Posted on 06 Feb 2012
Law firms are inceasingly finding themselves on the wrong end of lawsuits and are obtaining insurance against expensive liability claims as they increasingly find themselves on the wrong end of lawsuits.
Getting blamed for poor results is nothing new for law firms, but they say clients have become more willing to sue in recent years. Claims of employment discrimination and firm mismanagement also are popping up more often as postrecession, law firms cull their ranks and sideline some partners in an attempt to boost profits for those who remain.
Some clients are even using the threat of litigation as a way to negotiate their bills. Martin S. Checov, general counsel with O'Melveny & Myers LLP, says there has been "a disheartening increase" in such tactics since the economy tanked in 2008. There is "a lot more friction out there" with clients, he says. Mr. Checov declines to discuss clients with whom his firm has tussled.
Beefing Up Coverage
Professional-liability insurance typically has been among the top operating costs for law firms, after compensation and real estate. Most firms, particularly those with 50 or more lawyers, buy malpractice insurance, says Anne Marie Davine, who leads the U.S. law-firm practice at insurance broker Marsh. The biggest firms are taking out multimillion-dollar policies, and midsize partnerships that may have been underinsured are increasing their coverage, insurance brokers say.
Claims aren't tracked across the industry but several insurers say they have seen increases in the last year. A poll of six leading insurers last year found that four of them reported increases of 6% to 20% in malpractice claims, according to Ames & Gough Insurance and Risk Management, a specialty-insurance brokerage.
"Insurers are telling us that not only is frequency up, but so is claim severity. It's just costing more to defend and litigate a claim," Ms. Davine says.
A malpractice claim filed last June by J-M Manufacturing Co. against McDermott Will & Emery LLP is one case that the legal industry is watching.
The plastic-pipe manufacturer claims, among other things, that an outside vendor the law firm hired to review documents in a whistleblower lawsuit released nearly 4,000 privileged or irrelevant documents to the U.S. attorney's office in Los Angeles. The government then released those files to the whistleblower plaintiffs, who refused to give them back, J-M says.
The company is seeking unspecified damages and is expected to file a second amended complaint this month.
McDermott Will declines to comment.
In another case, Cold Spring Harbor Laboratory is seeking up to $82.5 million in damages from Ropes & Gray LLP stemming from how a former attorney at the firm handled cancer-research patent applications for synthetic genetic material.
The lab alleges that the lawyer copied text for Cold Spring Harbor's application from a prior patent application by another researcher, leading the U.S. Patent and Trademark Office to say Cold Spring Harbor's application wasn't unique. The lab says it paid hundreds of thousands of dollars in unnecessary legal fees as a result and "has lost millions of dollars in potential licensing fees."
A defense response to the lab's latest amended complaint is due later this week.
Ropes & Gray declines to comment.
The vulnerability of law firms to client litigation is climbing as the value of the underlying deals, patents and other work for clients rise, insurance brokers say.
And because big law firms carry more insurance than smaller firms, the big practices are particularly attractive targets for litigation. "Plaintiffs' lawyers are conscious of who has the deep pockets," says David Greenberg, a former general counsel for LeClairRyan, a national firm with more than 350 lawyers. Mr. Greenberg now consults on insurance and risk management for law-firm managers.
Insurance brokers say many law firms have expanded their coverage to guard against claims from former employees or disgruntled partners and are looking to shield firm leaders from suits over management decisions, such as whether to merge with other practices.
One case that could set the tone in future employment disputes is a lawsuit filed in 2010 against Kelley Drye & Warren LLP by the Equal Employment Opportunity Commission, alleging age discrimination against lawyer Eugene D'Ablemont and others.
The lawsuit arose from a policy that required partners to relinquish their equity stakes after turning 70. After Mr. D'Ablemont filed an age-discrimination claim over the policy, his compensation was cut to "significantly less" than that paid to younger attorneys with similar client collections, billings and productivity, according to the EEOC complaint.
The complaint seeks lost wages and compensation for pain and suffering. Kelley Drye ditched the policy in 2010, after the suit was filed.
Both sides decline to comment. A recent court filing indicates that they are in settlement negotiations.
The recession and sluggish recovery also have spurred litigation against firms as their clients file for bankruptcy. Trustees seeking to repay creditors often go after the failed businesses' former advisers: lawyers and accountants.
"It's part of my everyday work, where I'm dealing with a bankruptcy trustee or a receiver trying to recover assets any way they can," says Tom McGarry, a partner at Hinshaw & Culbertson LLP, who defends law firms against malpractice claims. "It's a new ballgame and all the loyalties are gone."