Claims against law firms – 2019 trends

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The professional indemnity claims landscape has evolved significantly for law firms and their insurers over the last five years since the dark days of the recession when a tidal wave of lender claims hit. Today, it feels more benign, at least in terms of the volume although there remains a growing range of diverse threats facing firms and their insurers and these will be accentuated in the event of an economic downturn. We have identified our top ten claim trends for 2019.

Every day of the week frauds

There has been an epidemic of so-called Friday frauds. These typically involve a fraudster masquerading as a seller in a residential property sale and absconding with the completion monies. The result is both firms on either side of the transaction being potentially exposed for a breach of trust and claims. A growing rise in cyber breaches (see below) can also involve hackers emailing solicitors in the name of their client and duping them into sending them client funds. The Solicitors Regulation Authority (SRA) has reported that over £11 million of client money was stolen due to cyber crime in 2016-17.

These frauds can happen any day of the week and despite the best efforts of insurers, risk managers, the SRA and government agencies (such as the National Cyber Security Centre) to highlight awareness, they remain a growing trend. Frustratingly, while some fraudsters are sophisticated and difficult to deter, many frauds could be avoided with basic risk management and by implementing rigorous financial processes (such as refusing to send money to a different account without prior signed authority). Firms are improving their first line of defence, but more can be done.

Other cyber frauds and data breaches

Cyber crime is an ever present menace at every level for consumers and businesses. Accidental data breaches are also on the rise (despite the risk of punitive fines). There will be a number of reasons for this, one of which is that as our economy becomes more reliant on technology, and criminals become more sophisticated, both accidental and malicious breaches will increase. In 2017, PricewaterhouseCoopers conducted a survey in which 60 per cent of law firms reported an information security incident in the previous 12 months, up from 42 per cent in 2014.

These thefts or breaches can lead to immediate and severe loss and a whole host of different claims as a result. Other malicious attacks might lead to consequential losses from ransomware/denial of service attacks – especially if client files are blocked and essential work cannot be carried out. Some first party claims such as theft from the firm itself or business interruption are not even covered under a professional indemnity policy. A cyber policy should no longer be an option but a necessity, and whether such policies respond will be something to watch.

Mental health

We consider that the profession is likely to see a year on year increase in claims where the root cause is related to mental health until sufficient action is taken to reduce the risk. Practising law is seen as a stressful job and one in four have experienced severe stress. While a snapshot of a file will not show stress as the reason a mistake was made, it is becoming more and more common now when interviewing witnesses that in fact it probably was.

Law firms are recognising the challenge and it is now a regular item on many board agendas. However, systematic change will be required to effect real change. Recently, some firms have announced limited hour contracts, for example 40 hour weeks. While the devil will be in the detail, this sort of action is a step in the right direction and it recognises that some lawyers have other competing interests to balance outside of work, and have to manage the stress and tensions that come with both.

Recession

In the short term, this is perhaps the biggest known risk factor. The Brexit divorce is more uncertain than ever as we go to press, with potentially severe economic implications. When considering the potential for a recession, one also has to look at economic stability of the European Union as a whole and it is fair to say that it is facing uncertain times regardless of the Brexit “sideshow”. Recent riots in Paris, unrest in Italy and Spain, and unsettling rhetoric from Hungary and Poland are evidence of this.

Taking the positive, if an acceptable deal can (ultimately) be passed through Parliament then the medium term future for the UK could benefit from a deeply unsettled European Union.

Wills and Trusts

This area of law has always been one where claims have arisen. However, in recent years we have seen an increase both in volume and in losses arising. It is difficult to pinpoint precisely why this is, but a few factors come into play. Firstly, people are living longer, marrying a second or third time, and have extended families. This brings added complexity to what should be a simple task. Also, the UK tax system has become increasingly complicated and, added to that, high net worth individuals can have global assets and so can be subject to multiple tax regimes.

