Law Firms Face Sharp Rise in Malpractice Suits
Emma Schwartz
Legal Times
May 10, 2005
It's getting more expensive for corporate lawyers to defend themselves.
A soon-to-be-released study by the American Bar Association shows that
the number of big-ticket suits -- those with claims of $2 million or
more -- against firms has risen dramatically since 1996. While the
overall volume of cases is still small, the numbers point to a costly,
long-term problem for law firms. If claims continue to rise, firms may
face much higher malpractice insurance premiums, higher deductibles and
insurance carriers that are less willing to provide coverage.
In other words, they'll face a big hit to the bottom line.
Corporate firms also must deal with an increasingly aggressive set of
plaintiffs firms that are willing to go after high-end cases, usually
involving big-money corporate and securities practices. Even a few
corporate firms are getting into the act, launching malpractice suits
against their competitors.
Excerpts of the ABA study were released to Legal Times last week.
Comparing two four-year periods, 1996 to 1999 and 2000 to 2003, the ABA
found that legal malpractice cases of $2 million or more jumped 60
percent. The study, which compiled data provided by 15 law firm
insurers, will be released in June.
The growing severity of claims stems in part from the major corporate
scandals of the past five years, which have opened law firms up to new
liabilities, insurers and law firm managers say. But the fallout goes
beyond some of the biggest headlines. In recent months, three major law
firms -- Sidley Austin Brown & Wood; Pepper Hamilton; and Gunster,
Yoakley & Stewart -- have each been hit by suits with claims that top
$100 million. All three firms decline comment.
Other firms have seen eight-figure jury verdicts. In February, a Texas
court ordered Baker Botts, along with co-defendant Wells Fargo & Co.,
which served as executor of an estate, to pay $71 million to the trust
of a widow for breach of fiduciary duty while planning her husband's
estate. Last month, Seyfarth Shaw was slapped by a Los Angeles jury
with more than $35 million in claims and punitive damages for
mishandling a lawsuit for one-time client and Tae Bo creator Billy
Blanks. Both firms have said publicly that the claims are baseless, and
they are appealing.
And that's just the public cases. In most instances, suits against
lawyers are settled behind closed doors.
Although firms have faced high-stakes cases in the past -- like the
wave of suits against firms like O'Melveny & Myers following the
savings and loan scandals of the 1980s -- malpractice lawyers say that
recent lawsuits have become increasingly complex and have expanded the
legal theories that can be used against lawyers.
In response, insurers have pushed firms to hire general counsel, to
tweak their ethics guidelines and to provide greater oversight to
identify potential malpractice claims. Firms are hoping the measures
will keep insurers from hiking rates.
"Without a doubt, everyone is focused and concerned about it," says
Kimball Anderson, general counsel of Chicago-based Winston & Strawn,
which is fighting a malpractice claim of more than $30 million by the
city of North Hempstead, N.Y., over the firm's representation of the
town in a lawsuit.
COTTAGE INDUSTRY
When Bennett Wasserman began practicing law 30 years ago, the New
Jersey-based attorney never imagined that he'd make his career out of
suing other lawyers. After all, legal malpractice was considered a
backwater specialty frowned on by other lawyers.
These days, though, suing lawyers is exactly what pays Wasserman's
bills as he shuttles between trying cases for his Newark-based firm,
Stryker, Tams & Dill, and teaching legal malpractice courses at New
York's Hofstra University School of Law. "Firms are beginning to
realize that there is good money in legal malpractice," Wasserman says.
The business can be lucrative. Lawyers, most often working on
contingency, can rake in up to 40 percent of verdicts and settlements.
As Wasserman sees it, the cases are a way to help self-police the legal
profession. "It really is the consumer rights movement arriving at the
doorstep of the legal profession," he says.
While the vast majority of malpractice cases are still handled by
specialized plaintiffs firms, even some major corporate firms are
showing a willingness to take on plaintiffs-side legal malpractice
cases. Hunton & Williams, for instance, is representing EarthLink Inc.
in a $1 million legal malpractice case against Powell Goldstein in
Atlanta. Powell Goldstein has countersued Hunton & Williams, alleging
conflict of interest because Hunton & Williams was EarthLink's general
counsel and, Powell Goldstein claims, was itself responsible for the
legal mistake that cost EarthLink $1 million.
