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PROFESSIONAL INDEMNITY INSURANCE AND RISK MANAGEMENT FOR SURVEYORS AND VALUERS

EMMA VIGUS AND ROBERT CROSSINGHAM

PROFESSIONAL INDEMNITY UPDATE

While the majority of RICS-regulated firms have, for the past decade, enjoyed access to competitively priced

Professional Indemnity Insurance (PII), it’s been a very different experience for those firms that provide

lending valuations. Enough has been written about this topic not to go into detail in this paper but, suffice to

say, new notifications, specifically against valuers, have fallen considerably and the insurance market is now

beginning to respond with an increased appetite and reductions in insurance rates. At the time of writing

(March 2016), the PII market for valuation surveyors is a calmer placer than was the case in early 2014.

Based on the experience of the last three economic cycles, the authors expect this to last until the next time

that the UK property market falls off a cliff. It is only then that we will really understand whether the Jackson

reforms, Valuer Registration, general improvements to risk management and increasing use of technology

have really made a difference in terms of their ability to both prevent and defend a claim. Until that point, all

firms, irrespective of the nature of their work, should ensure that they manage their risk and insurance

prudently, therefore laying the strongest possible foundation for, if it comes, the next onslaught of negligence

allegations.

EFFICIENT PII BUYING

PII spend may account for well in excess of 5 per cent of fee income and can be the second biggest expense

after pay roll.

The same diligence should therefore be applied to the management of PII as is applied to, for example, the

selection of a new member of staff. Unfortunately, for many firms, PII is seen as a necessary evil and is only

considered a few weeks ahead of renewal at which point the objective is to renew as quickly and as cheaply

as possible. This approach is unlikely to result in an insurance programme that, when tested by a claim,

performs as it should do. Surveying firms cannot legislate entirely against the impact of a downturn in the

property market but these relatively simple steps should at least help to establish resilient PII cover.

The insurance rate is the percentage of fee income payable as insurance premium. A firm with a £1m fee income paying a £10,000 premium is paying a rate of 1 per cent. Each surveying discipline will have a different rate allocated to it, according to the perceived risk; the higher the perceived risk, the higher the rate.

STAY INFORMED

Stay in contact with your insurance broker so that you remain up to date with any foreseeable changes in

insurance rate and insurer appetite. This should help you budget for any likely rise in premium and prepare

for the renewal process.

Remain informed about risk: speak to your colleagues, your competitors and your clients; sign

up for news alerts from law firms and insurance brokers and be aware of the events that

typically lead to an increase in claims. If you stay informed, you should be able to respond to

changes in risk by adapting your processes or by applying caution when taking on new work.

Start the PII renewal process at least six weeks ahead of renewal, allowing plenty of time to

complete the proposal form and ensuring that your broker has sufficient time to negotiate with

insurers. If your business operates in high risk areas and/or has a long list of notifications

and/or claims, the renewal process should start sooner.

Ensure the person responsible for buying PII understands the business, understands PII and

appreciates how to manage an efficient buying process. The proposal form should always be

completed by a principal of the business (by which we refer to the director(s), partner(s) or

principal(s) of the firm) and should be reviewed and approved by all other principals, prior to

submission.

Complete the proposal form

Completing the proposal form can be challenging but the disclosure of accurate information is vital to ensuring

that insurers have a comprehensive understanding of your business. Without that understanding, insurers

could justifiably elect to avoid settlement of any claims that may later arise.

The proposal form is a representation of your business. Ensure that it is neatly completed, consistent and

legible. Poor proposal forms are unlikely to result in a favorable response from insurers. If you wish to submit

additional information to demonstrate how your firm exceeds its peer group in terms of risk management or to

simply provide a more comprehensive overview of your business, this should be set out on your headed paper

and attached to the proposal form.

Additional information might include:

corporate brochure(s);

organisation chart(s);

an overview of risk management;

a CV of the principal(s);

a description of any services provided in the past six years which are no longer provided and/or

any new services the business intends to provide in the future;

an overview of the client base;

Terms of Engagement, particularly if they restrict your liability;

sample reports.