In times of economic uncertainty/austerity, governments tend to “tinker” with inheritance tax (IHT), pension allowances and tax investment loopholes. That creates a volatile advisory environment for lawyers working in this area, where the instruction given can be to make the individual’s estate as tax efficient as possible. There has also been a propensity for wills to be challenged on grounds of mental incapacity, and the fact that people are living longer adds to this trend. Even if defeated, the cost of dealing with claims of this nature are high, and the disputes themselves can be highly emotive.

Litigation-based claims

Litigators tend to see an upturn in work during/after a recessionary period and so between 2008 – 2016 law firms will have been busy in this area. However, following spikes in work levels, the trend is to see an equivalent spike in claims, and that is never more true than here. Litigation-based claims can take various forms – misconduct, wasted costs, under-settlement, inadequate advice – and the sums at stake can be significant. This is because not only are we looking at the “lost chance” of achieving a better outcome, but also the costs exposure incurred in the underlying dispute.

The trend is likely to continue for a few years as, unlike transactional work, complex litigation has a habit of lasting for years. Disputes that commenced in, say, 2014 may only now be concluding and so any issues with the outcome will only arise in the coming months/years.

Matrimonial-based claims

While divorce rates are currently at their lowest since 1973, the number of claims in this area is rising with significant losses attached. A failure to deal with pension valuations was a key contributor in recent years (linked with prolific advertising by some firms to attract such claims) and unravelling increasingly complex financial arrangements, and advising on the end outcome a client can expect, is far from straightforward. The cost of doing the job properly can be prohibitive for many clients, but in that event a lawyer needs to be on their guard.

We are seeing claims arising from under/over settlements, a failure to identify assets, inappropriate advice on disclosure and cost management generally, and implementation-based claims (ie insufficient security). The parties can be highly emotional at the time, and that can often carry over when a claim is subsequently made, not least when the former spouse suddenly receives an “unexpected” windfall from a business that was said to be valueless. Often such claims can simply be a product of “post-settlement remorse”, and on deeper investigation full and appropriate advice was given. However, it is a trend to note.

Lender claims

These are nowhere near the levels we saw during the recession. Those claims tended to be for negligence resulting from solicitors failing to identity badges of fraud in a transaction or mortgage application. With tightened lending requirements, many of the banks have systems in place to identify and deter fraudulent mortgage applications. But watch out for a growing rise in claims by lenders for breach of warranty of authority or breach of trust as a result of frauds. Further, the uncertainty around Brexit means all bets are off in respect of a property crash in 2019/2020. As with every property crash in the last twenty years, claims against solicitors will follow.

SDLT claims

Claims against firms for implementing or advising on Stamp Duty Land Tax (SDLT) tax avoidance schemes likely peaked a few years ago. However, we have seen a growing rise in claims relating to commercial property lawyers negligently advising on the appropriate rate of SDLT payable on the purchases of property or wrongly advising which reliefs apply. Often these claims relate to purchases of properties used up to that point for residential purposes for which higher rates of SDLT apply. Provided the economy does not crash and the commercial property market continues to grow (even slowly), expect to see more claims relating to SDLT.

Insolvent law firms

We continue to see an increase in claims with an insolvency element/cause. In short, it  has been a tough market for many law firms as result of the economy, regulatory change, competition (even if fleeting) and the impact of claims over a period with the resultant premium impact. As such, when facing financial difficulty a law firm can take its eye off the ball, staff leave, work gets taken on that falls outside of expertise, and there is a general lack of investment in the last year/months. In short, risk management falls down the agenda.

Summary

While we do not anticipate claim volume, we do anticipate that the current trend of complex/higher loss claims to continue. The professional indemnity market has been rate-competitive for some time, but brokers are reporting that things are hardening as capacity is less obvious, and the impact of the last few years plays out. The one trend that is a real positive is that risk management continues to be implemented with due seriousness by law firms, with support from insurers, brokers and third parties.

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