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Hard market expected to continue for professional liability coverage

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While the economy has recovered somewhat from the financial crisis, the effect on professional liability coverage remains far-reaching and is not expected to soften for several years.

That's the consensus of a handful of lawyers, brokers and insurers specializing in professional liability challenges confronting embattled lines such as mortgage brokers, financial advisers and real estate agents.

Litigation concerning Chinese reverse merger firms has resulted in insurers pricing them out of the market (see story below).

“Even though the fiscal cliff has been avoided, we still have serious, lingering questions around the debt burden in the eurozone and the debt ceiling in the United States, and their impact on the professional lines business,” said Carl Bach III, London-based president of NavPro Europe, a unit of New York-based The Navigators Group Inc.

“We've seen high claims frequency affecting several professions since the crisis,” Mr. Bach said, “but not high severity, which could potentially follow.”

Other professional lines experts expressed similar views, noting a significant increase in claims against some lawyers.

Kim Noble, senior vice president of the lawyers and real estate professional liability practice at OneBeacon Professional Insurance in Farmington, Conn., a unit of OneBeacon Insurance Group Ltd., cited increased claims activity against lawyers specializing in real estate, collections, foreclosures and probate.

“Whenever monies are lost in a transaction or in a litigated matter, it's a natural outgrowth to blame the lawyers,” Ms. Noble said. “We've certainly seen an uptick in the number of claims since late 2008, and I don't think we've seen the last of them. Even with the economy improving, I suspect we haven't seen the conclusion of this.”

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“I don't think we're close to an end game yet for financial institutions liability,” said Bruce Campbell, a shareholder at Dallas-based law firm Campbell & Chadwick P.C. “The (Federal Deposit Insurance Corp.) has a three-year statute of limitations to bring claims against directors and officers, lawyers and accountants” and other white-collar professionals. “We're still seeing a pretty big bubble working its way through the system. If we go into a recession, the likelihood is for more bank failures, which would not bode well for bank professionals and the professions serving them.”

Since 2008, 470 banks have failed in the United States, far less than the 2,300 savings and loans that failed in the late 1980s and early 1990s. But, Michael O'Connell, managing director and financial institutions practice leader at Aon Risk Solutions, said the situation actually is worse from a litigation standpoint.

“As of October 2012, the FDIC had authorized litigation against 665 directors and officers of 80 failed financial institutions,” Mr. O'Connell said. “The pace and pattern of claims likely to be brought against directors, officers, accountants, appraisers and advisers appears to be an accelerating trend, that will continue throughout 2013 and beyond.”

Professional liability lines tend to have long tails from a claims perspective and are typically written on a claims-made basis, “which means we still have a ways to go,” he said.

From a primary insurance market standpoint, Mr. O'Connell said pricing for D&O and other professional lines was up about 4.5% at recent renewals, although excess market pricing moderated the impact.

On the other hand, Ms. Noble said professional liability rates for lawyers and real estate professionals have increased.

“We're seeing a lot of lawyers with their first claim coming to us for risk management resources,” she said.

Mr. Campbell agreed, noting that attorneys who handle collection-type issues for financial institutions are experiencing “pretty sizable” premium increases. “This has nothing to do with the FDIC, but with lenders owed money that hire the attorneys to bring a claim against the creditor, only to receive a claim back for violating the Fair Debt Collection Practices Act,” he said. “These days, everyone is looking for somebody else to pay.”