Be responsive

Be prepared for additional questions from insurers and respond promptly and accurately. Ensure that any

claims or circumstances are reported to insurers ahead of renewal. Ask all principals within the firm whether

they are aware of any matter that may lead to a claim before you submit the proposal form. This is particularly

important in larger businesses or those firms that operate from multiple locations. Presenting a long list of

notifications at renewal may not make your PII any cheaper but if you fail to notify insurers of a matter that

could lead to a claim and that claim is subsequently avoided by insurers, the costs, which will be borne

entirely by your business, could be ruinous.

If you’ve had claims or notifications, provide as much information to your broker as possible.

If you are submitting your own claims report, be aware that some brokers will also ask for

reports from your current and previous insurers. It is important that both reports reflect the

same data. If, for example, you believe that a matter has been closed with no settlement

incurred, confirm that this is also your insurers’ position.

Insurers accept that firms have claims and notifications but they will want reassurance that you

have learned from past mistakes, so provide notes on the steps you have taken within your

business to prevent the re-occurrence of a claim.

Manage the relationship with your broker

Invest time in the renewal process and manage the relationship with your broker and insurers sensibly as

strong relationships can help deliver better results at renewal and during claims negotiations. We would

counsel against inviting several brokers to quote year after year as it may result in the insurance industry

taking a jaundiced view of your firm. We would advise firms paying in excess of £100,000 or operating in high

risk areas against appointing more than one insurance broker to handle the renewal process.

Use brokers with a demonstrable understanding of the surveying sector. Ask about other firms they act for,

ask for testimonials and evaluate the quality and frequency of the risk management guidance they publish.

Working with a specialist broker will help achieve a better deal at renewal and perhaps, more importantly, will

ensure that you get all the guidance and advocacy required in the event of a claim.

While price is important, the most important rule is to ensure that you are fully aware of what you are buying.

You should be comfortable with the financial stability of your insurer(s) and with your broker’s ability to service

your business throughout the policy year.

MANAGING RISK BEFORE YOU START

Once insurance has been secured, the responsible firm will do their utmost to protect their insurance policy

and the insurers’ interests. While there is a myriad of guidance on how to manage risk ‘on the job’, far less

attention is paid to managing risk before work has started.

Delivering accurate, quality work on budget and on time should help ensure that you remain on good terms

with your client. But it is not always enough to keep the client happy and if they are unhappy, that causes

problems. Cynics may suggest there is nothing you can do about the eternally discontented, while optimists

will say you can identify the bad jobs with a few simple checks.

Does the work fit with your organisation’s strategy?

Euphoria and competitive spirit arising from being ‘in the game’ can cloud an honest evaluation of why you

have been selected to bid. This may prevent a reasoned bid/no-bid process being undertaken, resulting in

winning work that does not fit with your strategy for a variety of reasons. As a minimum, you should have a

basic process in place to establish whether a tender is worth competing for.

Does your organisation have the expertise and resources to do the work accurately and on time?

Lack of expertise is one of the most common causes of Professional Indemnity (PI) claims. You must always

ask this question, whether taking on a new contract in an area in which you have long-standing expertise or

diversifying into a new line of work or geographic region. Irrespective of experience and capability, an

overstretched team is far more likely to make a mistake than one with a manageable workload.

Given the shortage of surveyors across most disciplines, consider long-term resource levels and their impact

on your ability to continuously deliver against a service level agreement. You might be able to service the

contract now, but will that still be the case in a year’s time? If not, how do you intend to fill the resource gap

and can you afford to?

What percentage of your overall income will the client account for?

Over-reliance on one contract or one client is a high-risk strategy. Aside from the financial downside of losing

a customer who accounts for a high proportion of income, over-dependence on one client can have an

adverse impact on your ability to negotiate either payment or contractual terms.

Is the work profitable?

