During a recession, and for the three years following, there has historically been a huge spike in paid claims, which is a number that typically doesn’t return to a more normalized level until five years post-recession. In addition, and looking back at the events of 2008 specifically, legal malpractice insurers experienced a spike in paid claims above $10,000 that ranged from 35% to 41%. I share this in order to explain why recessions always capture the attention of the insurance industry because given how the markets look of late, another recession appears to be imminent thanks to the COVID-19 pandemic. I wish it were otherwise, but it sure looks like history is going to repeat itself.
As a Risk Manager for a legal malpractice insurer, one interesting question for me is how will COVID-19 impact our insureds? While only time will tell, I have a few thoughts. Lawyers are already having to deal with telecommuting and all the associated risks, not the least of which is a significant increase in the risk of someone at a firm becoming a victim of a cybercrime. A number of lawyers and more than a few clients will be forced to deal with significant and potentially long-term reductions in household income. Some lawyers may simply say enough is enough and decide to retire while others may be forced into postponing retirement as a result of steep declines in their retirement accounts and this is just for starters. While I could continue on, I’ll admit this is starting to make me feel a bit depressed, so I’ll stop.
Here’s the point I’m trying to make. Everyone, including lawyers, is trying to find a way to maintain some level of control and normalcy during very uncertain times. The challenge here is to not let emotions, such as fear and panic, cloud one’s personal and professional judgment because that’s when poor decisions are made. For example, investments get sold at the market’s bottom, an attachment to an email that claims to have the answer to preventing the spread of coronavirus is opened too quickly, or an important deadline never gets entered into a calendar all because worry and fear rule the day.
Now, based upon what has happened as a result of past recessions coupled with the realities of the response to COVID-19 from the individual level to that of governments, here’s what legal malpractice insurers are currently concerned about. First, claim frequency and/or claims severity will change for any number of reasons. We just can’t accurately predict how. At a minimum, clients will look to blame their lawyers when their business dealings go south as a result of the near-certain recession that’s coming. Lawyers and staff will make mistakes that would otherwise not have been made due to the rapid transition to working from home and/or being under excessive stress. And clients, who are also experiencing excessive stress, will question decisions they made in light of the advice their lawyer gave them if their legal matter doesn’t work out the way they expected it to. Regardless, there will be a new normal in terms of claims, at least for a few years.
Second, policy retention may be an issue; but again, we can’t accurately predict how this might evolve. Lawyers facing difficult financial times may choose to leave the practice of law entirely or may decide to allow their policy to lapse and simply go bare as a way to save some money. Of course, there’s the flip side, some who have previously been bare may decide now’s the time to purchase coverage because the value of their assets have dropped, and their level of risk has risen. Only time will tell.
I do understand that right now it can be difficult to turn off the noise and stay focused on the tasks at hand; to stop worrying about finances and family and take care of the business side of the practice; and to keep emotions in check as you try to find the time to document your files, keep your clients informed, and struggle to deal with courthouse closures and emergency orders. It’s a given that mistakes will be made; but it seems to me that times like these truly underscore one of the values of having a malpractice policy. It’s the comfort that comes with knowing that if some mistake does eventually turn into a malpractice claim, you’ve got coverage in place.
That said, I can’t help myself. I need to add one final comment. For all of you who have up until now made a choice to forgo coverage, I can’t imagine a better time to rethink that decision because as I stated above, the value of assets has dropped, and the level of risk has increased. The peace of mind that comes with the purchase of a legal malpractice insurance policy is worth every penny if you ask me.