The Five Counties Conference, High Wycombe 4th March 2015 Reference Notes from the Professional Indemnity Session for Residential Chartered Surveyors

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1 The Session divided into 3 sections: Advice and Information on PII, Questions submitted by Practicing Chartered Surveyors prior to the Conference and Questions asked by Delegates at Conference. Claims Trends for Chartered Surveyors in the UK Residential Market Damp & Condensation claims are increasing. Whilst the amounts claimed can be relatively minor, there are some new, underlying problems that concern Insurers. A comment from an experienced Loss Adjuster/Chartered Surveyor: Many of the surveys involved date back to the lengthy dry spell experienced during the summer of 2014, when there may well have been no indication of damp within the properties. I am concerned, however, that I have seen a number of examples where rather than report and justify the statement that there is no damp, the issue has just been ignored, with no reference to it at all. If Insurers are to defend the Surveyors position, it is important that the Surveyors record, in detail, what measurements they have taken to record levels of dampness in properties. They should also report on issues such as how the property is occupied, ventilation etc., all of which can lead to problems with condensation: the increasing tendency to over-insulate and seal properties is preventing moisture generated in the interior from readily escaping to the outside. Subsidence was a major concern to Insurers 15 years ago and caused significant claims against Surveyors. However, a few years of wet summers meant that subsidence had almost disappeared in the UK: until recently, when the last couple of hot, dry summers has resurrected the problem. The major difference between now and the peak of the losses 15 years ago, is that complaints are now mainly confined to Extensions and Conservatories. What we have noticed is that Vendors are even more adept at deliberately hiding problems from Surveyors by obscuring cracks behind furniture and fresh decoration. On the outside walls, visible damage has been obscured by pot plants and even raised flower beds. Recent "property improvements" should be regarded with suspicion as they may indicate where there is a problem. Contract Conditions Terms of Appointment / Engagement Agree in writing the extent and limitations of the services you provide. One of the major reasons why Surveyors lose Court cases is because they never defined the extent of the services they were providing. The Claimant therefore has no boundaries when defining what services they were expecting and it's your word against theirs. The Courts are likely to err on the side of the member of the public if there s any confusion as to the extent of your duties. So make sure that these are clearly set out and signed by the Client including any subsequent variations of service that occur. The same applies with Commercial Clients: agree everything in writing. And follow up verbal agreements by as well. The more "evidence" you have, the more likely it is that your Insurer can successfully defend you. Tel : insurance@frasermiller.com Page 1 of 8

2 Conditions you should insist on in any Contract or Appointment 1 Alternative Disputes Resolution Clause: In any dispute, the first course of action should be to mediate and not litigate. Your Terms of Engagement should contain a clause stating that all parties will endeavor to resolve disputes through mediation and avoid Courts unless absolutely necessary. 2 Limit Liability: Wherever possible, stipulate the maximum limit of your liability. This may be a multiplier of your fees, a percentage of the total contract value or any other sum you settle on. Do not go beyond the Indemnity Limit provided by your Insurer and remember Claimant s Costs can be higher than any damages awarded so include Claimants Costs within the Limit. 3 Net Contribution Clause: This clause limits your liability to the proportion of the work for which you are directly responsible and excludes losses caused by other professionals or contractors. This is becoming common place in Construction. After all, why should you be liable for the errors of others within a project team? Personal Liability Merrett -v- Babb An employee was held Personally Liable by the Court for a Survey he had written whilst working for a Surveying Firm which went into liquidation, without arranging PII Run Off cover. The Court's decision was based on the finding that the Surveyor should have realised that the purchaser was an unsophisticated buyer of limited means and therefore he had a personal duty of care! This is a perverse judgement. No employee should face personal liability in these circumstances. The RICS at the time of the judgement didn t have the resources to take the matter to appeal. Since then, a fighting fund has been raised and there have been three positive cases protecting employed Surveyors from similar claims (full details may be found on the internet) : 1 Matthews -v- Ashdown Lyons & Maldoom 2 Russell v- Chisnall 3 David E Bush v- Summit Advances Ltd Differences between Merrett and Matthews: a) Merrett purchased a Condition Report via a Lender, which included a Lending Valuation. Merrett was deemed to be an unsophisticated purchaser of modest means, who would rely entirely on a report issued by a Chartered Surveyor. b) In the case of Matthews, the property value was 750,000 and the purchasers commissioned a report directly from Ashdown Lyons. The Judge deemed this to be vastly different to the Merrett case. Tel : insurance@frasermiller.com Page 2 of 8

