REPORT TO MEMBERS ON THE PROFESSIONAL INDEMNITY INSURANCE MARKET IN AUSTRALIA

Transcription

1 THE LATEST PROPERTY NEWS ISSUE April 2011 CONTACT DETAILS API e-news is produced by the Australian Property Institute, National Office. Editor: National Director Tel: Fax: Campion Street, Deakin ACT Disclaimer is published as an electronic newsletter by the Australian Property Institute (API) for members. API invites authors to submit content that is of significance to members in all or any fields of practice in professional property. Authors, contributors and advertisers warrant that the material supplied complies with all laws and regulations and that the publication of the supplied material or material that is linked electronically to API will not give right to claims of liability or are capable of being misleading or deceptive or in breach of respective laws in all States and Territories. At times, publishes technical material to assist professional practice that has been supplied by 3rd party sources. API accepts no responsibility for the expressions, opinions, outcomes or effectiveness of formulas or calculations contained in the content. Members should rely of their own professional judgement and seek independent, specialist advice on matters concerning business practice, financial outcomes and legal implications of all content published. REPORT TO MEMBERS ON THE PROFESSIONAL INDEMNITY INSURANCE MARKET IN AUSTRALIA The API has received a number of representations from members regarding recent trends in Professional Indemnity Insurance (P.I. Insurance) and the rising costs of premiums. We thank those members for their feedback, and we take on board the issues raised. Detailed below is a summary of the issues that we have observed, and the actions we are implementing. API Achievements in P.I. Insurance Sector. Prior to 2000 Professional Standards legislation, enabling the establishment of Limited Liability Schemes was only available in NSW and WA. During the period 2000 to 2006 the Institute lobbied for the establishment of Professional Standards legislation in all other States and Territories. This has been achieved, with Tasmania being the last jurisdiction to introduce Professional Standards legislation in Consequently, the mutual recognition provisions in the legislation (excluding Tasmania) have enabled the Institute to establish a Limitation of Liability Scheme in all States and Territories of mainland Australia. The Institute will commence work on establishing a Scheme in Tasmania later in Similarly, the Institute actively lobbied for the establishment of Proportionate Liability legislation across Australia as a mechanism by which claims for damages can be defrayed. Proportionate Liability legislation was introduced into all States and Territories and the Commonwealth by 2003.

2 PAGE 2 Proportionate liability has also been introduced at the federal level in relation to claims for damages under the misleading or deceptive conduct provisions of the Competition and Consumer Act 2010 (formerly the Trade Practices Act 1974 (Cth), the Corporations Act 2001 (Cth), and the Australian Securities and Investments Commission Act 2001 (Cth). We encourage members to provide feedback and communication through your Divisional Councils and in turn National Council so that we can continue to provide the best support possible to you our members. Fees. The Institute is aware that valuation fees and in particular fees for residential mortgage security valuations have diminished significantly over recent years. Prior to 1998, the Institute published a Recommended Scale of Fees to aid members and their clients in setting fees for certain types of work. The Institute was subsequently advised by the ACCC that the scale of fees was anti-competitive and in breach of the Trade Practices Act. Since that time fees for residential mortgage security valuations have declined for a number of reasons including a lowering or reporting standards required by financial institutions through such products as Desktop Assessments, kerbside valuations and Computer Generated assessments. This situation has been compounded through business practices such as quoting fees for services which may not cover costs and the reduction of quality control procedures. The API reinforces its stated position that unless the front end issues are accepted and acknowledged by the lending sector, the valuation profession is facing a very bleak future. Whilst there have been great efficiencies achieved through technological advances and the amalgamation of many cottage valuation firms, to suggest that a valuation can be produced at a lesser cost than twenty years ago is unrealistic. In 1992 the API had in place a recommended scale of fees which included a fee of $975 for a residential property with a market value of $500,000. In today s market a valuer would be lucky to receive a quarter of that amount to undertake a valuation for a lender for such a property. Not only has the fee been driven to an almost impossible level, but the turnaround time has contracted to the extent where the valuer often has only 48 hours to complete the task it is a recipe for potential disaster. The API considers that there is a need for the profession to be paid a fee commensurate with the quality of product and associated risk, including the ability to be able to pass on substantial cost increases such as those occurring as a result of the PI market. Otherwise it might be expected that there will be the large scale departure of valuers undertaking mortgage valuations for the lending sector in Australia. The API is in continuing discussions with financial institutions and LMI s with respect to the standard of valuation reports and the subsequent commercial relationships between valuers and financial institutions, which should go some way in reducing the number of P.I. claims and notifications. This in turn should assist with reducing some of the volatility currently being experienced in the P.I. Insurance. Some Financial Institutions have recognised that this is a problem and are working with the Institute toward achieving a solution. The ability for Collective Bargaining exists under Authorisation Provisions of the Trade Practices Act. PI Insurance Market Most members may be aware that the Coverforce Underwriting Pty Ltd property valuers binder has expired as at 1 March Coverforce Underwriting Pty Ltd^ is working hard to put in place a replacement binder to fill the gap in the market. Members should note that that there are numerous other underwriters (API is aware of at least four underwriters) who are operating in the open market and cover is available to members. Whilst not all underwriters will be willing to write every member, we wish to advise that cover is available in the majority of cases. Unfortunately property valuers have been burdened with an accentuated insurance market in recent years. What is concerning about the current set of conditions is the insurance market in general is considered soft (with substantial capacity, high competition and relatively low premiums across most professions) however the insurance market for property valuers stands alone in its lack of capacity (which is now leading to aggressive pricing and restrictions on coverage). It should be noted however that this is a global phenomenon, and in fact the majority of PI Insurance in Australia is sourced from overseas. The API is in daily ongoing discussions with insurers and lenders on the P.I. Insurance difficulties being experienced

