Professional Indemnity Cover – What Next for RICS Members?

In recent years it has been increasingly difficult for professionals to obtain professional indemnity insurance (PII) cover. With less Insurers writing PII, those professionals who can secure terms have had to pay significantly higher premiums for substantially reduced cover.

This has led to a rise in the number of surveyors seeking cover in the RICS Assigned Risk Pool (ARP) which offers temporary insurance on RICS Minimum Terms for a period of 12 months.

In order to combat these issues, RICS’ Standards and Regulation Board (SRB) commissioned a review of its PII model publishing a consultation on proposals to amend its Minimum Policy Wording in January 2022 and asking its members for feedback on any suggested changes. We recently reported about the consultation in our article here. This review focuses on surveying work undertaken in the UK, however, it is expected that a global review will follow.

The consultation focuses on the following key areas:

1. How RICS can best help support adequate, sustainable, stable and affordable PII for its members.
2. How RICS can best provide guidance and support for its members to help them obtain PII cover.
3. The information that should be provided to consumers and clients to ensure transparency about the PII cover obtained by RICS members.
4. How RICS can use its data to predict trends in the PII market to better assess and articulate the risk profile of the profession and help its members understand emerging issues in the availability of cover.

To support the review, RICS have appointed an expert advisory group consisting of members from Knight Frank LLP, Carter Jonas and the Construction Industry Council. Marcus Elwes FCII of DA Strategy has been appointed to produce an independent report.

Why is it increasingly difficult to obtain cover?

The PII market has hardened in recent years due to a combination of factors, including the fact that PII was found to be the second worst performing class of business for insurers in a review carried out in 2018, leading to 25% of insurers withdrawing from the market entirely.

With respect to surveyors, there is a perceived increased risk for insurers due to adverse economic conditions following on from the Covid-19 pandemic and Brexit. Although the property market has been buoyant so far, there is a fear that there may be a downturn which could result in a spike in professional negligence claims against valuation surveyors. In fact, we have already seen an increase in claims against valuation surveyors, where borrowers (particularly those in the hospitality industry) have defaulted on loans due to recent economic conditions and lenders have sought to recover the shortfall.

The pandemic also increased the number of surveyors carrying out property inspections virtually and notwithstanding the use of advanced technology, it remains to be seen whether there will be an increase in claims where defects may not have been spotted. Further, the construction industry as a whole is expected to see an increase in claims due to the proposed Building Safety Bill.

Proposed Changes

The consultation has outlined a number of short term and medium-term actions to help combat these challenges which are planned to be implemented within the next three years:

Short Term

1. Data collection – it is proposed that during the renewal process, RICS will collect data from its members on the premium paid and the number of claims made during the policy period and the circumstances which led to the claim being made.
2. Recommended broker scheme – RICS have proposed to develop a recommended list of brokers that would agree to a minimum service level and the use of a standardised broker form.
3. Commercial clients and lenders – RICS will work with lenders to encourage them to use more appropriate liability fee caps.
4. Repositioning the ARP – RICS have said that the ARP is misunderstood as being used for firms that have a poor claims history and it will consider if there is a way to create two pools, one for firms performing well on the market and another for firms that cannot obtain cover due to their claims history.
5. Government advocacy – RICS have said they will engage with the Government on whether a liability capping scheme could be introduced to limit its member’s exposure on a statutory level.

Medium Term

1. Self-Insurance – one option is for parts of the profession to self-insure by pooling premium payments into a protected vehicle and paying parts of that premium out when a claim is made. The risks of this approach are significant start up costs and the possibility of losses incurred being in excess of the premium collected. This would mean that calls for additional premium payments would be needed to offset those losses.
2. Master Policy – reintroducing a policy where all interested insurers would pool together to co-insure the profession. This would mean all members would obtain the same level of minimum cover, however, if there was one policy there would be no competition on pricing and firms with no claims history would be burdened by the same premium increases as those with a poor claims history. This is why this scheme, previously used by RICS, was disbanded in 1997.
3. Maintain and amend current model – another option proposed is to amend the RICS Minimum Wording to remove caps on excess entirely or for companies who meet a certain threshold of turnover. The current requirement is for the maximum excess to be 2.5% of the sum insured (up to £10,000 where the limit of indemnity is £500,000 or less). It is also suggested that a move to negligence only cover as opposed to full civil liability cover could provide more favourable terms.

Comment

As a firm we have seen a rise in claims against surveyors as well as an increase in the number of firms seeking cover in the ARP.  The overuse of the ARP has had a knock-on effect of discouraging Insurers from exposing themselves to the RICS market. It is clear that this situation is unsustainable, and it is positive that RICS are actively taking steps to assist its’ members who are struggling to find affordable PII cover with acceptable terms.

We question however, if these proposed changes go far enough to address the structural issues in the PII market for surveyors.  Lenders seeking to transfer the commercial risk of their lending practices, have continuously imposed tighter contractual terms on valuation surveyors, whilst reducing the fees paid for those services.  It will be difficult to drive down the rate of claims until this is addressed.

We await the results of the RICS’ consultation with interest. In the meantime, to reduce the scope for potential claims, we recommend that RICS members review their new instructions carefully to ensure that they properly reflect the work which they are being instructed to do and where possible negotiate financial caps on liability or exclude liability for certain types of losses. Further, we recommend that any reports produced clearly set out any assumptions which have been replied upon or any verbal conversations which may have taken place on site that change the scope of the instruction.

Should you require any further assistance or have any queries on the above, please contact David McArdle or Priya Thakrar.