3 Key Factors: 1 Ashdown Lyons was a Limited Company 2 All correspondence including Terms of Engagement were signed for and on behalf of Ashdown Lyons 3 s came from a generic address and not that of the individual Surveyor 4 The Surveyor s signature was button stamped with Ashdown Lyons name 5 All correspondence came from the Corporate Entity, not the Surveyor Points to Consider for Residential Valuing 1 Your Liability cannot be limited 2 Property price inflation 3 Fees paid by Lenders are not escalated to reflect the increased property values 4 PI Insurance premiums have to reflect the increased cost of claims 5 Is it time to call a halt? The Head of Professional Indemnity at Zurich Insurance recently told me that in his opinion, "Lenders view Valuers as a cheap Insurance Policy". When a purchaser defaults on their loan and a property is repossessed, the Lender can either apportion the whole amount of the loan to bad debts or have a Solicitor hold the Valuer responsible. By holding the Valuer liable, it allows the Lender to move part of the unsettled loan from "bad debt" to "recoveries" on their balance sheet. This is the reason why so many Valuers received confetti letters during the last recession. It is up to you to decide how you run your business but be aware that Insurers are concerned by the very low fees some Valuers are paid. They see a direct correlation between poorly paid work and claims. When Insurers calculate PI premiums, Residential Lending Valuations are one of the most expensively rated activities and even one Valuation places a business into a higher premium bracket: so is this work currently economically viable for your business? Tel : insurance@frasermiller.com Page 3 of 8

4 Questions from practicing Chartered Surveyors Q1: Can you comment on the Surveyors PII market conditions? What do you think will happen to premiums? A1: 2012/ m total premiums versus 500m open claims indicates what must happen to premiums. Insurers realise the need any business has for stability and successful defence of Valuation claims means that less are now being brought. However, those that are made are more likely to result in a claims payment. Property Managers are increasingly being sued for Personal Injury claims. In the Residential sector claims are largely from Block Management. In the Commercial sector, we see claims from Shopping Centres and Industrial sites, Office and Retail parks. Project Management and Bank Monitoring especially are problem areas. Construction is rife with litigation. Large construction claims are impacting the Surveyors PII market. Q2: Is it possible to buy a six year Run-Off policy? Solicitors and Accountants can, so why not Surveyors? A2: For Residential Chartered Surveyors, currently the simple answer is No. Careful planning and reduction of high risk work is recommended in the 3 years prior to retirement. The Run Off premium is calculated on the final year or an aggregate of the last 3 years fees, so do not retire when your fees are at the highest they have ever been! A good Broker may be able to estimate the total cost of Run Off over a 6 year period. From a PI premium point of view, it is much better to "slide" into retirement. Reduce or stop all higher risk activities at least 3 years prior to retirement. By reducing workload and income over, say three years, prior to retirement you effectively set a lower rate for Run Off. Q3: What can Surveyors do to reduce the likelihood and size of claims? A3: Surveyors are normally technically proficient. In our experience it is generally their administration that lets them down. Areas that will pay dividends in preventing a successful claim: 1 Record keeping, file and site notes 2 Site photographs. Copious, timed and dated photographs can be invaluable in defending Surveyors 3 Regardless of the Service Level Agreements you may have signed, a period of reflection can be needed. Never issue a report in a rush and without proper consideration. 4 Turn down poorly paid work. Poorly paid work is a source of claims and undermines a Surveyor's status as a Professional. We find that many Surveyors rush the work, hoping to make it profitable but it never is. 5 Stick to what you know. Do not take on work outside of your area of expertise. If you are asked to do so, there could be an ulterior motive. Tel : insurance@frasermiller.com Page 4 of 8

