Is E&O The Next D&O? The Lawyers E&O Loss Trends Tell The Story Elizabeth Pitrof Kerns, Pitrof, Frost & Pearlman L.L.C. Drew Dinsmore Max Re Bermuda Matthew Irvine XL Insurance (Bermuda) Ltd. Lorene Phillips Allied World Assurance Company Ltd. Nancy Settergren Aon Risk Services Inc. of New York Matthew Smith, RPLU Arch Insurance (Bermuda)

2006 Bermuda Perspective Symposium Hamilton, Bermuda ~ May 1 & 2, 2006 Is E&O the Next D&O? The Lawyers E&O Loss Trends Tell the Story

ABA 2005 SURVEY OF LAWYERS’ E&O TRENDS  Legal Malpractice cases of $2 million or more jumped 60% for the period of 2000 to 2003 as compared to the period of 1996 to 1999  Claim severity is related in part to the major corporate scandals of the past 5 years  Law firms are increasingly designating a partner to serve as general counsel to implement or expand ethics guidelines and to provide oversight in identifying potential malpractice claims  Corporate Boards are more open to examining whether the law firm handling its legal work may share blame for corporate problems

ABA 2005 SURVEY OF LAWYERS’ E&O TRENDS  Legal malpractice claims are becoming more complex and new legal theories are being developed  The size of global business deals exposes law firms to greater risk and potential damages  Growth in law firm size creates the potential for overlooking conflicts of interest

Panel Discussion  Is there a nexus between large D&O claims and Lawyers’ E&O claims?  Changes in the size, culture and composition of law firms and the impact, if any, on Lawyers’ E&O claim trends  Lawyers’ E&O claim trends outside of the corporate governance and securities litigation arena

Settlements/Verdicts Present _____________1999______2000_____2001_____ Directors’ & Officers’ Liability  $100 mln Lawyers’ Professional Liability  $20-30 mln  $30-50 mln  $ mln  $100 mln Shareholder class action settlements in which a law firm was also sued Total class action settlements- 127 Sources: Aon’s 2005 Year in Review, prepared by Aon Financial Services Group. Legal malpractice settlements and verdicts compiled by Aon Professional Services Group, from publicly reported information. The years above reflect the calendar year in which the settlement/verdict occurred, not the policy year in which the claim was reported.

Characteristics of Recent Large Professional Liability Claims Claims affecting Directors & Officers  Financial failures/large damages  Aggressive bankruptcy trustee/plaintiffs’ attorneys  Difficult political environment for defendants  Absence of an accounting firm defendant (i.e. Arthur Andersen) Additional element present in all significant claims involving law firms “Proximity” of the lawyer/firm to trouble or the troublemaker

Reasons Lawyers Are Not Sued  Suing the lawyers may complicate the plaintiff’s case  Conduct is too far removed from the central allegations  Lack of privity between the shareholders and the entity’s lawyers  Relatively few lawyers choose to sue other lawyers  Disappearance of aiding and abetting as a cause of action against lawyers under federal securities laws spares some lawyers

Judge Harmon’s Decision Re V&E – What Does it Mean for Protections Under the Central Bank of Denver  District court opinions are not binding precedents; not even for other judges in the same federal judicial district  Judge Harmon’s order is not a final order in the federal system (V&E could appeal)  Applies to federal securities law cases only, in which lawyers are rarely sued anyway.

Trends Affecting Future Lawyers’ Liability Claims  The overall severity of LPL claims and the frequency of severe LPL claims remain well below that of D&O claims.  The number of large LPL claims appears to be declining (based on policy year reporting), at least in the near term. – An improved economy is generating fewer corporate bankruptcies – Enhanced regulatory oversight of corporate (client) governance, e.g. Sarbanes Oxley, should help to reduce the number of clients with unsound business practices – Law firm awareness of risk exposures is greatly enhanced, supporting an increased focus on client intake and review of existing clients’ activities to avoid potential problem clients. – Law firms are emphasizing all forms of risk management, with greater attention to compliance with policies and procedures across the firm.

Trends in the LPL High Excess Market Gross premium increases since 2001:  Layer excess of $50 million + ~ 275%  Layer excess of $100 million+ ~ 350% More firms are purchasing higher limits and they place greater value on high excess coverage Rates are holding because firms’ appetite for limits matches or exceeds available capacity

Traditional Characteristics of Law Firms Partnership Structure & Mentality Generally Risk Averse Strong value placed on reputation Long history :  Client Relationships  Home grown talent Training more through mentoring and less institutionalized

Traditional Characteristics of Law Firms Process Oriented  Nature of exposure requires review of process and entity alone Attention to professional liability at the highest level within firms

The Shifting Tides within Key Spectrums Reputation Risk Drive for Growth/Profits Management Structures

Law Firm Trends Corporate Firms  Shift in culture  Centralized Management  Drive for growth Increased Awareness of Exposures  Resources committed to firm’s GC

Law Firm Trends (continued …)  Increased Attention to the following areas:  Client intake and culling  Attorney Professional Development  Oversight of attorneys  Business Conflicts  Lateral Hires  Partner Compensation

Law Firm Trends (continued …) Changes in regulatory environment