Building surveying: insurance
Turning the tables
11 July 2014
One year on, Emma Vigus reviews the impact of the Jackson reforms on professional indemnity insurance for the surveying industry
In November 2010, the Ministry of Justice announced the introduction of reforms to civil litigation procedures. Colloquially entitled the 'Jackson reforms', the majority of proposed changes took effect in April 2013.
The principal aim of the reforms was to address the following:
- reform 'no win, no fee' claims
- address disproportionate legal costs
- streamline the personal injury claims process
- combat compensation culture
- tackle referral fees.
The main change expected to positively affect surveying firms (particularly valuers) relates to alterations to the responsibility for the payment of costs (see Table 1).
|Before 1 April 2013||Success fee and premium recoverable by claimant's solicitors must have provided advocacy or litigation services before that date for additional liabilities to be recoverable|
|After 1 April 2013||Neither success fee nor premium recoverable|
|CFA entered before 1 April 2013 but ATE policy incepted after that date||Success fee recoverable but not ATE premium|
|CFA entered after 1 April 2013 by ATE policy incepted before that date||Premium recoverable but not success fee|
Many claims levied against valuers by lenders since 2008 were funded by conditional fee agreements (CFAs), backed by After the Event insurance (ATE). Consequentially, claimants had little interest in the costs incurred on their behalf because, win or lose, they made no contribution. Conversely, defendants were often pressured to settle, regardless of the merits of their case, to avoid an excessive costs award against them should they lose. The reforms transfer responsibility for paying success fees and insurance premiums from the unsuccessful party to the claimant.
The transfer of responsibility for payment of success fees and ATE premiums should force lenders to assess the justification for, and cost of bringing an action against a surveying firm. This should help to deter unwarranted allegations, and also enable surveying firms and their insurers to more confidently resist unmeritorious claims without fearing they will be liable for disproportionate costs.
While relied on extensively by lenders, all claimants, including those making allegations relating to missed defects in either a Home Buyers report or Building Survey, had access to CFAs. Missed defects claims are generally settled at a lower sum, often below a firm's excess, than a valuation claim. Consequently, they do not trouble insurers in the same way that valuation claims do but they can be significant in volume and the impact of several settled claims per annum on the insured's balance sheet cannot be ignored.
One of the key aims of the reforms is to address disproportionate legal costs, which commonly outweigh any damages awarded. This sometimes led insurers to settle for reasons of financial prudence, in preference to going through a costly defence process.
To improve costs management, the reforms introduced a cost budgeting process, which requires litigators to provide an explanation of the work done on a case and what further work is anticipated (at the time the budget is filed). This enables the court to decide whether the costs involved are appropriate. Parties are then expected to adhere to the approved budgets, reaching agreement on any divergence, or where this is not obtainable seeking approval for the revised budget from the court. Any overspend not agreed or approved will not be recoverable from the opponent.
After the Event insurance
After the Event (ATE) insurance covers the legal costs and expenses incurred in litigation insuring against the claimant having to pay the opponent's costs, should they lose. It can be used in any type of litigation by either a claimant or a defendant, although in practice it is mainly used by claimants. It is normally purchased by solicitors on behalf of their clients.
Conditional fee agreements
These agreements provide a method of funding litigation that enables the successful party's solicitor to recover both their normal fees and a 'success fee' from the losing party. The claimant could also normally recover from the losing party any premiums paid under an ATE policy.
In addition to reducing costs, it is anticipated that incentivising parties to more closely manage costs will lead to an increase in the number of disputes resolved through alternative dispute resolution (ADR) thus supporting the work the courts have done over recent years to encourage greater use of ADR. Whether the reforms achieve the objective of reducing costs will depend largely on how judges deal with their enhanced case management powers.
In the case of Finesse Group Ltd v Bryson Products & Bostik Ltd  EWHC 3273 (TCC), Akenhead J in the Technology and Construction Court (TCC) criticised the parties for submitting budgets in excess of £200,000 each on a £170,000 claim with the possibility of the claimant facing costs of up to £800,000 if another defendant was added. The court urged the parties to adopt imaginative solutions, such as sharing certain types of expert.
Relief from sanctions
To ensure litigation is conducted efficiently in terms of both time and cost, the new regime aims to enforce stricter compliance with rules, practice directions and orders. This aim is enshrined in changes to the court's case management powers, which are now far more robust. Where parties do find themselves in default, relief from sanctions will be harder to obtain.
To ensure litigation is conducted efficiently ... the new regime aims to enforce stricter compliance with rules, practice directions and orders
The impact of this can be seen in the recent case of Venulum Property Investments v Space Architecture and Others  EWHC 1242 (TCC). Venulum, a property development and investment company, bought an action against 13 defendants centring on an allegation of professional negligence arising from the fact that the supporting pillars in an underground car park of a residential apartment block were insufficient to support the building.
The claimant requested permission to extend time for service of its Particulars of Claim. The judge refused the request, and in so doing became the first to interpret the new provisions governing relief from sanctions under Rule 3.9. This demonstrates the more stringent and robust approach towards missed deadlines the judiciary are widely expected to take going forward.
Volumes of claims
While new notifications have reduced since April 2013, professional indemnity insurers are still dealing with a huge volume of claims initiated under the old regime. There was a flurry of new notifications served pre-reforms as claimants sought to take advantage of both the old regime and the pending expiry of the statute of limitation and its correlation to the date of the property market crash.
Although they remain nervous about the level of pre-change settlements yet to be reached, particularly where claims relate to commercial property, insurers with a long exposure to valuation surveyors view the reforms as positive. Rob Williams, a Partner at Weightmans LLP, says:
"While claims under the old regime will continue to extract a high price in terms of costs and damages, the new costs regime, combined with improved risk management in the profession, should herald a new era."
For those insurers considering entering the market for surveyors PII, the combined impact of the Jackson reforms, the Statute of Limitation and the return to relative prosperity of surveying firms as valuation instructions increase will certainly enhance appetite. There is already evidence of new capacity being made available to valuation surveyors, which should lead to a reduction in PII rates.
But in the time until the full effect of the Jackson reforms is felt we must hope that the increase in valuation instructions, a rising property market and a shortage of valuers does not lead to a repeat of the practices of 2005-07 that created the PII crisis the valuation industry is now experiencing.
Emma Vigus is a Director of Howden Windsor, the RICS preferred professional indemnity broker
Related competencies include: Insurance