Mutually Assured Protection Among Large Law Firms

47 Pages Posted: 11 Aug 2016 Last revised: 21 Feb 2017

Tom Baker

University of Pennsylvania Law School

Rick Swedloff

Rutgers Law School

Date Written: February 19, 2017

Abstract

Top law firms are notoriously competitive, fighting for prime clients and matters. But some of the most elite firms are also deeply cooperative, willingly sharing key details about their finances and strategy with their rivals. More surprisingly, they pay handsomely to do so. Nearly half of the AmLaw 100 and 200 belong to mutual insurance organizations that require member firms to provide capital; partner time; and important information about their governance, balance sheets, risk management, strategic plans, and malpractice liability. To answer why these firms do so when there are commercial insurers willing to provide coverage with fewer burdens, we talked to dozens of people in large law firms and the insurance industry, including those at the notoriously secretive mutual insurers. We developed a unique, qualitative data set that sheds important, new light on the legal industry, insurance markets, and the mutual insurers that protect many large law firms from malpractice risks.

We show that many of the most elite firms prefer the mutuals, in part, because they help solve traditional insurance market failures like adverse selection, moral hazard, and long-term contracting. But this only tells part of the story. We also provide an important and novel autonomy explanation. Many lawyers prefer mutual insurance because they perceive that it promotes professional independence in the face of the social control imposed by liability and insurance.

Our data also reframes the traditional understanding of organizational forms in the commercial insurance market. Most prior literature describes mutual and stock insurers as competitors. We show that stock and mutual insurers play complementary and symbiotic roles. Mutuals help manage access to the powerful risk-distributing potential of stock insurance through reinsurance and excess coverage, thus creating mutual-stock hybrids. Further, we show that even outside of this relationship, mutuals favorably affect the behavior of stock insurers, suggesting that these mutual arrangements produce positive externalities that benefit other lawyers and law firms in similar practice contexts.

Keywords: Insurance Law, Legal Malpractice, Lawyers' Professional Liability Insurance, Professional Responsibility, Ethics, Damages, Large Firm Liability, Mutual Insurance, Stock Insurers, Reinsurance, Risk

JEL Classification: G22, K13, K29

Suggested Citation

Baker, Tom and Swedloff, Rick, Mutually Assured Protection Among Large Law Firms (February 19, 2017). U of Penn, Inst for Law & Econ Research Paper No. 16-17. Available at SSRN: https://ssrn.com/abstract=2820654 or http://dx.doi.org/10.2139/ssrn.2820654

Tom Baker (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-2185 (Phone)

HOME PAGE: http://www.law.upenn.edu/cf/faculty/thbaker/

Rick Swedloff

Rutgers Law School ( email )

217 N. 5th Street
Camden, NJ 08102
United States

HOME PAGE: http://law.rutgers.edu/directory/view/swedloff

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