Says Robert Rolfe, general counsel for Hunton & Williams and lead
attorney for EarthLink's case: "No law firm likes to bring a lawsuit
against other law firms. But law firms realize that sometimes they have
to stick by a good client when a client has a problem."
A NEW WAVE
Thirty years ago, the bulk of legal malpractice claims focused on
lawyers who missed filing deadlines. Over time, as cases have grown
more complex, some of the biggest cases are coming from corporate and
securities practices.
Plaintiffs lawyers have also begun applying a legal theory -- deepening
insolvency -- that hadn't previously been used against lawyers,
malpractice attorneys say.
In such cases, plaintiffs argue that advisers added to the insolvency
of a failing financial company through bad advice or by failing to blow
the whistle on a company's wrongdoing. The suits generally stem from
company bankruptcies and often claim damages in the tens and hundreds
of millions of dollars. "What you're seeing more and more is the claim
being asserted against law firms," says Kevin Rosen, head of Gibson,
Dunn & Crutcher's legal malpractice defense group.
Two Delaware cases filed against Pepper Hamilton in recent months are a
prime example. One suit by the bankruptcy trustee and another by the
insurer of Pepper Hamilton's former client, the Student Finance Corp.,
contend that Pepper Hamilton lawyers contributed to Student Finance's
bankruptcy and its alleged corporate practice of disguising faulty
loans.
Other factors add to the ballooning size of claims. The increasing size
of global business deals has exposed firms to greater risk and
potential damages. And as firms grow, the potential for law firms to
overlook conflicts of interest has spawned litigation. "Now the
struggle is about whether the judgment that the lawyer exercises fell
inside or outside the standard of care," says Thomas Campion, a partner
at Drinker Biddle & Reath who defends law firms.
So far, the increasing number of high-stakes suits hasn't translated
into higher insurance premiums. Says Douglas Richmond, a senior vice
president at Aon Risk Services Inc.: "I just don't put much stock in
the allegations that are made."
Still, some firms are feeling the effects of big malpractice suits. To
cut down on the premiums, firms are taking out larger deductibles,
which means that they must pay the first $1 million to $5 million of
any malpractice claim, say insurers and law firm managers.
And Daniel Reed, a vice president with St. Paul Travelers, which
insures approximately 70,000 lawyers in the United States, says
insurers may be forced at some point to raise rates or cut back on the
amount of coverage they offer. "The rate levels at the market are not
reflective of what we're seeing in terms of overall cases. At some
point, either rates need to have an aggressive push upward or capacity
is going to restrict in some areas," says Reed, whose company
participated in the ABA study.
CONTROL ROOM
With mounting pressure from insurance companies, firms have centralized
ethics procedures, hired in-house general counsel, instituted fresh
ethics training and become more persistent about scrutinizing practice
group management.
A roundtable of law firm general counsel meets regularly through
Hildebrandt International, a legal consulting firm, to exchange
strategies. James Jones, a consultant with Hildebrandt, says firms are
realizing that this is an "important enough area" to stay on top of.
Aside from the potential hit to the bottom line, firms are concerned
about the cases because they can have a significant impact on a firm's
culture. A big claim can raise overhead and cut into a firm's profits,
potentially sending some rainmakers out the door. It may have a
chilling effect on relationships with clients. And lawyers, fearing the
rising costs of litigation and legal fees, may become overly cautious
in how they practice law.
Says Anderson, general counsel of Winston & Strawn: "People are maybe
overlawyering, maybe engaging in very defensive lawyering,
memorializing all conversations with the client. Over time, that adds
expense."
But plaintiffs lawyers like Larry Doherty, a name partner in
Texas-based Doherty Long Wagner, dismiss concerns that malpractice
cases are having a negative effect on the way lawyers do their jobs.
"In Texas parlance, those kind of arguments are just bullshit," Doherty
says.