3 PAGE 3 by members in an effort to ensure the situation does not deteriorate further. The API continues to work closely with the insurance industry and selected brokers and underwriters to find a solution to this immediate problem. The API is fully aware that the insurance market is tight and premiums have increased. Notwithstanding this the API is also aware that in most instances insurance cover is available. Premium increases The API analysis of hard statistics reveals that the average increase in PI insurance premium costs are between 30%- 50% from last year. The API is also aware that there is a comparatively smaller number of members whom have experienced premiums costs increases of 100%-200% or more. Members should note that these types of high increases are more of an exception to the rule and are generally based on specific factors which the insurance industry applies to each insured. It must be remembered that each insured is quoted individually, as each insured s circumstances are different. Before insurance terms are generally offered, the insurer, as part of its underwriting criteria and risk profiles will consider such matters as: claims history; types of exposure; turnover; the type of profession; type of work/valuations performed (e.g. residential vs commercial); number of years in the profession/experience; risk management processes undertaken; and the limit of indemnity being sought. The Insurance industry has concluded that these factors vary considerably between members. Members who have experienced such high increases in their insurance premiums should ensure that the insurance broker provides a full explanation regarding the increases and breadth of coverage to ensure a full understanding of reasons for such an increase. Declined Cover The API is aware that some members have indicated they have been declined cover even when their claims history is unblemished. The API recommends those members to contact their Broker for advice and full explanation on this matter. It is possible that there are other reasons involved as to why a cover would have been declined. Members have access to a full time resource in your Professional Indemnity and Compliance Manager Betty Warner-Lehman. Betty has assisted many members over the course of this year to obtain cover. Members who are having difficulty should contact Betty for assistance. Retrospective Cover Some members have reported that they can t obtain retrospective cover and can only obtain insurance terms from inception date. Most PI policies are provided on a Claims made basis which includes consideration of prior activities. Hence, generally, the lack of retrospectivity only occurs when a member has not had any prior insurance. It would be unusual in other cases for an insurer not to provide such cover. Does your current policy provide adequate insurance cover? It is important that members understand the extent of their policy coverage and their insurance requirement. Policy coverage is always subject to the terms, conditions and exclusions of the insurance contract and policy wording provided by the insurer. The importance of understanding the extent of member policy coverage and all the limitations is vital to ensure that members are adequately protected in the event a claim should arise. These limitations may extend, for example, to limit the types of properties to be valued, requirements to be observed in entering into contracts with the clients of the valuer (such as not contracting out of proportionate liability legislation). ^COVERFORCE INSURANCE BROKING PTY LTD continues to operate as a specialist professional indemnity insurance broker to property valuer. Coverforce Insurance Broking Pty Ltd has access to other markets outside of the Coverforce Underwriting facility; as such API members are reminded not to confuse Coverforce Insurance Broking Pty Ltd with Coverforce Underwriting Pty Ltd. If any members wish to obtain further clarity on the position of Coverforce Insurance Broking Pty Ltd, we suggest they call Justine McDonald, National Manager, on

