Professional Liability Claim Trends
As of October 1, 2023
1) Artificial Intelligence
“Reports of my death are greatly exaggerated,” – Mark Twain. Also exaggerated are reports that AI is going to replace professionals, including lawyers and accountants. A well publicized case where two lawyers who used ChatGPT to draft briefs were subsequently sanctioned for it likely threw cold water on the notion that AI will take a prominent role in professional work, at least in the short term. However, there is a high probability that in the near term that AI will replace administrative functions at professional service firms and become involved in other work. There are daily reports of large professional firms planning to utilize AI in various ways, and Silicon Valley is working to embed itself further with professional firms through AI. Additionally, professionals under time pressures – which often happens – will almost certainly rely on AI in the future to complete their work, leading to the likelihood of claims if the AI is not prepared. The potential for errors for firms that embrace the new technology without sufficient guardrails will persist for some time.
2) Plaintiffs’ Increased Expectations
Anecdotally, we are seeing that it harder to resolve professional liability claims as plaintiffs seem to be asking for the sun, the moon, and the stars, and getting flabbergasted when their demands are not met. Why there is a sudden divergence in case assessments is unclear, but what it means is that cases are dragging on for longer than they have in the past, especially large, eight and nine figure cases, where plaintiffs are refusing to settle early for fear of leaving any money on the table. This is especially in line with cases involving failed or bankrupt companies, as investor losses can be substantial, and lawyers and accountants are viewed as ‘insurance policies’ when things go wrong. Investors who have lost money in bad deals often feel entitled to compensation from professionals, even when they struggle to link any acts by the professional to the ultimate losses. What this means is that more cases going all the way through discovery and into trial, substantially increasing the defense spend and ultimate cost of a claim.
3) Regulators Flexing Their Muscles
We have seen a significant recent increase in the SEC, PCAOB, FDIC and other agencies’ use of the subpoena power either in targeted or more general ‘sweep’ inquiries. Additionally, uncertainty at the SEC level while Jarkesy is pending before the US Supreme Court and the future process of SEC Enforcement Proceedings is in limbo is slowing down these ALJ proceedings, and thus keeping certain matters open longer than usual. Additionally, the SEC has made it clear to auditors that they intend to provide stricter regulation of the industry as a whole.
Additionally, updated compliance rules for Private Equity firms and hedge funds will increase the workload and uncertainty for advisors of these firms, leading to the risk of claims for meeting these new standards.
At the state level, state finance departments and insurance regulators are pressing for documentation and confirmation from auditors that the entities – be it banks or insurance companies – under regulation are properly capitalized. The failure of SVB, Signature, and other banks has turbocharged state regulator investigations.
4) Increase in Bankruptcy Filings
Cornerstone research recently issued a report citing an increase in the number of “large” bankruptcy filings this year. The report cited Chapter 7 and 11 bankruptcy filings for large corporations (over $100 million in assets) between 2005 and the middle of 2023. According to the report, there were a total of seventy two (72) Chapter 7 and 11 “large company” filings in the first six months of 2023, compared to twenty (20) in the first half of 2022. With 53 bankruptcy filings for large firms in all of 2022, we have already surpassed that number through the first half of this year. Smaller firms are also struggling, with over 1,500 Subchapter V bankruptcies through September 28, 2023, which is more than all of 2022. Part of the reason for this increase is due to rising interest rates, but regardless of the factors, bankruptcies are typically bad news for professionals, as claims by Trustees often follow and can cause significant losses.
5) Commercial Real Estate – Ticking Time Bomb?
There have been a lot of reports that commercial real estate companies may be heading the bankruptcy protection. The rise of interest rates over the past year has put enormous stress on highly leveraged companies, and the increase in remote work has considerably reduced revenue for commercial landlords, whose business plans and borrowing decisions were made before the COVID pandemic reduced many companies’ need for a “downtown footprint.” Should these firms falter, professional service firms that advised these companies may also face the risk of claims.
54% of business leaders saying they expect their organization to “inevitably” fall victim to a cyberattack and 50% believing they will ultimately experience a ransomware event, according to the 2023 Travelers Risk Index. In 2023, there has been an increase in cyberattacks against professional firms, and well publicized attacks. Professional firms continue to offer an enticing target to cyberattackers as they represent a “sweet spot” for due to the data stored there, such as privileged documents, and client financial data, health information, personal information (Social Security and bank information), patent specifications, IPO/M&A plans, inter alia. As professionals work remotely more and as human error is a significant cause of successful cyberattacks, these risks will continue to be present. Regular training for all employees is imperative to decreasing the likelihood of a significant breach.
7) Inflation and Social Inflation
Inflation – both social and economic — drove personal and commercial auto liability claim costs an estimated $95 billion to $106 billion higher than they would otherwise have been between 2013 and 2022, according to a new report from the Insurance Information Institute (III). Although we do not yet have data and comparisons for professional lines, the numbers are likely analogous. Law firms and experts/vendors are increasing hourly rates to keep up with inflation, which serves to drive up the projected cost of defense beyond initial budgets. Social inflation – the term that describes how claim costs are increasing above general inflation – is also driving up costs. As well publicized deals and nuclear verdicts desensitize potential jurors, we have seen plaintiffs’ firms acting more bullish about jury trials and the potential for excess of policy judgments. These phenomena are part of the cause of a substantial increase in claims severity in professional lines.