Lawyers face increased liability risks as credit crunch bites
11 July 2008
The economic downturn in the US and many parts of Europe, caused by the contraction of readily available credit, will increase professional liability claims against law firms during the next 12 months, Lloyd’s broker Marsh has warned.
Marsh believes that more professional liability claims will arise as a result of the slow down in the economy for a number of reasons.
Sandra Neilson-Moore, European practice leader for law firms' professional indemnity at Marsh, said that more claims against law firms, particularly for drafting errors or incongruities, is likely over the next 12 months as the effects of the economic slow down continue to bite.
“Now, more than ever, firms should pay close attention to managing their risks. Risk management among the UK's largest 100 law firms is generally good,” she said. “But there are still those that need to implement robust risk management procedures to reduce the causes of claims and increase their ability to successfully defend themselves against professional liability allegations.”
Marsh says that contract details are more heavily scrutinised during periods of economic downturn. That means law firms are more susceptible to action on drafting errors and discrepancies. Poor proof-reading and ambiguous translation of arithmetical formulas into narrative can thus lead to claims.
Clients inevitably look for others to blame in straightened times and lawyers’ “scoping” of engagement is not always sufficiently robust, Marsh notes. This means that when things do not work out for a client, the client may attempt to seek compensation from the law firm by alleging poor advice. These claims gain credibility when the firm has not made clear to its client the scope of engagement and disengagement on the transaction.
Jon Davies, assistant general manager at Travelers Professional Risks, believes it is too early to say to what extent direct credit crunch related claims will hit lawyers PI records, but he says there are already signs of an up-tick in counter claims from clients following fee disputes. “And this is something to be expected. Staying on top of Work In Progress and regularly billing clients to ensure bad debt does not build up can make all the difference,” he advises. “For this renewal we will be taking firms’ procedures in this respect directly into account when determining our pricing.”
As good work slows down due to the downturn, firms may also be tempted to take on the “wrong type” of client. Marsh advises firms to take positive steps to resist the temptation to take on dodgy clients saying that with the increase in examples of organised crime backing businesses, firms need to make sure they are not tempted to take on work for companies with dubious backgrounds.
Mark Casady, a specialist underwriter in solicitor’s PI at Lloyd’s insurer QBE, agrees that the economic downturn will have an effect on the risk profile of solicitors. He says that this will impact small High Street solicitors firms as well as the big corporate firms, which tend to be more diversified.
“Smaller firms involved in transactional business such as conveyancing are already beginning to see a reduction in their fee base,” he says, “The fall off in transactions in the last six months has been dramatic.”
Many of these firms will look to replace lost business by diversifying into new areas of law, Mr Casady says: “That can be a high risk strategy. As solicitors move out of their core competency they will make more mistakes.” Even if they hire in new expertise, there is still the question of who is there to supervise and control the new business, Mr Casady says.
He also agrees with Marsh that smaller law firms could be affected by an increase in the detection of mortgage fraud, as the housing market and wider economy continues to deteriorate. Some insurers have remarked to Marsh that incidences of mortgage fraud backed by organised crime have begun to surface in the claims notifications of some of the smaller law firms involved in buy to let transactions.
“Organised mortgage fraud is potentially very expensive and one case can cost a firm and its insurers millions,” Casady says. “And I think that we are only just beginning to see the emergence of what will be a widespread issue.”
Last updated on 11 Jul 2008
