Is E&O The Next D&O? The Is E&O The Next D&O? The Lawyers E&O Loss Trends Tell Lawyers E&O Loss Trends Tell

The StoryThe StoryElizabeth PitrofElizabeth Pitrof

Kerns, Pitrof, Frost & Pearlman L.L.C.Kerns, Pitrof, Frost & Pearlman L.L.C.Drew DinsmoreDrew Dinsmore

Max Re BermudaMax Re BermudaMatthew IrvineMatthew Irvine

XL Insurance (Bermuda) Ltd.XL Insurance (Bermuda) Ltd.Lorene PhillipsLorene Phillips

Allied World Assurance Company Ltd.Allied World Assurance Company Ltd.Nancy SettergrenNancy Settergren

Aon Risk Services Inc. of New YorkAon Risk Services Inc. of New YorkMatthew Smith, RPLUMatthew Smith, RPLU

Arch Insurance (Bermuda)Arch Insurance (Bermuda)

ABA 2005 SURVEY OF LAWYERS’ E&O ABA 2005 SURVEY OF LAWYERS’ E&O TRENDSTRENDS

Legal Malpractice cases of $2 million or more jumped 60% for the period of 2000 to 2003 as compared to the period of 1996 to 1999

Claim severity is related in part to the major corporate scandals of the past 5 years

Law firms are increasingly designating a partner to serve as general counsel to implement or expand ethics guidelines and to provide oversight in identifying potential malpractice claims

Corporate Boards are more open to examining whether the law firm handling its legal work may share blame for corporate problems

ABA 2005 SURVEY OF LAWYERS’ E&O ABA 2005 SURVEY OF LAWYERS’ E&O TRENDSTRENDS

Legal malpractice claims are becoming more complex and new legal theories are being developed

The size of global business deals exposes law firms to greater risk and potential damages

Growth in law firm size creates the potential for overlooking conflicts of interest

Panel DiscussionPanel Discussion

Is there a nexus between large D&O claims and Lawyers’ E&O claims?

Changes in the size, culture and composition of law firms and the impact, if any, on Lawyers’ E&O claim trends

Lawyers’ E&O claim trends outside of the corporate governance and securities litigation arena

Settlements/VerdictsSettlements/Verdicts1999 - Present1999 - Present

_____________1999______2000_____2001_____2002 2003 2004 2005

Directors’ & Officers’ Liability

$100 mln. 5 4 6 6 11 10 15

Lawyers’ Professional Liability

$20-30 mln. 2 2 2 3 0 0 0 $30-50 mln. 0 0 0 0 0 1 5 $50-100 mln. 0 0 0 0 0 0 1 $100 mln. 0 0 0 0 0 1 0

2004 Shareholder class action settlements in which a law firm was also sued- 3

2004 Total class action settlements- 127

Sources: Aon’s 2005 Year in Review, prepared by Aon Financial Services Group.Legal malpractice settlements and verdicts compiled by Aon Professional Services Group, from publicly reported information.

The years above reflect the calendar year in which the settlement/verdict occurred, not the policy year in which the claim was reported.

Characteristics of RecentCharacteristics of RecentLarge Professional Liability ClaimsLarge Professional Liability Claims

Claims affecting

Directors & Officers

Financial failures/large damages

Aggressive bankruptcy trustee/plaintiffs’

attorneys

Difficult political environment for defendants

Absence of an accounting firm defendant

(i.e. Arthur Andersen)

Additional element present in all significant claims involving law firms

“Proximity” of the lawyer/firm to trouble or

the troublemaker

Reasons Lawyers Are Not SuedReasons Lawyers Are Not Sued

Suing the lawyers may complicate the plaintiff’s case

Conduct is too far removed from the central allegations

Lack of privity between the shareholders and the entity’s lawyers

Relatively few lawyers choose to sue other lawyers

Disappearance of aiding and abetting as a cause of action against lawyers under federal securities laws spares some lawyers

Judge Harmon’s Decision Re V&E – Judge Harmon’s Decision Re V&E – What Does itWhat Does it Mean for Protections Under the Central Bank of Mean for Protections Under the Central Bank of

DenverDenver

District court opinions are not binding precedents; not even for other judges in the same federal judicial district

Judge Harmon’s order is not a final order in the federal system (V&E could appeal)

Applies to federal securities law cases only, in which lawyers are rarely sued anyway.

Trends Affecting Future Lawyers’ Trends Affecting Future Lawyers’ Liability ClaimsLiability Claims

The overall severity of LPL claims and the frequency of severe LPL claims remain well below that of D&O claims.

The number of large LPL claims appears to be declining (based on policy year reporting), at least in the near term.

– An improved economy is generating fewer corporate bankruptcies

– Enhanced regulatory oversight of corporate (client) governance, e.g. Sarbanes Oxley, should help to reduce the number of clients with unsound business practices

– Law firm awareness of risk exposures is greatly enhanced, supporting an increased focus on client intake and review of existing clients’ activities to avoid potential problem clients.

– Law firms are emphasizing all forms of risk management, with greater attention to compliance with policies and procedures across the firm.

Trends in the LPL High Excess Trends in the LPL High Excess MarketMarket

• Gross premium increases since 2001:

Layer excess of $50 million + ~ 275%

Layer excess of $100 million + ~ 350%

• More firms are purchasing higher limits and they place greater value on high excess coverage

• Rates are holding because firms’ appetite for limits matches or exceeds available capacity

Traditional Characteristics Traditional Characteristics of Law Firmsof Law Firms

• Partnership Structure & Mentality • Generally Risk Averse• Strong value placed on reputation• Long history :

Client Relationships Home grown talent

• Training more through mentoring and less institutionalized

Traditional Characteristics Traditional Characteristics of Law Firmsof Law Firms

• Process Oriented Nature of exposure requires review of

process and entity alone

• Attention to professional liability at the highest level within firms

The Shifting Tides within The Shifting Tides within Key SpectrumsKey Spectrums

• Reputation

• Risk

• Drive for Growth/Profits

• Management Structures

Law Firm Trends Law Firm Trends

• Corporate Firms Shift in culture Centralized Management Drive for growth

• Increased Awareness of Exposures Resources committed to firm’s GC

Law Firm Trends Law Firm Trends (continued …)(continued …)

Increased Attention to the following areas:

Client intake and culling Attorney Professional Development Oversight of attorneys Business Conflicts Lateral Hires Partner Compensation

Law Firm Trends Law Firm Trends (continued …)(continued …)

• Changes in regulatory environment