Lloyd’s underwriter tackles lawyers’ reputation risk
18 March 2008
Reputation is everything in the legal business and a damaging malpractice claim can cost a law firm millions in lost business and staff defections. That’s why Lloyd’s underwriter Beazley, a leading underwriter of professional insurance for big US law firms, is expanding the scope of the professional liability cover it offers to lawyers.
To help law firms address the total economic cost that results from reputation loss in malpractice lawsuits, Beazley is partnering with specialist advisors such as the US crisis management consultant Kekst and Company.
Insurable defence and settlement costs can be dwarfed by the longer term uninsurable costs of a malpractice claim. “A major professional liability claim for a large law firm could cost between $5 million and $50 million,” said Lloyd Fielder, head of Beazley’s lawyers’ professional liability (LPL) team. “But the total economic cost will invariably be higher, and can sometimes be a multiple of the insured portion of the firm’s losses.”
Fielder explained that the total economic cost of malpractice claims not covered by insurance includes lost billable hours resulting from the diversion of resources to resolve the lawsuit. “Unwelcome publicity can also lead to a loss of clients,” Fielder said. “Talented staff may leave for rival firms and, at the same time, prospective recruits can be deterred from joining.”
Other uninsured losses can include the law firm’s self insured deductible and any losses that exceed the firm’s limit of indemnity from its professional liability insurer.
To fill the intangible risk void, Beazley’s new legal PL package will include access to crisis communications experts Kekst and their reputation management advisors. Beazley’s cover will provide for half of the first $50,000 of Kekst’s fees, in the event of a claim.
Legal malpractice claims can arise for many different reasons. One law firm was sued by the widow of a wealthy industrialist for failing to disclose a conflict of interest in handling her late husband's estate. The law firm had recommended to the widow that she turn over management of her husband's entire trust to a bank that was also a client of the law firm.
In another case, a law firm was sued for drafting and negotiating multiple fraudulent loan transactions, designed to hide customer losses. The suit was brought by a private equity company that had bought a stake in the company at which the frauds had taken place.
Negligence can lead to a claim. In one case, a privileged document was negligently passed by a law firm to a competitor of the law firm's client. On the strength of the document, the competitor brought a successful, and very expensive action, against the law firm's client. The client sued its lawyers for malpractice.
“The reality is that the details of almost any large malpractice lawsuit are potentially damaging to the reputation of a law firm - and therefore reputation management advice can be invaluable,” Fielder said.
Reputation management is one of several risk management and loss control services that Beazley is planning to offer law firms. The Lloyd’s underwriter has also identified risks related to electronic data management, fraud by rogue partners and risks from strategic changes such as mergers or overseas expansion.
“We’re not claiming to have all the answers to all law firms’ risk management challenges in house,” Fielder said. “We are claiming that we can identify the people that do have that expertise.”
Last updated on 18 Mar 2008