5 Q4: Are Insurers concerned by Japanese Knotweed? A4: Knotweed is a headline grabbing problem of little real concern to Insurers. Make sure you have good site photographs and a plan of where photos were taken. If in any doubt, recommend a specialist report. As a general point, do not be afraid to recommend further specialist investigations when you cannot be certain of the cause of any problem. Q5: How long should we retain files and s? A5: The absolute minimum periods we recommend to our Clients are: 1 Non-contentious work e.g. Estate Agency, Residential Property Management etc. - 6 years 2 Higher Risk work e.g. Survey & Valuation, Project Management, Bank Monitoring etc years 3 Architectural Design 15 years 4 If you have space, keep everything for 15 years. Q6: Are there dangers to using camera poles to inspect otherwise inaccessible areas of a property? A6: Use of a pole to gain access to an otherwise inaccessible area increases your liability and should be a separate, heavily caveated report, for which there is an additional charge. Anything beyond the normal methods of inspection should be by way of a stand-alone report. Do not put a noose around your own neck by trying to be too helpful. Q7: What are your thoughts on Pay Per Valuation insurance? Will this save Valuers a fortune if it happens? A7: This is not a panacea for Surveyors but it may be for the Lenders. All upfront costs will have to be paid for by Surveyors, despite Banks being the driving force behind it: great for the Lenders but not so good for Surveyors! Technology is a major obstacle, as all reports will have to be issued on tablets and there isn t any system or software that is robust enough to do this at present. If a major loss occurs before Insurers obtain the necessary critical mass, the insurance market may decide that this model is fatally flawed and withdraw support: making the Surveyors investment worthless. Q8: I believe there has been a recent change to Claimant s Costs in No win, No fee cases. Will this reduce premiums? A8: This has had little impact to date. In practice, damages payments have been increased to take into account the Costs issue. Solicitors are the only ones getting rich from Surveyors PII! Tel : insurance@frasermiller.com Page 5 of 8

6 Q9: How high should my Indemnity Limit be? A9: This is a common question and there is not a straightforward answer. Each business is different as much depends on the type of work and type of clients. We recommend to almost all of our Clients that they have a minimum Indemnity Limit of 1m AOC, as property values and legal costs are currently only going upwards. The Indemnity Limit is the sum of money you have to pay for any error of your making. This limit also includes the Claimant s Costs which can be substantial. We have often dealt with cases where the legal costs have been double the damages awarded to the Claimant. When deciding on an appropriate limit, factor in any Claimant's Solicitor's Costs. Rule of Thumb Minimums: 1 1/3rd of your highest Valuation - e.g. a 2m limit should cover a 6m Valuation as well as any Valuation below. 2 2m for any Property Management to take into account the potential for Personal Injury claims. Q10: The Surveyors Ombudsman Service is free to the User but I have to pay the costs. Wouldn t it be better for me if this service did not exist? A10: The Surveyors Ombudsman s Service has been a positive step for the profession. In the majority of cases we have seen, the Ombudsman has been supportive of the Surveyor. Even in cases where the Surveyor has been found against, prolonged and expensive litigation has been avoided, which is a benefit to the Surveyor, both emotionally and financially. Q11: Should I advise Clients to seek Indemnity Insurance from the Conveyancing Solicitor for structures that don t have Building Regulations sign off? A11: We have dealt with many claims for extensions where there was no Building Regulations sign off, so we are very concerned by such structures and would advise you to let the Solicitor make insurance recommendations. The Surveyor, however, must pay even more attention to the structure. Our advice is to: a) Assume that there is a defect and you need to look hard for one. b) Take numerous photographs and pay attention to every aspect of the structure. c) Make certain you mention and report on inaccessible areas. d) Do not hesitate in recommending the need for a Structural Engineer's report, should you have any concerns. Tel : insurance@frasermiller.com Page 6 of 8