Are you receiving a fee that reflects the resources required, your expertise and the associated risks, and

leaves you with some margin? If you are intending to run the project as a loss leader, establish at the outset

the strategy you are going to deploy to convert related opportunities into income.

Is the work high risk?

Sophisticated firms will put prospects through a due diligence process. This involves: gathering intelligence

on everything from financial stability and corporate structure through to (in the case of lending valuations) prior

history of negligence allegations, approach to securitisation, average loan to value ratio and how a borrower’s

susceptibility to default is assessed. Research will pay dividends here, as will conversations with your peer

group and other professional advisers, including your insurance broker.

Should you notify your insurance brokers and what will the impact be on PI Insurance?

You should always talk to your insurance broker before accepting an unusual instruction, for example, working

overseas for the first time or undertaking a new category of work. They should be able to advise on the

suitability of existing insurance cover, confirm any additional insurance costs and, if required, notify your

insurer (failure to do so where something is deemed material can result in your policy being voided).

Is there a conflict?

The purpose of a conflict check is to identify anything that prevents, or could be perceived to prevent, an

individual’s or a firm’s ability to act impartially and in the best interests of a client. To carry the checks out

effectively, the quality and efficacy of your client relationship management system and processes is critical,

particularly in larger firms.

Do you know who you are working with?

Undertake due diligence on sub-contractors and other contractors, for example, panel members, architects

and project managers. This should include:

an assessment of their financial standing;

a review of their insurance arrangements (limit purchased, excesses and breadth of cover);

their claims history;

referencing conversations with your peer group.

These steps should help to reduce the likelihood of finding yourself in the position of ‘last man standing’ in the

event of a claim or, at worst, uninsurable.

Do you understand the contractual terms?

Read and understand the contract and, if necessary, seek clarification from your insurance broker or solicitor.

Pay particular attention to the liabilities you are required to cover and ensure you appreciate the commercial

impact of any uninsured exposures.

For example, does the contract require cover for ‘all losses, costs, damages or expenses incurred’? No

insurance policy will provide all this. If you are operating under a service level agreement, pay heed to the

penalties that apply should you fail to perform to the standard required. Penalties are uninsurable.

Do you understand what the client wants and do they understand what you are delivering?

Although this is clearly important on complex instructions, it is equally important when working for members of

the public who are unlikely to have an in-depth understanding of technical terminology or appreciate the

physical restrictions that come into play when undertaking, for example, a building survey: ‘No, sir, we don’t

remove cladding to inspect the structure behind.’

Follow these guidelines to manage clients’ expectations from the outset:

do not agree to timelines you cannot meet;

do not promise to deliver the undeliverable to win the business;

if demands are unreasonable, explain your concerns in writing and keep records of all

communications;

ensure that uncertainty surrounding the service you are providing is resolved before you start

work.

Are your terms and conditions up to date and fit for purpose? Have you sent a letter of engagement outlining the scope of services?

Serious consideration should be given to the negotiation of exclusions, limitations of liability and restrictions

on the classes of person entitled to claim. Bear in mind that not all exclusions will be effective in law so, if

possible, consult a legal adviser at drafting stage.

What will and will not be held to be effective will be dependent on a number of factors including:

the identity of the parties;

the nature of the transaction;

the availability of insurance cover;

the reasonableness of the exclusion.

You’ve won the tender, but why?

The euphoria of winning a new instruction can cloud your judgment about what represents a good opportunity.

Before starting work, try to understand why your firm has been selected. You may think it is all about the

quality of your business, but an honest appraisal might show that the reason you have been selected is

because yours was the cheapest tender or yours is the only firm willing to agree to the contractual terms.

Equipped with this insight, you can make an informed decision about whether you are willing to bear the risk

and the steps you can take to mitigate it.

