Professional indemnity insurance: consequences of lower premiums
You get what you pay for
23 November 2016
Emma Vigus explains why lower professional indemnity insurance premiums could have unforeseen consequences
The professional indemnity insurance (PII) market is a friendlier place for valuers than it was 2 years ago. Trends in PII claims are largely driven by the economic cycle: allegations of negligence rise during a downturn and fall as conditions improve. The past year has been no exception, seeing a significant fall in new PII notifications across all professions.
A review of recent notifications across the surveying sector shows a return to a level of claims similar to those experienced before the economic downturn in 2008. Typically, low-value claims arising from property management, building surveys and estate agencies occur fairly frequently and are often being settled under the excess. Higher-value matters relating to services such as rent reviews, Law of Property Act receivership and development valuations occur much less frequently, but are now far more likely to be backed by a robust case than the so-called ‘confetti-letter’ accusations of 2009–2012 relating to valuations; one firm received more than 100 such letters in one day. But despite the relatively benign claims environment, there are, as always, some key events of which firms should be aware.
Most businesses increasingly rely on IT and data. If IT networks are interrupted or data is mislaid, stolen or rendered inaccessible, your business and clients may suffer negative impacts ranging from financial loss to reputational damage. You may think you have resilient systems in place in your organisation, but your business is increasingly likely to be affected by some form of breach, whether as a result of malicious intent or other causes.
Should the worst happen, you will need immediate access to specialist expertise to minimise damage and re-establish operations as quickly as possible. Those resources will often not be available in house and can be very expensive. This is one of the main reasons stand-alone cyber liability cover is so critical: it will provide protection for some financial losses but, more importantly, it gives access to mitigation services designed to reduce the impact of a data breach significantly. These services are unlikely to be available under a PII policy.
Money laundering and fraud
Anti-corruption charity Transparency International estimates that over £180m of UK property transactions have faced criminal investigation since 2004 as suspected proceeds of corruption, while the National Association of Estate Agents believes that hundreds of millions of pounds are laundered through the UK every year. Encouragingly, mortgage fraud fell in the first quarter of 2016, but there are suggestions that the procedures used by agents, surveyors and solicitors are not sufficiently rigorous to safeguard against either fraud or money laundering.
Recruiting and retaining good-quality staff is regularly cited as a challenge for professional organisations. The surveying profession is no exception, with some sectors experiencing a significant decline in new recruits. This affects risk profile, as poor-quality or badly managed staff are more likely to be the subject of a negligence allegation.
Each new regulation represents another rule with which a company can fail to comply and potentially, therefore, be found negligent. Regulation can increase the cost of running a business, heighten pressure on employees and detract from customer service, all of which can enhance risk.
A badly managed PII buying process will affect a firm’s risk profile. It might, for example, result in the erroneous purchase of a non-RICS-compliant policy or a failure to comply with the terms and conditions of the policy wording. Effective and informed management of the PII buying process is more likely to mean that your policy performs effectively in the event of a claim.
Two-way information flow
Stay in touch with your insurance broker so that you remain informed about any foreseeable changes in insurance rate and demand. Your broker’s role does not begin and end at renewal. Use their expertise throughout the year to get, for example, guidance on the insurance implications of launching a new service.
Remain informed about risk: speak to your colleagues, your broker, your peer group and your clients. Staying informed should help you respond to changes in risk, allowing you to adapt processes or apply caution when taking on new work.
It’s all in the preparation
Start the PII renewal process at least 6 weeks ahead of the due date. The process should start even sooner if your business operates in high-risk areas, or has a long list of notifications or claims. Allow plenty of time to finalise the proposal form, which should always be completed by a principal of the business and reviewed and approved by all equivalent senior members of the organisation before submission.
A responsible person
Ensure that the person responsible for buying the policy comprehends the business, understands PII and appreciates how to manage the buying process. Their role will become even more critical after the Insurance Act 2015 takes effect.
The Insurance Act 2015
The act represents the greatest change to insurance contract law in the UK for more than a century. It mainly affects commercial insurance and will apply to contracts issued, renewed or amended after 12 August 2016 where they are governed by UK law. Ensure you are aware of the changes the act introduces, particularly those relating to disclosure of material information.
Complete the proposal form
This can be challenging, but the disclosure of accurate information is vital to ensuring you comply with the requirements of the act. The form is a representation of your business, so it should be completed neatly, accurately and legibly. Poorly completed forms are unlikely to result in a favourable response from insurers. Once the form has been submitted, you should be prepared to respond promptly and accurately to additional questions from insurers.
Do not deny any claims made
All claims, notifications and circumstances must be reported in detail to insurers ahead of renewal. Your own claims report should be consistent with that provided by your insurer. Presenting a long list of claims and notifications may not make your PII cheaper, but failing to notify insurers of a matter that could lead to a claim could be ruinous. Insurers accept that firms have claims and notifications but they will want to see that you have learned from mistakes, so be prepared to explain the steps you have taken to prevent these recurring.
Manage the relationship with your broker
Use brokers with a long-standing expertise in arranging PII for the surveying profession. Manage the relationship with your broker and insurers sensibly, as strong relationships may help secure better results at renewal and during claims negotiations. We would counsel against inviting several brokers to quote year after year because this may lead to insurers and brokers alike taking a jaundiced view of your firm.
Very few people can accurately predict the economic cycle or its impact on the level of claims, but all firms can take steps to ensure that both their risk management and insurance policies are as robust as possible.
Emerging risks are often difficult to foresee and assess in terms of their timing and impact. Better identification of such risks – and opportunities – demands that we counter the trend for focusing on the minutiae and broaden our field of vision. We must consider what lies over the horizon, and where possible accommodate that in the development of risk-management policies rather than focusing exclusively on ticking the boxes in front of us.
Emma Vigus is Director of Howden Professional Indemnity