7 Q12: If the complaint can be settled for less than my Excess, can I try to settle it myself, as Insurers can sometimes make matters worse by appointing Solicitors? A12: You must advise Insurers of all complaints. This is a condition of every PI policy. If you do not and the situation escalates, it might be claimed that you had prejudiced your Insurer's position by not giving them early information. The claim might then not be covered. We understand it is tempting to try and resolve matters without reference to your Insurers. Many Surveyors are concerned that any notification, no matter how spurious, could have a negative impact on their future premiums. Part of the problem is that some Insurers and Lloyd s Syndicates use Solicitors, rather than experienced claims handlers, to manage PI claims. In our experience this is less than satisfactory as Solicitors are more concerned with arguing rather than resolving a problem. Experienced Insurers have their own in-house claims team, which for the majority of cases can provide practical, timely assistance. We go a stage further and use a leading firm of Chartered Loss Adjusters, with their own Chartered Surveyors to manage the majority of complaints against our Surveying Clients. Questions from the floor (time constraints only allowed for 3 further questions) Q13: Is it possible to limit liability with Private Clients? A13: This has been discussed by the RICS and a recommendation given that Surveyors follow other professions and limit their Liability by contract. Such a limitation cannot be applied to private individuals, as you are not on an equal footing with them and the Courts would simply override this. What you should do though is limit your Liability with Lenders. We appreciate that Lenders have their Standard Terms and Conditions and they dictate where business is given but Residential Valuers are in short supply. Now is the opportune time to use this leverage. Please ensure that any agreement on Limiting Liability is no more than your PII Indemnity Limit. With Commercial Clients, Liability Limitations are more easily obtained, although you may need to fight hard for this concession. Tel : insurance@frasermiller.com Page 7 of 8

8 Q14: The RICS has restricted the list of Insurers that Surveyors can insure through. Is this reasonable and should it be expanded? A14: The RICS has, like many Professional Bodies, prescribed a minimum standard of PII cover for its members. Only the Insurers listed by the RICS may provide PI insurance to Chartered Surveyors and they are also required to subscribe to the RICS Assigned Risks Pool. This was set up to provide shortterm cover for businesses that, for whatever reason but usually due to a poor claims record, could not obtain PI insurance on the open market. The Insurer must be based within the UK and have a minimum A rating from Standard and Poor's. The RICS restrictions provide a better level of protection for Chartered Surveyors than other Professions, such as Solicitors. The Solicitors Regulation Authority (SRA) allows unrated and non-uk domiciled Insurers to provide cover to its members. A number of these overseas Insurers have folded, leaving Solicitors vulnerable to uninsured losses. In comparison the last time a RICS Approved Insurer failed was in June 2001, when The Independent Insurance Company was put into liquidation. When new Insurers and Lloyd s Syndicates enter the Surveyors PII market, attracted by the relatively high premiums, they often leave very quickly. The principal reason is that they are not set up for the volume of claims from your profession. It is not unknown for an Insurer to pay a single, very large loss which completely wipes out all of the premiums collected from their entire book of Surveyors. Q15: You mentioned the importance of Site Notes but the Solicitor appointed by my Insurer said these were of no use in defending me and the claim was settled just above my Excess. A15: The Solicitor's comment that Site Notes would not help your defence is bizarre, as no Survey can possibly include all the information recorded during and after an Inspection. The Survey should have all the salient points from the Inspection and be a distillation of comprehensive Notes. In over 25 years of experience of advising Chartered Surveyors, we can say that Site Notes are used by Expert Witnesses and Solicitors in the defence of claims. My assumption here is that subject to your report being comprehensive, the claim was settled on economic grounds. This can happen when a claim is within or close to your level of Excess. The Insurer simply feels it is not worth spending the money on a defence, when they can recover most of the claim from you! In future, ask your Broker how your Insurer defends claims. Do they only make use of Solicitors? Or do they have their own experienced and well-resourced Claims Department? If the answer is that their first recourse is to Solicitors, then you are unlikely to receive the support you need for claims within your Excess and the premium may not be quite as cheap as it seemed. Tel : insurance@frasermiller.com Page 8 of 8