4 PAGE 4 Claims Made Contract of Insurance Professional Indemnity Insurance policies are Claims Made policies, that is they only cover claims made or Known Circumstances that members become aware or could reasonably be expected to give rise to a claim that arises during the period of insurance. If there is any claim or potential claim or even a circumstance that could reasonably be expected to give rise to a claim, it should be reported to your insurer immediately, regardless of member s own view as to fault or liability. If a claim or circumstance is not reported promptly (and certainly within the insurance period in which it arises) it is unlikely the member s insurance policy will be able to be relied upon when it materialises. The Importance of Notifying All Known Circumstances As highlighted in Risk Management Modules undertaken by all CPV members, by notifying all circumstances that might give rise to a claim, during a policy period, an insured can get the benefit of their statutory rights under Section 40(3) of the Insurance Contracts Act Section 40(3) provides an insured with statutory rights to notify a circumstance or insured, to an insurer, during the currency of the policy. If a claim eventuates against an insured from the notified circumstances, then the insurer cannot deny indemnity, despite the fact that the claim arose outside the period of insurance. Therefore, any fact, situation or circumstance, which a reasonable person in the insured s professional position would have thought might result in someone making a claim against them, should be notified to their current insurer. Changing from one Insurer to another (Notification of known circumstances) If members change insurers, members will need to notify their insurer of every known circumstance before the expiry date of their policy. If this is not done, and if a claim was to occur in the future from a circumstance not previously notified, members may well be be left uninsured, with neither the previous or the current insurer accepting liability for the claim. The prior insurer may deny the claim as the insured failed to notify the circumstance or claim during the period of insurance. Insurance Policy Wording Each insurance company has their own policy wording, this means that coverage can vary considerably from one insurer to another. For example, some members have informed us that there are certain LMI exclusion clauses in their policies. Of course any types of exclusion clauses like these are not in the API s control, the insurer has every right to endorse and/ or exclude matters from their contract. It is important that you and your Broker compare each policy based on the appropriateness of cover for your individual business needs and not just the costs of premiums. Professional Indemnity and Compliance Manager The API has engaged a Professional Indemnity & Compliance Manager (Betty Warner-Lehman), whose primary role is to provide strategic leadership for APIV Ltd as well as to build, promote, oversee and administer the regulatory requirements associated with the APIV Ltd Limited Liability Scheme. The role has a strong focus on member issue management relating to the Scheme and the PI Insurance market as a whole. Any member experiencing difficulties with his or her Professional Indemnity Insurance or seeking information relating to the Limitation of liability Scheme are encouraged to contact your Professional Indemnity and Compliance Manager, Betty Warner-Lehman. Insurance Broker Selection Since the 28 February 2011, Betty Warner-Lehman (API Professional Indemnity & Compliance Manager) has spoken with about 400 individual members whom had issues with sourcing cover and/or insurance premiums costs. Approximately 20% of those spoken with could not source cover at all. Upon investigation it became clear that the lack of cover did not relate to the market itself, but rather insurance Brokers who did not understand the current market issues and the APIV Limited Liability Scheme requirements. Furthermore, the insurance Brokers themselves did not have sufficient contacts within the industry to find and/or bind cover for members. Of the 20% of members (with the exception of one member) who had experienced difficulty in the insurance market the API has been successful in sourcing cover for them by simply

