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Home > Blog > Attorney Malpractice—Trouble on the Horizon for Real Estate Area of Practice?
TUESDAY, FEBRUARY 21, 2017

Attorney Malpractice—Trouble on the Horizon for Real Estate Area of Practice?

The Financial Crisis and Great Recession had its roots in a number of major problems.  One of those was Real Estate.  Many Home Equity Loans that were over 100% of equity in the house value.  Lenders were willing to lend up to and in some cases over the value of a home.  Houses were selling at a record pace, the pricing were going up never to stop, and lenders were eager to lend packaging the loans off to the secondary market with little or no risk to the primary mortgage lender.  The only exposure for many lenders was the short time that they continued to hold the loans before resale on the secondary market.  Houses continued to turn at a faster and faster pace, with many a homeowner using their houses as piggy banks to buy cars and vacations that they could not afford with just their income.  It was all good because housing prices were expected to continue to of up forever.  But the fairy dust was starting to wear off.  Any parallels to 2017?

Even in 2006, delinquency rates on homes were starting to rise.  The promises to securitized mortgage buyers on the returns were starting to not be kept.  Ordinary people who had counted on their “piggy bank” to keep funding their lifestyle were starting to find that they could not refinance or sell their homes for what they owed.  All of a sudden the money funding real estate dried up, almost bringing the country to its knees.

So why would this have any impact on Law Firms that practice in Real Estate or any of the other Real Estate Related practices?  To a large extend almost every real estate transaction has a law firm involved.  From drawing up the purchase agreements, doing the title searches, making sure that the loan agreements meet the criteria to be sold on the secondary market, to drawing up the offerings to sell the securities.  Even in the best of times errors are made.  As we now know, corners were cut in the mad rush to close more and more deals.  As long as none of the work done was tested when trying to repo a house all was good.  Errors made along the way, both honest and less than honest, from the loan documents and title searches to the packaging of the security offerings started to produce attorney malpractice claims.  The great thing about having real estate prices continue to go up, even if there was an error, the error did not cost anything as the value of the real estate more than covered any error made.   As such there were no damages and no malpractice claim payout everyone was happy.

Most Law Firms carry Attorney Malpractice Insurance.  And the Lawyers Professional Liability Insurance Carriers starting in about 2010 and 2011 to have frequent and severe Real Estate Area of Practice or related areas malpractice claim losses.  The frequency and severity of these claims continued to increase till about 2014. 

As is normal, the attorney malpractice claims trailed the economic events that caused the claims and the Attorney Malpractice Insurance Carriers reacted to close the barn doors after the cows were out of the barn.  All Attorney Malpractice Insurance Carriers carry reinsurance to spread the risk.  Even though there are many Attorney Malpractice Insurance Carriers there are only a few reinsurers insuring the insurance carriers for Attorney Malpractice exposures.  When the reinsurers started to notice the uptick in Real Estate related Attorney Malpractice Claims, the primary Attorney Malpractice Insurance Carriers were basically told around 2012 to 2013 to raise rates and/or severely curtail their writing or real estate attorneys.  Many Primary Malpractice Insurance carriers stopped writing real estate law firms.  By this time it was not a question of “if” there would be more Real Estate Related claims for lawyers but “when” would they be reported.

Time past and the claims started to slow down.  By 2015 primary Attorney Malpractice Insurance carriers were starting to accept most Real Estate Exposures again.  The reinsurers were starting to allow the Primary Insurance Carriers to accept real estate law firms.

Unfortunately, Attorney Malpractice reinsurers must see trouble on the horizon again for the Real Estate market.  In middle part of 2016 Primary Attorney Malpractice Insurance Carriers were starting to limit their exposure to Real Estate again in lock step.  This is particularly true for those firms that are involved in repossessions or loan workouts.  By the beginning of 2017, many Primary Malpractice Insurance carriers have started to decline Law Firms with any repossession and/or loan workout work.  Malpractice Insurance Carriers have also severely limited the percentage of Law Firm Real Estate related work that an insurance carrier is willing to accept.  This is making forcing many law firms that specialize in certain areas of real estate to get coverage in the Surplus Lines market at much higher rates.

L Squared continues to have access to a few admitted Malpractice Insurance carriers that are willing to write heavy Real Estate Law Firms.  But even those carriers are attaching higher rates to the Real Estate Area of Practice Exposure.  Normally Attorney Malpractice is a trailing indicator for claims of the economy as a whole.  This time it appears they going to be a leading indicator of what may be coming in the Real Estate market?  Only time will tell.

Posted 12:10 PM

Tags: attorney malpractice insurance, lawyers professional liability insurance
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