RISK AND LIABILITY WITHIN VALUATION CONTRACTS

As highlighted previously in this paper, effective risk management involves a professional taking control of the

extent of their liability, the nature of their liability and the parties to whom the liabilities are owed. Assuming

the professional and the client have equal bargaining power, which may frequently not be the case where

secured lending services are concerned, one can immediately see how the professional might seek to control

and limit their liability in contract by, for instance, the insertion of exclusion clauses. The position in non-

contractual, or tortious duties is less obvious, as these liabilities arise irrespective of whether a contract is in

place at all and may well arise in relation to individuals or classes of people who are not the valuer’s client; a

classic example of such a liability arising outside contract would be where the valuer owes a duty to the

borrower in a residential mortgage transaction where the valuer’s contractual client is the bank, although

valuers are being exposed to ever wider liabilities and categories of potential claimant. So how do such duties

arise and how can they be controlled?

The case of Freemont (Denbigh) v Knight Frank LLP [2014] EWHC 3347 (Ch) is a good example of a valuer

successfully relying on a narrow contractual definition of the services which it was retained to perform, and

reminds us of the importance of controlling the scope of the services offered. In this case, the surveyor

valued a property at £17m with outline planning permission, and £18.7m with detailed planning permission.

After the purchaser’s acquisition of the property, it then took no steps to develop the site and the buildings

became dilapidated. In the circumstances, the purchaser sought to dispose of the property and put it on the

market, receiving a number of offers but rejecting them, it said, on the basis of the surveyor’s initial valuation

which was given in the entirely different context of the purchaser’s initial acquisition. Ultimately, the purchaser

sued the original valuer saying that, had the initial valuation been accurate, they would have accepted lower

offers and that, having rejected a number of offers, they had lost the chance to dispose of the site on best

terms. Having reviewed a number of the seminal cases in the area — Smith v Eric S Bush [1990] 1 AC 831;

Scullion v Bank of Scotland [2011] 1 WLR 3212; Caparo v Dickman [1990] 2 AC 605 — the judge held that

the valuer was not liable for the claim. The contract between the valuer and the purchaser was key: it

narrowly defined the scope of services as relating to the security valuation only, there could be no suggestion

that there was a wider or longer-tail liability in relation to any later or other reliance by the purchaser on the

advice, and the advice could not be relied on by the purchaser in considering the subsequent disposal of the

site. So, largely as a result of the clear and narrowly defined scope of the valuer’s contractual retainer, its

advice could be relied on only for the purpose for which it was intended, and the circumstances of the claim

were therefore outside the contractual and tortious scope of the valuer’s duty. The lesson for practitioners is

to be as clear as possible about the scope and purpose of their advice and to limit this as far as possible.

The recent case of Titan v Colliers serves to emphasise how the courts will be reluctant to unravel the

complexities of a securitisation arrangement or artificially to restrict the classes of person to whom liabilities

are owed. Importantly, it also demonstrates the potential risks of agreeing collateral warranties or side letters

without proper consideration of the implications. In short, the surveyor advised Credit Suisse on the value of a

commercial property in Nuremburg, valuing it at €135m. Titan then acquired a portfolio of secured property

loans originally advanced by Credit Suisse, including the Nuremburg property and, in turn, ‘noteholders’

purchased shares in the debt from Titan so that there was no net outlay from Titan itself. The surveyor signed

a ‘Third Party Consent Letter’ which enabled any investor to rely on its advice, although they said that they

were unaware of the security portfolio or Titan’s involvement. Subsequently, the tenants and borrower

defaulted on the underlying loan and the administrators sold the property for €22.5m, giving rise to a loss of

€88m on the Credit Suisse advance and €113m less than the original valuation figure. Having acquired the

rights from Credit Suisse, the loss was suffered by Titan’s noteholders, but Titan itself sued the valuer for

€135m. The primary question for the court was whether Titan could sue the surveyor for the noteholders’

losses given that Titan itself had not suffered any loss or spent any of its own money in acquiring the loan

book, or was it only the noteholders who could sue? The valuer accepted that it owed duties to Credit Suisse

and also to the noteholders under the Third Party Consent Letter, but not to Titan. The court held that Titan

was able to bring a claim against the valuer, notwithstanding that it had not itself suffered any loss at all. This

was because it was contractually bound to distribute any sums recovered to its underlying noteholders and it

was the most procedurally expedient and just approach to allow Titan to bring the claims on behalf of the

noteholders. This outcome is perhaps slightly unexpected and arguably belies the principle that it is open to

the professional to define who its client is; in most cases that will be right, but in some more complicated

cases dealing with collective securitised portfolios or, perhaps, peer-to-peer lending, the courts may adopt a

more broad-brush approach to give best effect to the concept of justice and legal process.

