PII: covering theft and fraud

Are you exposed?

19 November 2018

Third-party professional indemnity insurance may not offer protection from theft and fraud, warns James King

The large sums collected in rents or held in bank accounts to cover service charges, maintenance and sinking funds make an attractive target for fraud or theft. Many landlords, freeholders and management companies see mitigating and insuring against the risk of such financial crime as the managing agent’s responsibility – but this could turn out to be a costly assumption.

The limits of PII

The problem is that too much reliance is placed on managing agents’ professional indemnity insurance (PII) policies as a catch-all way to cover any losses, without considering the potential limitations.

For a start, suppose the managing agent themselves is involved in the fraud or theft? Unlikely, you would hope, but still possible. PricewaterhouseCoopers’ 2018 Global Economic Crime and Fraud Survey found that more than half of all frauds have been committed by employees, so there’s a huge element of trust here.

PricewaterhouseCoopers found that more than half of all frauds have been committed by employees

Where a managing agent steals funds, this would fall outside the scope of their PII. Suing the company may not be an option either if the senior executives have gone to ground. It’s likely that tenants and leaseholders will expect those that engaged the agents – that is, landlords, freeholders or management companies – to bear the loss, while still delivering the services for which they as occupants have paid.

Of course, the vast majority of managing agents are highly reputable, but there are still other pitfalls to take into account. The threat of a cyber attack is much more likely: scammers making fake requests for payment or hacked emails in which supplier bank details have been changed are commonplace examples. What if the level of cover is insufficient for the scale of the losses, too, which could be significant? Even if a policy appears to offer adequate cover, its scope may change on renewal if the agent decides it is too expensive or unnecessary, or there may be a hefty excess. Clients may not be made aware of this, however.

Taking control

At issue here is visibility and control – or lack of it. By relying on third-party PII policies, landlords, freeholders and management companies cannot be sure exactly what is covered, how much protection they actually have, and the exclusions or other terms and conditions to which it is subject. Even more importantly, since it is not their policy they have no rights to make a claim under it – only the insured party can do that.

So if the company that took out the insurance is no longer in existence, then neither is the PII policy. Proactive steps are needed to fill these gaps in insurance coverage. It’s clear that third-party PII is not enough, and specific crime coverage is required. It may be that a managing agent has its own crime insurance policy.

However just as with PII, where the policy would be in the managing agent’s name, any landlord, freeholder or management company cannot be sure exactly what is covered, and neither do they have any rights to make a claim against it.

As such the best option is for clients to take out their own crime cover, to ensure that they have the level of protection they need and are in control of it. Crime cover tends to be incredibly broad in scope, providing enormous assurance and comfort to those insured. It’s also comparatively inexpensive, so it is perhaps not surprising that demand is growing significantly.

Insurance is all about peace of mind: but there’s a legitimate concern that the property sector’s high expectations of the protection given by PII might not be met. Given the risks posed by ever-evolving fraud tactics, specific coverage for financial crime is a sensible precaution. No matter how good your relationships with managing agents or how competent or reliable they are, it’s not something that should necessarily be left to others. There’s too much at stake.

Broker top tips

  • Check the lease to see whether there are explicit requirements to insure funds against theft – if the proper cover is not in place, you could be in breach.
  • Check with third-party agents what insurances they have and what the terms are, to see whether assets are properly protected.
  • Consider becoming co-insured on a managing agent’s crime policy; though bear in mind this may not be suitable or available in most cases.
  • Investigate getting your own crime cover – this is likely to be the safest option for the majority and should not be prohibitively expensive.

James King is Senior Executive, Clear Insurance

Further information