JURIES DO NOT FORGIVE LAWYERS WHO:
TLIE has experienced an incredible turnaround in the last five years. TLIE's claim frequency has declines by 40% and there has been no significant increase in the severity of claims in the last four years. This has allowed TLIE to reduce its premiums and reward those law firms that maintained their insurance with TLIE through the difficult 1980's.
CURRENT EVENTS
However, we are beginning to experience a repeat of some of the basic root causes of the catastrophic legal malpractice claims that led to the crisis in the mid-1980's when the commercial carrier all but abandoned the legal malpractice market in Texas.
"While we do not see the new 25-story office building on every corner in every metropolitan downtown in Texas, we are starting to see some disturbing signs that lawyers are beginning to repeat the mistakes of that period"
Because of the highly-fragmented nature of the market on Texas, you can expect the commercial carriers to panic more quickly and leave the market, if they detect a return to the catastrophic claim activity and an increase in claim frequency we experienced in the 1980's. If TLIE is to continue lowing premiums, we cannot forget the lessons that we and our insureds learned as a result of the difficult 1980's.
HISTORY
In looking at TLIE's claim history, it is easy to spot the activity that led to the high-dollar claims being asserted against lawyers, often resulting in very large jury verdicts. The collapse of the Texas real estate market led to claims over failed real estate transactions. The gross abuse of tax shelters in the middle 1980's, which was ended by the Tax Reform Act of 1986, ultimately led to claims being made against lawyers by investors in those shelters as they were challenged by the IRS. The frenzied days of the 1980's produced unbelievable business investment, particularly in real estate, through limited partnerships, partnerships, joint ventures, corporate formation, etc. Many of those projects wee not only ill-conceived, but also ill-timed. The business fundamentals were based on projections using totally unrealistic assumptions. As a consequence, as many of those investments failed, investors and developers looked to recoup their losses from lenders and lawyers. Estates were devalued overnight which led to challenges by beneficiaries.
In addition, the collapse of the S&L industry led to very substantial claims being made against lawyers by the FSLIC and later the Resolution Trust Corp. The unprecedented number of very high-dollar claims made against lawyers, particularly in Texas, during the 1980's made lawyers' malpractice insurance the most difficult line of insurance to underwrite. It also resulted in unprecedented rate increases year after year. It even resulted in the collapse of one underwriter (VASA North Atlantic), and made a significant contribution tot he downfall of The Home Insurance Company whose rates were not adjusted to correspond to the risk.
"In the analyzing the individual claims that came out of this period (especially the cases that were tried to juries), we learned the claims were not always based on predictable errors such as missed statute of limitations, poorly drafted leases, erroneous opinions or simple neglect. Instead, in many cases the lawyers were being held accountable for the actions of their clients."
We have not returned to the business climate of the mid-80's, and our banking structure seems sound. While we do not see new 25-story office buildings on every corner in every metropolitan downtown in Texas, we are starting to see some disturbing signs that lawyers are beginning to repeat the mistakes of the past.
CASE STUDIES
In analyzing the individual claims that came out of this period (especially cases tried to juries), we learned the claims were not always based on predictable errors such as missed statute of limitations, poorly drafted leases, erroneous opinions or simple neglect. Instead, in many cases the lawyers were being held accountable for the actions of their clients. Most of the high-dollar claims arose from situations involving questionable actions by a client that tainted the jury's view of the lawyer.
Many of the cases tried to a jury involved allegations of conflicts of interest. Either it was alleged the lawyers favored one client over another client (past or present), or the lawyer favored in their own interests over those of their clients. We saw situations in which law firms did not know that one group of lawyers in the firm were representing one party in a transaction, while another group of partners was representing another party in the transaction. We had many cases involving lawyers who were providing independent legal advice to a company (or where supposed to be), while at the same time serving as an officer or director of the company. Many claims were asserted against lawyers who accepted as their fee a financial interest in the client's business or transaction.
We had numerous situations in which lawyers did business with their client. For example, some lawyers "flipped" land for clients by acting as one of the purchasers in the chain of buy-and-sell transactions. We have seen claims in which the lawyer who did the estate planning for a client was also a beneficiary under the client's will. We have had situations in which lawyers who were business partners with a deceased client continued that business activity as executor under the deceased's will. Juries simply do not forgive conflicts of interest.
Another characteristic of those depressed times that we saw over and over again was the expansion of our insured law firms through the hiring of lateral partners. The lateral partner was supposed to bring a certain amount of business that would both justify compensation as a lateral partner and financially benefit the firm. In case after case involving lateral hires, we learned the hiring decision was not based on a close examination of the attorney's credentials, but rather on the assessment of the amount of business that he/she would bring to the firm.
LESSONS
We believed, as the last four or five years seem to demonstrate, that our insureds had learned the lessons of the 1980's and there would not be a repeat of past mistakes. However, in the last six months, we have seen some disturbing signs that these lessons are being forgotten. Claims have been reported to TLIE that, once again, involve clients attempting to utilized that good name of a lawyer as part of what appears to be questionable business transaction. We are seeing an increase of allegations of conflict of interest which seem, on their face, to be supported by the facts. Beware: "he who ignores the past is doomed to repeat it." Rigorously screen your new clients and their cases. Do not represent a client who has little chance of success. Apply the "smell test" to the clients and to what they want you to do. When evaluating lateral hires, don't lose sight of the individual talents of the lawyers involved and the way those lawyers will fit in with your firm. Do not base your decision solely on the alleged size of the billings they will be bringing to the firm. Know who your clients are and set up a system that will warn attorneys in the firm when there is a potential for conflict.
Although we have gotten safely past the collapse of the S&L industry and the real estate market in Texas, we are facing a continuing attack on lawyers from third parties. The privity defense is under constant attack. Over time, we can expect to see liability imposed upon lawyers by parties who are not their clients. This area will probably be expanded. What this means is that a lawyer must look harder at the activity of the client and make a decision about whether or not the lawyer should support that activity through his services. Finally, the most pervasive error we see made is the lawyer who takes on representation that has little chance of success. The client believes his case has merit and cannot understand why his opinion is not shared by his lawyer. Often his phone calls are not returned. The lawyer doesn't share the client's sense of urgency. Nothing seems to be happening. If suit is filed, the lawyer often tries to get the client to accept what the client believes is a minimal settlement. If suit is not filed, the lawyer frequently returns the file to the client at the last minute (or later) with little work having been done. The end result is at best a very unhappy client.
Why even take on marginal representation? Sometimes this occurs when an inexperienced associate is allowed to sign up cases. Sometimes it occurs when the lawyer takes a case to maintain a referral source. In any event, a lawyer must investigate new cases quickly and communicate his evaluation of these cases in writing to the client without delay.
RECOMMENDED READING
A lawyer's only protection from charges of malpractice is his or her own vigilance. If you have not reviewed TLIE's "Legal Malpractice Self-Audit" recently, I recommend it to you as a way to increase your vigilance. The Self-Audit is available free of charge. To obtain a copy, please call 800-252-9332. TLIE's Self-Audit is a confidential self-evaluation of your firm's liability prevention procedures.
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