In almost all cases, claims are not made against the individual valuer but against their firm or organisation.

However, it sometimes happens that individual valuers are successfully sued even though acting through a

firm, and it is important to understand how and why this happens and what can be done to prevent it; again,

much will turn on the foresight of the valuer in defining the scope of their retainer at the start, and preparing

their advice in careful terms. The case of Merrett v Babb [2001] EWCA Civ 214 concerned the purchase by

Ms Merrett of residential property. Ms Merrett’s bank, which was funding the purchase under a mortgage, had

instructed a partnership firm of valuers, and it had allocated the preparation of the valuation report to an

individual valuer, Mr Babb, whose report failed to disclose the presence of settlement cracks in the property.

Meanwhile, Mr Babb’s firm became insolvent and its professional indemnity insurance was, somewhat

foolishly, cancelled without any run of cover being obtained so that Ms Merrett brought her claim against Mr

Babb personally rather than against his insolvent and uninsured firm. In finding Mr Babb liable, the court had

regard to the fact that his valuation report contained a certificate signed personally by him and giving his

personal qualifications.

Although this certificate was omitted from the report that was passed to the clients, Mr Babb would have

known that they would rely on it and it was a report for which he had accepted personal responsibility, ‘a

professionally qualified person giving advice may owe a duty of care to an effective recipient of that advice in

addition to the duty owed to their employers’. It seems to us that the key lesson to learn here probably relates

less to the need to take care before accepting personal responsibility for advice, and more to the importance

of every individual professional satisfying themselves that they are insured under their firm or employer’s

professional indemnity insurance, and that there is adequate run-off insurance in place if a firm or practice

ceases trading.

In the unusual circumstances where the practice does not have live cover or run-off then the individual would

be well-advised to take steps to obtain their own individual cover. That said, there is a counterpoint to Merrett

v Babb in the form of the more recent cases of Matthews v Maldoom and Mavis Russell v Walker. Indeed, in

the Maldoom case the court considered that Merrett v Babb had been decided for particular public policy

reasons to protect borrowers of modest means where it was foreseeable that the borrowers would be relying

on the valuer’s advice and ought to have recourse to a claim or indemnity. In Maldoom, the property was a

substantial mansion property for which the court considered (consistent with the reasoning in Scullion v Bank

of Scotland) that the borrowers could and should commission their own valuation. It was also significant that

Mr Maldoom’s former employer was a company rather than a partnership, as in Merrett, and that it would have

ignored the separate legal personality of the practice if individual liability had been placed on Mr Maldoom.

The lessons from these cases are that individual practitioners will be much less likely to be exposed to

personal claims if they practice via a company or LLP than a traditional partnership; steps should be taken if

possible to exclude personal liability; and individuals should always take an interest in the practice’s insurance

arrangements and satisfy themselves that they would be covered in the event of a claim against them

personally; if there is a risk of the practice’s insurance not covering they should make their own arrangements.

Much has been said about controlling the extent of the professional’s liability and using express terms in the

retainer and advice in order to do so. Of course, the most obvious step to take in this regard is to consider

exclusion clauses and liability caps, but do they work and what issues arise for consideration? In Omega Trust

v Wright Son & Pepper [1996] Court of Appeal, when sued by a co-lender in respect of the shortfall on

security, the valuer successfully relied on a clause in its report stating that the advice was for the recipient

only (the primary lender) and could not be relied on by any other party (the co-lender to whom the report was

not addressed). In Ampleforth v Turner & Townsend, the surveyor included in its retainer a clause limiting its

liability to the lower of £1m or its fees which were £100,000. When the claimant brought a claim for £200,000,

the surveyor relied on the £100,000 liability cap which it had sensibly included in its terms and conditions.

