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Malpractice Claims Tied to Real Estate Deals Head List in Latest ABA Survey of Insurers

Monday, September 17, 2012
CHICAGO--Claims against lawyers resulting from real estate transactions took the top spot in the latest ABA survey of claims reported by more than two dozen professional liability insurers.

It was the first time since the survey began in 1985 that this area of law generated the most claim activity.

Overall, three practice areas have consistently been responsible for most of the malpractice claims filed in the United States in the last 25 years, according to the study released Sept. 6 by the ABA Standing Committee on Lawyers' Professional Liability. They are--in their current order--real estate, plaintiffs' personal injury, and family law.

The Profile of Legal Malpractice Claims 2008-2011 was introduced at the opening session of the ABA's Fall 2012 National Legal Malpractice Conference, held here Sept. 5-7. Co-sponsoring the conference with the LPL Committee were the Law Practice Management Section, the Center for Professional Responsibility, and the Tort Trial and Insurance Practice Section.

The Profile is based on information reported by malpractice insurers in the United States and Canada from 2008-2011. It is the sixth such study since the committee's 1985 inaugural report. See 24 Law. Man. Prof. Conduct 571; 21 Law. Man. Prof. Conduct 459; 17 Law. Man. Prof. Conduct 379.

 







 

Top Five Problem Practice Areas


1. Real Estate (20.33% of all claims)

2. Plaintiffs' Personal Injury (15.59%)

3. Family Law (12.14%)

4. Estates, Trust, and Probate (10.67%)

5. Collection and Bankruptcy (9.20%)



The 2011 study is the largest so far, with data on 53,000 claims submitted by 20 lawyer-owned and eight commercial malpractice insurers. The previous survey, which covered 2004-2007, involved 40,000 claims from a group of 18 insurers.
What's Changed
For the first time in the survey's 27-year history, plaintiffs' personal injury practice no longer appears in first place as the biggest generator of malpractice claims. Real estate is the new titleholder--bearing out the 2007 survey's prediction that, “given the current real estate market meltdown, the 2011 Study may see real estate pull ahead of the pack.”

What is surprising is that the two have switched places not so much because of an increase in the claims relating to real estate but rather because of a noticeable drop in the claims generated by plaintiffs' personal injury practice.

Between the previous survey and this one, the share of claims arising out of real estate practice increased by only 0.28 percent, while the share arising out of plaintiffs' personal injury decreased by fully 5.97 percent.

As to the downturn in plaintiffs' personal injury, conference panelists offered two theories. First, personal injury firms may be doing more networking to make sure that the “big” cases get to good lawyers. Second, smaller plaintiffs' personal injury firms may be having difficulty finding lines of credit for such litigation.

Information on real estate claims is not broken out between residential and commercial. However, panelist Michael J. Furlong, vice president of underwriting for CNA in Overland Park, Kan., said he believes that it was claims from residential real estate closings that had driven the uptick noted in the 2007 study. In 2008 the residential closing claims had already begun to taper off, he said. Furlong pointed out that the year-by-year breakdown shows real estate claims actually peaking in 2008 and then consistently, though very slightly, declining in each of the following years.

Debt Collection Troubles
Another anomaly is a marked increase in claims associated with collection and bankruptcy--an area that had generally seen declines since the 1985 study.

Sal G. Concu, managing director of professional liability claims at Travelers Bond & Financial Products in Jericho, N.Y., speculated that the spike is attributable to collections rather than bankruptcy, particularly to the increase in claims arising out of the Fair Debt Collection Practices Act.

Karen R. McCarthy, president and CEO of the Bar Plan Mutual Insurance Co. in St. Louis, agreed that the problem lies more with collections than bankruptcy practice. Collections claims traditionally present a frequency issue rather than a severity issue, she said, but severity may rise because of the “significant increase” in FDCPA claims.

The Profile shows that almost 70 percent of all claims are made against firms with fewer than five lawyers; of that 70 percent, almost half are made against solo practitioners. These findings are consistent with the data reported in previous studies. But as the Profile makes a point of emphasizing, the average firm in many states has no more than three lawyers anyway.

