Article
Managing law firm risk in an era of rising liability costs
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.
Drivers of increasing liability risks for law firms
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.
Five ways law firms can better mitigate risk
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:
- Establish a process for evaluating risk before taking on new clients or transactions
Law firms of all sizes should assess the potential exposures associated with a client or transaction in light of the firm’s overall risk tolerance and capacity to withstand potential losses, particularly for matters with significant complexity or financial stakes. - Evaluate and enhance client communications
Law firms should consistently use engagement, disengagement, non-engagement and termination letters. Firms should also document key client communications and advice to help avoid claims involving inadequate communications or failure to disclose material risks. - Ensure appropriate staffing and supervision at the outset of matters
Law firms should carefully assess staffing needs at the beginning of each matter to ensure that the team has the appropriate experience, resources and supervisory structure for the scope and complexity of the representation. - Implement an integrated docketing and calendaring system with centralized oversight
These systems should include redundancies, automated reminders, and clear personnel assignments for monitoring critical dates and deadlines. - Access services provided by your insurer
Many insurers offer services that can help law firms mitigate risks, such as telephone hotlines with experts who can answer questions about client management, ethics, conflicts of interest and other topics that pose liability risks.
Engage with your broker to evaluate programs and coverage
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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