However, the liability cap failed and the surveyor was ordered to pay the full amount of the claim. This was

because the court considered the cap to be overly ambitious and contrary to the Unfair Contract Terms Act,

not least because it would render the surveyor’s professional indemnity insurance and indemnity limit of £10m

entirely illusory, which was considered unreasonable in circumstances where technically, the court held, a

small proportion of the fees paid by the client were intended to fund the indemnity insurance.

So drawing all this together, it is possible to discern some lessons. First, professionals should use their terms

and conditions to restrict the scope of their duties and limit the purpose for which their advice can be used.

Secondly, they should identify the client and classes of client who can rely on the advice, as well as making it

clear that no individual surveyor takes responsibility for the advice given. Thirdly, careful consideration should

be given to liability caps but, if they are to be enforceable, a degree of circumspection needs to be applied so

that the caps and limits have a chance of being considered reasonable by the courts. And fourthly, always

have in mind the availability and extent of any insurance which is in place, and this is particularly important for

individual surveyors following the collapse or insolvency of a partnership.

THE FUTURE

At the time of writing, many surveying firms will be benefitting from an upturn in work as the UK property

market continues to enjoy a period of relative prosperity. While speculation about interest rates abounds, a

glance at newspaper headlines could

lead many to believe that we have

returned to the heady days of the pre-

downturn market with lending and

property prices reaching record highs.

Hopefully risk will not follow suit and

hopefully surveyors have learned from past mistakes. Businesses must not be tempted to under-price, take

on too much work, agree to overly onerous contractual conditions or to use the inexperienced to counteract a

short fall in capacity.

Several initiatives relating to both risk management and legal process have been introduced since 2008 which

should have a positive impact on the volume of allegations the next time the property market crashes. But,

and it is a big but, they have yet to be tested in a downturn so must not be relied upon to save the industry’s

skin when lenders start re-possessing properties. It remains the case that the best defence a surveyor can

have is a job done well, supported by a comprehensive file and a good relationship with the client.

In the short term, insurance underwriters will monitor the performance of the UK property market closely, with

any tangible evidence of a sustained downturn likely to cause extreme nervousness. More esoteric

valuations, for example, Homes of Multiple Occupancy and New Build will continue to cause concern,

especially for those firms who dabble in this sector of the market.

While of less concern to insurers (as the value of the claim will often fall below the policy excess), firms should

be aware of the increasing number of allegations in relation to Home Buyers Reports and building surveys:

missed defects, Japanese knotweed; problems with services, etc.

Consumers are increasing likely to point the finger at the surveyor in the event of a post-purchase ‘failure’ in

their property and while these matters are often resolved fairly quickly, few firms can afford several pay-outs a

year or have the time to deal with numerous complaints from aggrieved members of the public. While these

matters often won’t trouble the insurer’s balance sheet, insurers will take a dim view of a business that has

numerous notifications or claims, irrespective of who the claimant is.

Know who you are working for. Deliver the product that meets the client’s requirements. Provide great

customer service. If you can get all three right and you still get a negligence allegation, then it is time to join

the cynics.

“A dearth of supply of new homes will continue to support property prices in the longer-term, and could lift gross lending to as much as £320bn, from £288bn last year.”

Adam Applegarth, Northern Rock, 27th July, 2006

This article originally appeared in the Journal of Building Survey, Appraisal and Valuation, Volume 4, Number

4, Spring 2016, published by Henry Stewart Publications.

Emma Vigus

T +44 (0)20 7133 1570

E emma.vigus@howdengroup.com

Robert Crossingham

T +44 (0)20 7822 1991

E robert.crossingham@weightmans.com