Print Edition
August 2010 
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Professional Liability In A Distressed Market |
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Selina Harrison, November 2009 |
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In the aftermath of the financial crisis, more companies and individuals are exposed to professional liability risk across all sectors. Valuations have been decimated across the board, and as a result, entities of all types have been desperate to mitigate their financial losses – ultimately causing the number of liability-based lawsuits to rise. This has been notable in certain sectors such as financial services and healthcare. Further, when such claims occur in a bankruptcy situation, they can incur costly handling issues. As such, it is vital for all professionals to be aware of the liabilities that can emerge in the current business environment, and how to deal with them.
Post-crisis liability risk
Liability-based claims are an ongoing concern in most sectors, regardless of the market at large. However, for the financial services, healthcare and legal services sectors, the current market has been particularly challenging. Arguably the financial services sector, has been the hardest hit.
In recent months, Wall Street has witnessed several high-profile cases where shareholders have brought claims against banking executives, which has created a toxic environment for directors and officers (D&O) liability risk. This is partly due to the proliferation (or lack thereof) of D&O insurance coverage for personal claims, although such policies are available, not every firm will have taken them out. As a result, the risks associated with holding a top-level executive position is greater than ever. Executives are very aware of this trend, and are increasingly demanding that adequate D&O insurance coverage as a provision of their employment.
In addition, medical malpractice has always been a hot liability area, and this remains unaltered through the financial crisis. Indeed, Bill Coffin, a director of publications at the Risk and Insurance Management Society Inc, explains that “there is an expectation among the general public that all medical concerns should somehow be taken care of and when that level of service is not met or when there is an actual incident of incompetence that either fails to address a medical concern or that actually harms a patient, then there is a reflex desire to seek deep compensation in return.” Further, recent legal developments in the US have made the healthcare sector more susceptible to liability claims. In March, the US Supreme Court ruled that drug manufacturers could be sued in a state court over alleged defects, even if the Food and Drug Administration (FDA) had approved its use. The ruling came after an individual was injected with the anti-nausea drug Phenergan, made by Wyeth. The drug label permitted intravenous injection, but explained that care was needed to avoid hitting an artery, as likely complications included gangrene. This ultimately arose in one case, and the patient’s forearm was amputated. She sued, alleging the drug should be barred from intravenous use altogether. Wyeth appealed to the Supreme Court on the grounds that the FDA had approved Phenergan, but the state jury sided with the claimant, awarding her $7.4m in damages.
Tough financial conditions have also refocused claimants’ attention on the advisory community. Legal advisers to dealmakers are finding themselves increasingly and unexpectedly, under fire. “There has been an increase in lawsuits against transactional lawyers based on claims that were rarely brought in the past,” notes James Walker, a partner at Richards Kibbe & Orbe LLP. He explains that legal professionals who handle transactions can be vulnerable to professional liability claims as disgruntled investors are increasingly looking to sue their legal professionals as a way of reaping compensation for their losses. “Even sophisticated investors will claim reliance on the legal professionals involved, especially in the absence of clear evidence that such reliance was unreasonable. This was crystallised in recent comments from Judge Jed S. Rakoff in SEC v. Bank of America, where Judge Rakoff appeared to criticise the SEC for not targeting the lawyers who made all the relevant disclosure decisions,” adds Mr Walker.
In the SEC v. Bank of America case, failures in the conduct of both parties aroused suspicions as to the honesty and competency of each. Indeed, the failures that occurred are among the most common reasons behind legal malpractice claims. This is backed up by the latest edition of ‘The Profile of Legal Malpractice Claims’, published by the ABA Standing Committee on Lawyers’ Professional Liability. “The leading cause of liability claims was the failure to know or properly apply the law. The increase in these claims results from the increasing complexities of specialised legal fields and the failure of counsel to recognise the need to refer to, or at least consult with, an expert in the field,“ says Edith Matthai, a partner at Robie & Matthai. According to the publication, the second most common cause for a legal malpractice claim was an overall failure to act promptly and to obtain necessary information. Then come cross complaints, wherein a lawyer has to sue to collect fees from a client. Ms Matthai explains that in this turbulent financial climate, these suits have increased as more clients are unable to pay fees, and in turn, more firms are unable to write off the receivables.
Specific issues and legal solutions
However, in the current economic environment, many of the companies facing professional liability claims may also be going through bankruptcy proceedings. In such cases, the bankruptcy process can raise a number of additional issues for all parties – and particularly legal professionals. After the bankruptcy filing, the new trustee and his lawyer will carefully review all pre-filing actions taken by the client's attorney, to determine whether malpractice has been committed. “Courts generally hold that the bankruptcy trustee has standing to bring most, but not all, professional liability claims. Because the bankruptcy trustee steps into the client's shoes, the bankruptcy trustee will be permitted to review all information that previously was protected by the attorney-client privilege,” says Dennis P. Waggoner, a partner at Hill Ward Henderson. He adds that because the bankruptcy trustee steps into the client's shoes, the client's pre-filing actions may be used as a defence to the trustees’ claims under an in pari delicto theory.
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