Takeaways from State of the LPL Market Panel Presentation at ABA National Legal Malpractice Conference – Boston 2017
- Big Data is changing Underwriting, Broking and Claims Handling and helps to keep the LPL and APL markets highly competitive and insurance reasonably priced.
- P & C events, such as Hurricanes in the Caribbean, no longer drive rates up for Lawyers and Accountants because carriers now distinguish between Casualty and Professional Liability risks.
- The Great Recession, the largest economic crisis in 70 years, created a hard market that only lasted about six weeks.
- Capital to insure professionals keeps pouring into the market, despite an increase in huge claims individually exceeding hundreds of millions of dollars.
- Despite all the positive developments, premiums have increased between 2 and 4% on average for Lawyers E and O insurance in 2017. While 20 years ago this would have been classified as an annual inflation adjustment, now it may be the closest thing we will see to a hard market for some time.
In its recent Opinion No. 27707, Rogers Townsend & Thomas, P.C. v. Peck, et al., Appellate Case No.: 2011-199626, the South Carolina Supreme Court found that Community Management Group (“CMG”), a management company for homeowners associations and condominium associations, engaged in the unauthorized practice of law when it (1) represented its association clients in Magistrate’s Court; (2) filed judgments in Circuit Court; (3) prepared and recorded liens to recover unpaid assessments and other charges; and (4) advertised that it could perform the services the Supreme Court now deems the practice of law.
CMG argued that the administrative order In re Unauthorized Practice of Law Rules Proposed by South Carolina Bar, 309 S.C. 304, 422 S.E.2nd 123 (1992), allowed a non-lawyer officer, agent, or employee to represent a business, and that it, as an agent of its association clients, could therefore represent them. The Supreme Court disagreed and clarified In re Unauthorized Practice, finding that non-lawyer third-party entities or individuals, such as CMG, are not “agents” because they have no nexus or connection to the business arising out of its corporate structure.
CMG further argued that suing in Magistrate’s Court on behalf of associations to collect unpaid assessments was not the unauthorized practice of law because it did not require specialized legal skill or knowledge. The Court disagreed. Likewise, the Court found that filing judgments from Magistrate’s Court in Circuit Court constituted the unauthorized practice of law, as did preparing and recording liens and other legal instruments. The Court chose not to rule on whether (1) interpreting covenants for homeowners; (2) addressing disputes between homeowners and associations; and (3) advising the associations on remedies to collect unpaid assessments constituted the unauthorized practice of law because petitioner did not include specific facts or details about CMG performing those services.
This Opinion offers some clarity on what can be a blurred line between performing legal and non-legal services on behalf of community associations. As management companies continually offer and perform expanded services to community associations, they must remain diligent in considering the implications of their conduct. Similarly, community associations and their lawyers must ensure legal tasks are appropriately assigned to, and performed by, lawyers. The convenience or financial benefit of allowing a non-lawyer to address these tasks is outweighed by the risks it may be completed improperly, the Court could deem it the unauthorized practice of law, and it could lead to a criminal charge . The unauthorized practice of law in South Carolina is a felony requiring a fine of up to $5,000 or imprisonment for up to 5 years, or both, once the Supreme Court has deemed the charged activity is the practice of law.
Takeaways from Professional Liability Underwriting Society (PLUS) International Conference 2016:
1. Law firms fail because of: too much debt, rapid expansion, guaranteed salaries, and/or cultural divides.
2. We are all expecting a U.S. law or accounting firm to get hit with a Panama Papers style data breach which brings down the firm and probably yields management liability claims as well.
3. The IRS will continue its attack on captive insurance companies utilized to avoid tax with no real risk transfer.
4. Mary Jo White will be missed and you might expect the SEC to focus less on Wall Street and more on Main Street in the next four years.
Just last week the ABA’s Standing Committee on Lawyers’ Professional Liability (LPL) released its Survey of Legal Malpractice Claims 2012-2015. Items of note include:
1. Total legal malpractice claims increased by 20% from the 2012 survey. This might appear to be a big increase but it looks small when you read on.
2. There was a huge increase in the number of claims in which claimants received over $1 million. There were only 52 such claims reported in the 2011 study but there were 440 such claims reported in the 2015 study for more than a 700% increase. Perhaps you should check my math, as a lawyer with a calculator is a scary thing; nonetheless, we should all check our limits and make sure we have enough coverage in a world of big dollar claims.
3. Total real estate claims dropped 21% when 2015 is compared to 2012. This is true despite the fact that commercial real estate transactions have increased during that time and many commercial real estate lawyers are experiencing the best of times. Not many real estate deals are failing and that helps keep the pressure off the lawyers who do the deals.
4. 46% of the claims arose from administrative errors, client relations or intentional wrongs. While this is a slight reduction from prior surveys, it still emphasizes the importance of basic blocking and tackling.
- Keep your administrative machine running smoothly, return client calls, be nice, don’t intentionally hurt your client, and your E & O risk is cut in half.
- The seamless web of the law is vast and can’t be perfectly understood by any of us. Let’s all do the easy stuff and reduce our risk dramatically.
5. Claims against bankruptcy and collection lawyers have only dropped off about 4% from the 2011 study to the 2015 study. Despite the precipitous decline in consumer bankruptcy filings, commercial bankruptcy filings are said to be on the rise and so are claims against the lawyers involved.
The Standing Committee puts out the Profile on Claims every third year and also sponsors two great conferences annually. If you are interested in getting involved in our work feel free to reach out to Joe Kingma or just say hello at our spring meeting in Boston.
Fighting For Your Professional Life: Accounting and Attorney Malpractice
Defamation claims against lawyers and accountants are on the rise, as noted in the recent Carlock, Copeland & Stair Accounting Risk Management program in Atlanta. That point was highlighted recently when a forensic accountant was sued in Fulton County, Georgia. The facts are complex, but the plaintiff was involved in a failed bank and sued over an allegedly negative reference in a national publication. Accountants and all professionals need to be careful what they say, especially in the press.
Five Takeaways from the Carlock Copeland & Stair Accounting Risk Management Program Presented on May 19, 2016
1. The Panama Papers, and Big Data in general, demonstrate the risk posed for accountants when clients hide or launder money offshore. An international consortium of major news sources is actively soliciting more leaks and tax officials from 28 countries met in April to plan a joint strategy to mine the Panama Papers for gold. The database lists many U.S. CPA firms and diagrams their relation to various suspect transactions. Governments from Russia to Britain to Argentina have been rocked by the disclosures. Don’t get your firm’s name added to the list and avoid overly aggressive strategies. Protect your own files from those who might like to steal your clients’ confidential information.
2. Professional judgment is what you get paid for, but can also be what you get sued for. Audit engagements in particular require lots of judgment calls. Make sure your firm’s work reflects good judgment and that those who make the judgment calls are properly trained and professionally skeptical. If you have young auditors in the field without onsite partner supervision, talk through the tough issues with them in advance.
3. Read your insurance policies. Policy provisions may be negotiable and you may gain value in ways beyond premium reductions. Be very accurate when filling out your application and compare it to your website. Submitting a neat and accurate application can save you real money. Price should not be your only consideration and you should check to see which carriers treat their clients well.
4. Jurors hold outside accountants to high standards when a client suffers from internal fraud. Take another look at your engagement letters to make sure you have included all the damage limitations and disclaimers the laws allows and avoid engagements where the client’s lack of internal controls creates too much risk.
5. Accountants are getting sued for defamation even when they make statements in good faith and in the course of their clients’ engagements.