverage.

"Pricing was affected by heightened litigation, with traditional securities lawsuits increasing in frequency and severity," the report said, as insurers "continued to tighten terms and reduce capacity."

"During an economic downturn, lots of people will stop paying their lawyers, and at some point, that will leave the firms stuck and lead to lawsuits and counterclaims" of malpractice, said Rick Swedloff of Rutgers Law School, who has studied the professional liability insurance market.

"That likely will mean premiums going up for a lot firms that haven't suffered losses, and for the firms that have suffered losses, they will go up even more," he said.

--Editing by Jill Coffey and Michael Watanabe.

For a reprint of this article, please contact reprints@law360.com.

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