High real estate prices in a harsh economic climate are at the heart of an explosion in LawPRO claims, according to president and CEO Kathleen Waters.
In its latest annual report, Ontario’s legal insurance provider documented a nightmarish trend: not only had the number of claims increased, but the cost of each one had also escalated. At the same time, family law and trusts and estates practices have seen particularly big spikes in claims over the years.
In 2009, there were 2,300 malpractice claims against lawyers in Ontario, up 27 per cent since 2000. The average cost of a claim in 2001 stood at $24,000; by 2007, that number had jumped to $34,000, a 42-per-cent leap.
“If you look across areas of law where a lawyer may be accused of negligence, it’s not uncommon that a piece of property can be embedded in the problem somewhere, driving up the damages amount even if it wasn’t a real estate retainer,” says Waters.
Resolving the malpractice claims launched in 2009 will cost LawPRO an estimated $85 million. In 2004, the total stood at just over $50 million.
Strong investment returns have insulated lawyers from the increased costs in the past, but this time they took a hit after a disastrous year in the markets contributed to a $500 increase in the base premium to $2,950.
The struggling economy dealt a further blow by making clients more litigious, according to Dan Pinnington, director of PracticePRO, the company’s risk management program.
“When everything is humming along and real estate values are going up and share prices are going up, people want to do the deal,” he says.
“They want to buy the property, and if little bumps in the road happen, they find a way to get around it. In harder economic times, people may not have the money to close the deal, so bumps in the road will be used as an excuse to delay payments or as justification to get out of it altogether.”
Estates and wills files, as well as family law, saw some of the greatest increases in claim values. Family law claims jumped an astonishing 237 per cent to $6.4 million in 2007 from $1.9 million in 2000. Wills and estates claims jumped a less dramatic 85 per cent to $6 million from $3.3 million over the same period.
Then there is real estate itself, traditionally accounting for the largest proportion of claims paid by LawPRO. Last year, 36 per cent of all claims costs originated in real estate law.
Jerry Udell, a partner at McTague Law Firm LLP, says some lawyers underestimate the difficulty of real estate law. “There’s many potholes in the real estate road,” says Udell, who also teaches the subject at the University of Windsor’s faculty of law. “There are so many variables and so many opportunities for somebody to make a mistake.”
Udell would prefer to see designated real estate specialists working on deals but understands that many sole practitioners can’t afford to specialize. “Just because somebody is called to the bar doesn’t mean they are competent to do every real estate deal,” he says.
“I wouldn’t fathom stepping into a criminal court. Some people dabble in real estate, and it’s a dangerous thing to do.”
Sally Burks, co-chairwoman of the Working Group on Lawyers and Real Estate, says the public expects to pay too little for legal services related to real estate, which tempts lawyers to cut corners.
“There are lawyers out there running what I like to call puppy mills where they crank out real estate deals using paralegals or secretaries. Every minute that the lawyer spends with the client cuts into the overheads of the lawyer, so they just don’t do it and probably don’t take the necessary time.”
Burks says the emergence of title insurance in Ontario has given homeowners and lawyers a false sense of security when it comes to real estate law because they fail to understand exactly what it covers.
In her opinion, lawyers should advise clients to get a survey of their property because it can identify problems not covered by title insurance. “I don’t think lawyers are telling clients that because clients just don’t want to hear it,” she says.
“When clients come to us, they already have somewhat of an understanding of what they think a real estate transaction should involve,” she adds, noting many lawyers are complacent about the chances of a malpractice claim. “I don’t think they realize it until they get sued or their buddy gets sued.”
Pinnington’s job is to get lawyers thinking about claims before one happens. “Like most unpleasant things, you tend to avoid thinking about it,” he says.
Despite the recent spike in claims and the unique economic circumstances of the last two years, Pinnington says the basic trends remain the same. “In terms of where and when and why lawyers make mistakes, it’s virtually identical across the board.”
Pinnington’s avoidaclaim.com blog alerts lawyers to the latest frauds and provides advice on spotting suspicious cheques as well as more routine reminders about performing due diligence.
But as Waters points out, the top cause of malpractice claims remains constant. “The No.1 cause of claims is communication-related.
Any time you’re dealing with personal law issues, clients can be quite invested in the situation, and lawyers have to be really careful with how they communicate and how they document that communication.”