With the severity of the economic downturn continuing to bite, most law firms would probably accept that such conditions have exacerbated the liability risks they face. In particular, whilst there has been a degree of scaremongering about the claims environment during the last few years, history demonstrates that the level of claims does generally reflect the state of the economy.
Claims Trends
The latest statistics published in the Judicial and Courts Statistics Report (for 2011) show some decrease in the number of professional negligence actions launched against solicitors, slightly reversing the steep upwards trend seen between 2007 and 2009. In 2006, only 30 claims were issued against solicitors in the Chancery Division of the High Court; this increased to 80 in 2008 and to 210 in 2009. Although the total dipped to 144 in 2010 and then decreased again to 125 in 2011, solicitors remained the profession facing the most claims in Chancery by a very considerable margin. The other High Court Divisions do not produce a breakdown by type of profession, although 227 actions were launched in the Queen's Bench Division in London in 2011 under the category of "Other Negligence (including professional negligence)" a slight decrease from the 247 claims launched under the same category in 2010.
The overall statistics show that there were 35,238 proceedings started in the High Court's Chancery Division in 2011, an increase of 6% compared to 2010, although 23% lower than in 2009. There were 13,928 proceedings started in the High Court's Queen's Bench Division in 2011, 16% less than in 2010 and 25% less than in 2009.
Despite the recent dip, the level of professional negligence claims post-2007 (post credit crisis) has remained considerably higher than figures for the preceding years. So although litigation may have generally reduced, there seems to be a greater willingness to sue the lawyer in troubled times. Clients scrutinise the advice they receive more readily and any gaps in that advice are far more likely to cause loss, be detected and be pursued.
Whilst a significant number of small law firms have become embroiled in large numbers of property – related claims in recent years (some of them involving mortgage fraud), the overall picture has, until recently, been relatively benign for larger law firms.
There has, however, been a deterioration in the overall claims experience and there are a number of substantial claims currently working their way through the courts at present. Note also SIMIA's withdrawal from the solicitors market in March 2011, citing an "unusually severe" claims experience over the previous three years, with firms of all sizes experiencing a higher volume of larger claims. In January 2012, SIMIA announced an unprecedented supplementary call of £15.8million on its members, largely as a result of a substantial deterioration in its prior year's claims experience for the 2003, 2004 and 2006 years of account. SIMIA's experience is telling of the significant risk exposure of the UK solicitors' market.
In the United States, the large mutual, Attorneys' Liability Assurance Society ("ALAS"), recently reported an underwriting loss for the first time in nine years for the 2011 year of account. Although the frequency of claims reporting was unchanged from 2010, it remained at its highest level since 2002. More importantly, gross claims expenses, excluding reinsurance recoveries, increased from approximately $101m in 2010 to $405m in 2011. ALAS reported that this deterioration was not driven by a particular area of practice and nor is it considered that the US claims environment has fundamentally changed; rather, the losses are the product of a small number of major claims involving familiar generic factors, such as poor client quality, mistakes and conflicts of interest.
In general, large claims against lawyers have caused problems both here and in the States.
Future Outlook
Where do all these factors and trends leave us in terms of the claims outlook for the profession?
Whilst there has been a deterioration in the overall claims experience, the "claims tsunami" predicted by some commentators has not materialised; nor will it, notwithstanding the likelihood of further claims by lenders over the next 12 months.
Much may ultimately depend upon how long the current economic difficulties persist and how many problems emerge once assets are disposed of in the future. Given the long-tail nature of such claims, the underwriting years from 2008 have yet to mature and it will, therefore, be some time yet before their ultimate outcome can be predicted with any degree of certainty.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 06/07/2012.
