Now that the premium-renewal season for surveying firms is upon us, Trevor Weyland sheds some light on the confusion surrounding professional indemnity insurance
During the past few months the property press has seen a number of “Letters to the Editor” which have voiced very understandable concerns and confusions over professional indemnity (PI) insurance. These include seemingly over-inflated premiums which do not match the level of valuation work, a concern over run-off cover for former partners and directors of liquidated firms, and a letter which divulged that most surveyors in the corporate sector appear to be “oblivious to the risks to which they are exposed”.
There is little excuse for such oblivion when the high media profile of recent valuation cases demonstrates all too clearly the heavy demand which professional negligence can ultimately make on the surveyor’s pocket. In the High Court case of Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [4] 31 EG 68 and 32 EG 89, for example, John D Wood Commercial was found guilty of overvaluing three major London properties. The surveyor had been sued for direct negligence by the Belgian bank and Eagle Star over negligent valuations of three properties in London. The guilty verdict carried a severe penalty – £15m in compensation for the bank and the PI insurer.
What has caused all this confusion? First, the property crash which led to a plethora of valuation litigation cases – pushing PI premiums up by 35% to 40%. In 1990, for example, £3.71 was paid out in claims for every £l paid in premiums. Furthermore, owing to the lengthy process often involved when litigation is undertaken, the true claim exposure might not be known until a number of years after the payment of premiums. Therefore, claims arising from activity in 1992-93 can be expected to have an effect on 1994-95 premiums.
Second, as the RICS tried to link up directly with the insurance market, many surveyors wondered what the consequences would be. Now, however, the RICS has been prevented by an injunction from setting up its own dedicated underwriting agency which would have cut out the RICSIS (thereby cutting out the broking input that is so necessary for most renewals). In the meantime, then, this potential confusion at least has stabilised.
Small firms can take some comfort from the decision made recently by the RICS general council to exempt very small practices from the requirement to more than double previous levels of minimum PI cover for practising surveyors. From the premium year starting April 1 1995, firms with an annual turnover of less than £50,000 will need to purchase PI cover at a lower tier of £100,000 – £150,000 below the level for larger firms.
Firms with a turnover of between £50,000 and £100,000, however, have less cause for rejoicing: from April 1 1995 they are required to purchase PI cover to a level of £250,000 – more than double the current £100,000 level.
The RICS proposal is similar to a scheme operated by the Independent Surveyors and Valuers Association, which also has plans to make it compulsory for members to return a certificate to the RICS, confirming the correct level of PI cover, within 28 days of the inception of the policy.
Clearing up the confusions
So, where do you stand if, having moved firms, your former employer goes into liquidation and is then sued for being negligent on a particular project with which you were intimately involved?
First, check that your former employer makes his PI payments regularly after your departure. Chartered surveyors moving from one practice to another, and who were partners/directors at their former practice, are required under PI regulations to maintain run-off cover for both their own work as well as for work carried out in the name of the firm itself. In these cases, their responsibility for providing cover extends to work carried out by their former employees. The unavailability of cover for some firms does not exonerate the partner/director from liability for negligence. The response that individuals must make under such circumstances is clear: take out personal run-off cover for work undertaken and supervised by them.
Controlling your PI premiums
The surveyor’s life is not an easy one and the cyclical nature of the PI market represents yet another market force bearing down on the profession. What should the surveyor make of the latest developments, how can he best serve his own interests for the future and how can he protect himself from further increases in premium and self-insured excess?
As the old adage goes: the best form of defence is attack. While a single surveying firm cannot influence overall market forces, a firm can make the most of its current good points, and should take steps within the firm to reduce its long-term risk.
This currently means making sure that the renewal proposal form/presentation to underwriters primes the broker to be able to differentiate the firm from the mass that are being underwritten at the same time. Therefore, you should express an up-to-date, and honest, opinion on all the claims circumstances that are outstanding, particularly so that underwriters are aware of the potential of the claims and the likelihood of those claims actually being paid. Don’t leave underwriters assuming the worst, if you know better.
Make sure that your, or the broker’s, underwriting presentation highlights any beneficial risk factors in your firm:
- Are you doing less valuation work?
- Is the valuation work less risky than last year?
- Have your internal procedures been improved?
- Have you sought advice from your solicitor on your contractual engagement terms with your clients?
- Do you intend implementing any new training programmes?
These are all factors which will affect on your risk profile in the eyes of the underwriter. Remember, the underwriter is effectively taking a gamble on your business, and the premium that he charges you directly reflects just how nervous – or confident – he is about your activities.
With your broker, or an in-house steering committee, plan how you are going to improve your risk profile and give a detailed brief to your underwriter, highlighting how you are identifying, eliminating or reducing the PI risk through assessment and action within the firm.
In order to stay competitive, you must understand the potential liabilities of the practice, predict where these may arise in the future, and ascertain what can be done to minimise risk and thus improve the firm’s performance. To remain in business, therefore, you will already be doing the right thing.
Indeed, it is not necessarily a lack of knowledge of professional matters which gives rise to the majority of claims, but rather the human element or the inadequacy of systems, which are not difficult to improve, such as:
- Lack of supervision, poor communication, inadequate record-keeping
- Failure to take written instructions or acknowledgement of instructions in writing
- Inadequate office procedures
- Personal stress
- Not admitting problems early enough.
These could all increase the likelihood of claims against the firm. If an underwriter suspects sloppy systems, he will demand a premium level which will protect him.
Although quality-control procedures may seem fairly hackneyed, they can positively affect a firm’s risk profile.
Premiums v Fees
If it is not possible to make substantial reductions to your PI premiums, you can nevertheless make substantial savings by controlling the increases. The effort in saving, say, £5,000 on PI premiums would be a lot less than if that £5,000 had to be found in fee income.
Monitoring your systems, having early discussions with your broker and, together, making a convincing presentation to the underwriter will prove to be both time efficient and cost effective. n
Trevor Weyland is associate director, professional indemnity and financial institutions, at Sedgwick Europe.
