Professional Liability Claim Trends

As of July 1, 2023

Increased Regulatory Scrutiny

o   Regulators such as the SEC, FDIC, PCAOB, FTC, and various state disciplinary committees have all flexed their regulatory muscles in recent years. The bank failures earlier this year have supercharged those efforts in the bank auditing space, with dozens of banks receiving subpoenas from regulators. SEC Enforcement Actions increased 9% from 2021 to 2022, with fines/remedies rising to $6.5 billion, a 70% increase from 2021 (with penalties doubling year over year). The SEC’s annual report highlighted the actions filed against gatekeepers (auditors and lawyers). PCAOB Enforcement Actions increased 61% from 2021 to 2022, and the PCAOB has noted problems in its review of auditing firms, suggesting increased scrutiny is coming. While stats are not yet available for 2023, we believe that the trend continues to move towards increased regulation and more action by regulators.

Fallout from Bank Failures

o   The winding down of Silvergate, and the subsequent closure/takeover of Silicon Valley Bank, Signature Bank, Credit Suisse, and First Republic Bank have led to a number of claims against auditors and advisors. Additionally, there are a number of banks that have not yet failed but that are considered by regulators and investors of being at risk due to their holdings of government bonds that have reduced value in light of recent increases in interest rates.  To the extent that the Federal Reserve continues to increase rates, as it has signaled that it will, the risk of other bank failures is significant, which could lead to further action against bank advisors.

Slight Uptick in Number of Bankruptcies

o   While the number of bankruptcies dropped significantly during the COVID pandemic, the number of bankruptcies increased slightly in the 12 months ending March 31, 2023. The Federal Reserve’s increase of interest rates has led to a credit crunch, which has caused companies with significant debt loads unable to refinance. Moody’s is projecting defaults for companies with speculative-grade debt to rise to 4.9% by March 2024, up from 2.9% at the end of the first quarter of 2023.   An increase in bankruptcies typically corresponds with an increase in claims against professionals.

ERP Upgrade Issues

o   Companies across the country engage in software upgrades. It has been many years since companies began installing Enterprise Resource Planning software, and many systems are in need of upgrades.  Whether it’s from increasing misalignment between the ERP system and changing business requirements, or the added capabilities of new ERP systems, many organizations find themselves overdue for an ERP upgrade—or replacement. The time, effort, and cost of these upgrades is considerable, especially for larger companies or those with significantly outdated systems. These upgrades do not always go smoothly, whether it be from mismanaged expectations, software problems, lack of communication, or other unexpected issues that lead to recriminations. Those recriminations are increasingly leading to claims against the professional firms that are managing these upgrades.

Artificial Intelligence

o   The topic de jure is AI, and while it is likely decades away from replacing professionals, it is being used by the public to make things easier. Whether it is being used by students to write term papers, or being used by lawyers to write briefs, the potential for things to go awry is real. In Varghese v. China Southern Airlines, lawyers representing the plaintiffs used ChatGPT to write a brief that made up non-existent cases, leading to sanctions against the lawyers. While this was well publicized and should be a warning to other professionals, the likelihood that this exact situation will repeat itself is very high as lawyers under pressure turn to AI to help them meet a deadline. As ChatGPT and other AI services improve, their use by professionals will likely increase, leading to claims when things do not go as planned.

Digital Assets/Crypto

o   The “Crypto Winter” appears to have been short following collapse of FTX in late 2022 and subsequent closure of Silvergate and Signature Banks, which were significant banks for the crypto industry, but there are still storm clouds on the horizon. In June the SEC charged Coinbase, one of the largest crypto exchanges, with operating as an unregistered securities exchange, and the SEC has indicated that it is only stepping up its crypto enforcement after several years of lax regulation. While the potential for fraud and mismanagement is still high in the crypto space, it provides increased risk for professionals advising those in this industry.

Legal Malpractice Payouts Increasing

o   Although the total volume of legal malpractice claims filed in 2022 remained fairly steady compared to 2021, a new report from insurance broker Ames & Gough shows that the costliness and severity of claims have continued to increase in line with a decade-long upward trend. The cost of defending legal malpractice claims continues to climb, and lawyers continue to be a major target for plaintiffs’ firms when deals/litigation/trusts and estates do not go as intended or expected.

Increase in Cyberattacks

o   Cyberattacks on law firms are growing in number and severity. Bryan Cave Leighton Paisner, Gibson Dunn, and Loeb & Loeb were all recent victims of attacks. Foreign law firms also have been targeted recently. A number of accounting firms have also been listed as victims of the MOVEit breach by Russian cybercriminal group CL0P. Overall, it appears that professional firms are being specifically targeted by some hacker groups in order to obtain sensitive client data. The increase in breaches leads to more claims against professionals.