Discipline Cases Counted
An interesting development identified by moderator Gerald Merritt, president of Hanover Professionals E&O in Itasca, Ill., is the increasing availability of insurance coverage for disciplinary proceedings.

But he noted that disciplinary proceedings are not calculated as a separate category in the survey. This means, he said, that an increasing but unknown proportion of the total claims reported in the study may actually involve disciplinary proceedings rather than actual malpractice claims.

And according to panelist Chad C. Karls, small firms also account for the lion's share of lawyer disciplinary actions. Karls is principal of Milliman in Brookfield, Wis., the actuarial company that provided statistical consulting for the claims survey.

Types of Errors
The report divides sources of asserted claims into four groups: administrative errors, substantive errors, client relations, and intentional wrongs.

According to the survey, substantive errors generate 45.07 percent of claims and thus continue to be the worst problem, as they have been since 1985. But it also states that the share of claims attributable to administrative errors has risen to an all-time high of 30.13 percent.


“[T]he purpose of the study is to develop information that may be used for claims-prevention programs.”

Profile of Legal Malpractice Claims 2008-2011

Client relations errors are back up to their 2003 study level of 14.6 percent after decreasing to 11.22 percent in the 2007 study, although this is still short of the 18.75-percent peak reported in the 1999 study.

The “positive development” announced in the report is that claims arising out of intentional wrongs have decreased. After peaking in 2007 at 13.53 percent, this category now ranks last in the four type-of-error groups, with 10.19 percent of claims.

Nevertheless, the report observes that client relationships and intentional wrongs together account for a quarter of all claims filed--“though these errors seem entirely within lawyers' power and control to avoid.”

Of the types of activity most likely to generate claims, preparing, filing, and transmission of documents (not including pleadings) remains in first place with 28.46 percent of claims.

Advice, however, has moved ahead of commencement of the action or proceeding to take second place. Advice had been in third place in claims-producing activity since 1985, but after a 7.51-percent jump from the level reported in the 2007 study, this category is now responsible for 20.19 percent of reported claims.

Fewer Big-Dollar Payouts
The number of claims resulting in indemnity payments exceeding $2 million has actually declined, according to the survey.

The 2007 study had reported an “ominous” increase, with the number jumping from 19 to 44. By contrast, the 2011 study reports only 21 such claims during the previous four-year period, and concludes that the increase was temporary.

But the report cautions once again that “underrepresentation of midsize and large firms in the claims data studied is probably significant as to severity, as the bigger firms are sometimes required to defend against particularly big claims.”

The report notes that “inactivity or abandonment of claims accounts for more malpractice case dispositions than ever: 67.12 percent.” This is a spike of more than 15 percent.

“Whether this is due to insureds being more conscientious about reporting claims they once might have considered insignificant because of a fear of the 'claims made and reported’ exclusions in their policies is impossible to discern from the data, but is, we believe, likely,” according to the report.

Reservations
The LPL Committee noted that factors inherent in the surveys may cause the reported numbers to vary beyond the actual activity in the marketplace.

The report includes a disclaimer that because the data come from a different pool of insurers for each survey, comparisons among them may be misleading and the numbers should not be used to establish trends in malpractice claims. Rather, it explains, “the purpose of the study is to develop information that may be used for claims-prevention programs.”

In cautioning underwriters against using the information to identify high- and low-risk practices, the report makes these points:


  • The information does not reflect the entire lawyer population. Many lawyers have no malpractice coverage, and by the same token many carriers--particularly those that insure larger law firms--chose not to participate in the survey.

  • The law governing malpractice claims varies from state to state, and “national data blur these distinctions.”

  • There are no data showing how much time lawyers devote to different subject areas. Therefore, it is not possible to determine if the share of claims arising from a particular subject area is disproportionate to the overall quantity of legal work undertaken in that particular area. If collections work is generating a greater share of claims, for example, it may just be because there is more collections work and more lawyers engaging in that activity.


 

By Elizabeth J. Cohen


The malpractice claims survey report (product code #4140045) is available for purchase from the ABA Bookstore,http://apps.americanbar.org/abastore.

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

Copyright 2012, the American Bar Association, All Rights Reserved.

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