The Evolving Relationship Between Insurers and Legal Firms Amid Rising Legal Malpractice Claims

FEBRUARY 13, 2025

A growing concern for both the insurance and legal industries is the deteriorating relationship between insurance carriers and the law firms they insure. Over the past decade, a sharp increase in lawsuits filed by insurers against their legal clients has led to friction, particularly as insurers have experienced an increase in claims severity.

In this guide, we will explore the relationship between insurers and law firms, then present details about legal malpractice coverage designed to protect against increasingly aggressive settlement tactics.

The Texas Insurance Company Case

In December, 2024, the Texas Insurance Company filed a legal malpractice claim against one of its clients, a law firm called Hinshaw & Culbertson. The lawsuit, titled Texas Insurance v. Hinshaw & Culbertson, alleges that the insurer did not receive appropriate or timely advice before a jury verdict was issued in an automotive collision case.

The dispute originated from another lawsuit filed in California’s San Francisco Superior Court. In that case, the claim named Texas Insurance and another of its clients, DeSoto Cab Co. A jury trial resulted in an $11 million verdict, but only 3% was assessed as DeSoto’s responsibility. Texas Insurance, on the other hand, was found jointly and severally liable for the verdict as required under the State of California’s Proposition 51, which states that joint and several liability applies only to economic damages, while apportionment of fault applies to noneconomic damages in a case.

In Texas Insurance v. Hinshaw & Culbertson, the lawsuit contends that the insurance carrier would have settled the underlying lawsuit within the $1 million policy limits had the carrier been appropriately advised of the risks posed by Proposition 51. According to Texas Insurance, the law firm of Hinshaw & Culbertson did not provide written or oral guidance addressing Proposition 51 and its inherent risks posed by economic damages. The lawsuit continues to work its way through the San Francisco Superior Court, where Texas Insurance hopes to recover the $11 million awarded in the underlying suit.

Insights into Insurance Defense

According to a senior advisor at a major commercial insurance carrier, so-called “insurance defense” was a low-frequency area of practice (AOP) in the past; it was considered poor form for an insurance carrier to sue its panel counsel. In more recent years, however, the frequency of lawsuits has increased dramatically, leading to the deterioration of the relationship between insurance companies and their legal clients.

Why are insurance carriers more frequently suing their clients? It is known that insurance companies have become far more aggressive in settling claims and suing their counsel; likely factors include the interest rate environment, economic inflation, and an increase in claims severity.

On the legal side, many young lawyers in law firms do not want to participate in insurance defense cases, owing to the long work hours and relatively low hourly rates for such work. As a result, law firms tend to be reluctant to defend themselves against insurers – often companies with experienced legal teams of their own. The relationship between insurers and their clients continues to erode.

Why is Legal Malpractice Insurance So Critical?

Legal malpractice insurance is crucial for law firms because it provides financial protection and safeguards their reputation in the event of claims alleging professional negligence, errors, or omissions. Here are some key reasons why legal malpractice insurance is essential:

Protection Against Costly Claims

• Even the most diligent law firms can face lawsuits from clients or third parties alleging mistakes, inadequate representation, or breaches of duty. Legal malpractice insurance covers defense costs, settlements, and judgments, which can be financially crippling without coverage.

Coverage for Errors and Omissions

• Mistakes such as missed deadlines, clerical errors, conflicts, and other administrative, substrative, and client relations related errors. A policy ensures that the firm is protected against such risks

Reputational Safeguard

• Allegations of malpractice can damage a law firm’s reputation. Insurance helps cover the costs of legal defense and public relations efforts to mitigate reputational harm.

Defense Against Frivolous Claims

• Even baseless claims can result in significant legal expenses. Malpractice insurance helps ensure that firms can defend themselves without financial strain.

Despite the protections afforded by a comprehensive legal malpractice insurance program, law firms have a responsibility to provide timely and accurate legal guidance to the insurance carriers they represent. By doing so, this can help mend the relationship between firms and their insurers and also avoid costly, embarrassing, and lengthy lawsuits like Texas Insurance v. Hinshaw & Culbertson.