2013 was a year of significant change. We are already seeing the impact of the Jackson reforms giving rise to (costly) claims against lawyers for failing to comply. Last year also saw the peak in claims arising out of the collapsed property market in 2007, and while it is hoped this is coming to an end, there may be some satellite litigation. It was also a year of increased economic stability which in itself means that, in future, different areas of legal work will form the basis for claims. We are also seeing divorce rates rise which in turn is likely to give rise to claims against law firms arising from, in particular, ancillary relief proceedings. Finally, for firms that have looked for opportunities to grow their businesses, the real test for their success (and preventing claims) will be investing in risk management. 

Claim trends 

Limitation 

Across all types of claim we have seen limitation forming an increasing part of the defence strategy, often resulting in the claim being struck out or discontinued. The point is not one to take lightly, and in doing so an immediate conflict of interest arises for the claimant’s law firm. In fact, it can often make it impossible for them to continue to act where settlement discussions include consideration of limitation. 

Missing dates is not a new phenomenon by any stretch. In our experience, the last five years has been an environment of increased litigation activity. Law firms operating in that field have faced resource issues that increase the scope for error. Two other factors may have contributed to limitation becoming more of an issue:

  • A less litigious environment, such that parties are now encouraged to avoid litigation, and by implication not issue proceedings.
  • A mis-match between the complexity of limitation and the person handling the claim.

Standstill agreements are common, but again care needs to be taken as to what they cover and who the correct parties should be. 

Ancillary relief and other aspects of matrimonial work 

We anticipate seeing a rise in the number of claims against law firms arising from ancillary relief proceedings. Civil partnerships were introduced in 2005 but the number of dissolutions is said to now mirror the general trends in divorce, with couples separating in their first ten years. Divorce rates are also expected to continue to rise generally, and most significantly for couples over 60. We have seen “ambulance chasing” become commonplace over the last 18 months. Claims management companies or law firms invite anyone who has been divorced to make contact. While often spurious, the claims that emerge often allege under-settlement or failure properly to consider the alleged value of a pension. 

The recent Court of Appeal decision in Mulcahy v (1) Castles Solicitors and (2) Hextalls with Castles & Co highlights the duty to investigate all assets and fully advise. It also gives comfort to law firms with a finding for defendant on causation. 

The Court of Appeal rejected the claimant's claim against her former solicitors for allegedly failing to provide counsel in matrimonial proceedings with her up-to-date self-employment income figures. While the claimant had not pleaded that allegation, it was held that even if the figures had been deployed in her matrimonial proceedings, they would have made no difference to the outcome because no-one would have had any reason to think that a short-term dip in the claimant's earnings indicated a long-term fall in her earning capacity. 

Grey hair divorces can present law firms with new challenges because elderly people can have more complex financial arrangements in place. For example, a divorcing couple aged 30 – 40 may commonly have a matrimonial home as their main asset, and the issues are often mainly focussed on children and maintenance. However, those issues have (in most cases!) gone by the time couples reach 60, but they may have very different financial arrangements in place. 

Risk management 

The law firm of 2014 is markedly different to that of 2007. The profession has been through many changes, and the potential for claims in the future is likely to be heavily influenced by the approach law firms adopt to risk and its management. Insurers should ask law firms “what is your appetite for risk?”. Firms should have policies that clarify their approach to risk and the checks and balances they have agreed. 

For example, what is a law firm’s attitude to a merger? This has been a trend in itself over the last five years but can produce an unsettled environment and with that an increased claims risk. Law firms need to have clear strategies and be better managed than ever before. If they do, the risk of claims will be reduced. 

An example would a law firm’s approach to new work/clients. The temptation in difficult times is to take on whatever comes through the door. However, a well managed law firm with a clear strategy will be prepared to say no, either because:

  • It recognises it does not have the right level of expertise.
  • It cannot service the client/work in such a way so as to minimise the risk of mistakes arising (for example, volume work).

Conclusion 

We expect 2014 to herald a shift in terms of the overall make-up of claims against law firms. Numbers should reduce due to primary limitation being in play for transactions in 2007 and before. As such, insurers should have some increased confidence that lenders’ conveyancing claims will cross their desks less often. 

However, claims arising from the areas identified above and litigation generally (under-settlement), are likely to rise. In addition, with an increase in economic activity, more corporate and commercial property based claims will increase in prominence, possibly more in 2015/2016. Overall, and assuming that 2014 remains relatively stable, as seen during the back end of 2013, we believe that insurers can be relatively optimistic that the claims this last economic cycle produced will have peaked. 

If we contrast the period we are now entering with that of 2001 – 2007, an opportunity arises to reduce the exposures that will inevitably arise from a future recession. Getting risk management right, as well as ensuring legal work is properly resourced, are critical to achieving this aim. Separate representation of lenders and borrowers is something that should remain on the agenda as it would, in one simple move, dramatically reduce future claims arising from residential conveyancing.