Professional liability insurance claims can turn disastrous and be very expensive, especially when there is conduct that involves fraud, conversion or intentional acts that draw a negative reaction.
“These cases can be around for years, often for a decade or so,” according to Gary Shendell, managing partner at the law firm of Shendell & Pollack, P.L.
These types of professional liability insurance (PLI) claims may also be an easier sell to jurors than others. “It’s easier to sell a profit loss versus pain and suffering to jurors,” said Randy Johnston, owner and partner of Johnston Tobey.
Shendell and Johnston joined other experts in discussing characteristics of potentially disastrous PLI claims at the annual Professional Liability Underwriting Society (PLUS) conference in San Diego, Calif.
Gerald T. Merritt, president of The Hanover Insurance Group, described a design defect case a client brought against an architect involving questions about the time and material charged on a project, a case he said started with architects and engineers and ended with legal malpractice. There was a finding of fraud, which triggered the issuance of a reservation of rights letter. The case went to verdict, resulting in a $7 million award. Ultimately, the case was settled for $4 million, with the carrier paying the full policy limit of $2 million.
The architect, a volatile client, turned on the defense firm, filing suit alleging legal malpractice and damages totaling $5 million. The case was tried to verdict. The jury found on behalf of the client and awarded him $300,000 because of a weak link in the carrier’s case. In the original lawsuit, the carrier did not want to pay the expert to review the time and material line items. As a result, the jury found that the carrier failed to have the time and material charges reviewed thoroughly. The defense of the case cost seven figures.
The panelists said that PLI claims are economically driven, the result of a customer’s money being lost or stolen, a failed business transaction among friends, or high expectations from a bygone economic boon. “Money lost increases a professional customer’s angst,” Merritt said.
Shendell offered another example of how a fraudulent act can affect business associates. A law firm in Florida opened an ancillary investment firm. The law firm created phony settlement documents which it sold on the investment side to high net worth clients. It was a $1 billion scheme, according to Shendell. As a result of the fraud, the law firm’s retained accounting firm, corporate law firm, and business consultant were all sued.
Sometimes professional liability claims arise as a result of a fee claim initially brought by the professional. “Advising a client to drop a fee claim is the hardest thing of all,” said Eric. D. Kaplan, managing partner of Kaplan Papadakis & Gournis P.C. “It creates a difficult situation, even though the case may not have started without the fee.”
Though an insured professional may demand the pursuit of fees, insurers will not pay for this, resulting in billing difficulties for counsel retained to defend an insured. “A carrier doesn’t want to spend time on the pursuit of fees. This can create a conflict for counsel,” Kaplan said.
Once a fee lawsuit is filed, the professional’s records are open to scrutiny. “Probably the worst thing you could do is file a lawsuit to get fees paid,” Johnston said. “It opens up the underwear drawer.”
How a professional handles the expenses associated with a job may be the most important factor of all, according to Johnston, who provided an example of a professional billing a customer for three drinks while waiting for a flight.
Cases typically involve an arrogant insured with a volatile personality, the panelists said.
They provided tips on how retained counsel can best work with an insured on these types of claims:
- Meet the insured as soon as possible upon retention
- Set ground rules early on
- Maintain case management control
- Keep the insured informed as case developments occur
In an interview with Claims Journal and Insurance Journal following the presentation, Merritt discussed the professions that are seeing an increase in lawsuits.
“I would say anything on the real estate side…so that breaks down into a bunch of components. Certainly title agents have had significant issues over the last two years. Mortgage brokers, appraisers, home inspectors, realtors,” he said.
“Then, on the non-real estate related side, certainly lawyers. There’s been a continuous uptick in frequency with lawyers,” said Merritt. “It’s civil and insurance defense, which is a little unusual because that’s usually a favorable class from an underwriting standpoint, but we have seen situations where insurance companies are actually not satisfied with the services that have been rendered by their defense counsel.”
According to Merritt, attorneys, accountants, investment advisors, and realtors continue to be popular targets for PLI suits.
In the initial case example cited involving the architect, the client was a well-known Hollywood star. She went so far as to badmouth the architect on a late night talk show. “High profile cases puts pressure on claims examiners,” said Merritt. He recommended carriers use seasoned adjusters, familiar in the handling of difficult claims.
“I recommend that the insurance companies who are participating in this space need to pay particular attention to the depths and experience of their claims examiner staff,” Merritt said. “It’s very important that the insurance industry from a claims perspective, especially in specialty lines, makes sure that they have seasoned, large complex claims handlers who can handle these frequency spikes that we have periodically, but then to leverage that experience to bring along the earlier in career or mid-career type examiners. You can’t just close them out of the process. You need to bring them into that process, otherwise there’s no transference of the claims intelligence.”
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