5 PAGE 5 changing the member s insurance Broker. In the current insurance market, it is vital to select a Broker with the set of skills to assist and advise you in the renewal process. Equally it s important that you select a broker who understands your business, is familiar with the insurance market for valuers and importantly understand fully the implications of the Limitation of Liability Scheme. Members should commence their renewal process with their Broker well in advance of their expiry date. The API suggests, as an absolute minimum, members initiate negotiations at least two months prior to their P.I. Insurance expiry date to enable members to develop fall back strategies with their Broker. Members who are experiencing difficulty in sourcing or securing their PI cover terms are asked to contact Betty Warner-Lehman for advice. LMI s & Lenders Members would be aware that typically LMI is required and paid for by consumers when they borrow 80 per cent or more of a property value. This cover insures Lenders against loss incurred if a borrower defaults. As the contract of insurance is governed by the Insurance Contact Act 1984 between LMI and a Lender the LMI has a legal obligation to pay claims in accordance with the contract at that time. It should be noted that the insurer (in this case the LMI) has a right of recovery from any 3rd parties to reduce their claim made against them if they are of the belief that there are other parties which may have contributed to the loss, irrespective of the level of contributory negligence by the parties involved. APIV Limited Liability Scheme (Scheme) The API has been made aware that some members are of the belief that the insurance premiums increases are linked to the Scheme itself. This is not correct. The Capping Legislation has nothing to do with the current state of the P.I. Insurance market. The contraction of the market is brought about by a combination of underwriting practises in the past and escalation of claims, particularly in recent years both in the Australian and UK markets. Whilst the benefits of the Scheme might not be clear to members at this point, the API is confident that within the next few years the market will again open up to competition when the risk profile of the industry improves. The general benefits of participating in the Scheme are: Capped civil liability on claims in return for complying with high standards of risk management, as well as having a required level of Professional Indemnity Insurance (PII) cover or equivalent business assets that meet the limit of liability. Enhancement of your reputation the Professional Standards Legislation (PSL) and Scheme are in the public interest, as PSL will protect consumers by making insurance and risk management programs for professionals compulsory. Members are likely to benefit from the positive image associated with consumer protection. PSL may also have some positive effects in the area of PI Insurance, with benefits flowing to members. Some suggest PSL may lead to lower PI Insurance premiums over time. Others believe the availability of cover may improve; or that PII policies may start offering an expanded range of cover. While it is still too early to confirm developments like these, the API is confident that these (or similar) benefits will become more obvious as the Scheme matures. Annual reporting by API and periodic monitoring by the Professional Standards Councils provide an informal feedback mechanism to APIV through monitoring the professional risks and reviewing practices. The Scheme ensures that our members can continue to provide independent and impartial advice to property lenders and other market participants without the threat of financial ruin. The Scheme is seen as a pivotal step by the API towards assisting members. In addition to the Limitation of Liability Scheme, the API is investigating the establishment of a Mutual Scheme which would operate alongside with the Limitation of Liability Scheme. In addition, the API is also working with a selected insurance brokers and London based underwriters to find a fast solution to the growing issues which surround the P.I. Insurance market in Australia. The API can confirm that whichever solution is found, thus far the feedback received from those brokers and underwriters is that any future solution offered will be required to be underpinned on the Scheme itself

6 PAGE 6 Meetings with Regulators The API has established a sound relationship with commonwealth regulators over the past five years, with a further meeting scheduled for early May These meetings have highlighted the predicament valuers are in when it comes to valuation fees and P.I. Insurance and dealing with financial institutions, particularly in relation to valuations for residential mortgage security purposes. The API is well aware of the practice of multiple claims being lodged against valuers, placing undue burdens on firms by way of multiple excess payments and this issue will be included on the agenda for the scheduled May meeting. It is important to note however, that in order for the API to make meaningful progress with regulators and the Commonwealth Government Treasury Department, solid data and statistical facts are required, including claims, notifications, settlements, changes in P.I. Insurance premiums and circumstances surrounding all of these items. The implementation of the Limitation of Liability Scheme will place the API in the unique position of having access to industry wide factual data on claims that will be integral to future dialogue that API has with regulators. The more members and member firms join in the scheme, the more relevant the data will become. Members who undertake the valuation of real property are encouraged to participate in the Scheme. It is early days in the Scheme and the benefits of the Scheme will flow from full participation. If you have firsthand experience in these matters, then please make contact with Betty so that we can build the supporting evidence to our position. Betty s contact details are Betty Warner-Lehman Ph: (03) bwarner-lehman@api.org.au