Looking Ahead: Professional Indemnity Insurance
International law firm DWF has outlined and explored the impact that the recent COVID-19 pandemic has had on small businesses, legal firms, construction professionals, valuers, brokers, IFAs and accountants, including what effect it has had on claims.
The direct impact of COVID-19 and the switch to home working will dominate a number of important sectors in the professional indemnity market in 2021.
The redeployment of staff in response to the rapid growth in some areas of work and overnight stagnation in others, caused by lockdown and new ways of working, will have resulted in large numbers of professionals working outside their usual practice areas under light touch supervision, at a time when they may have been facing substantial personal and logistical pressures. Errors will have been made and may be picked up more slowly than would have been the case pre lockdown.
The uncertainties of Brexit and the last minute nature of the negotiations will have made it substantially harder for many professionals to advise their clients. As late as mid-December 2020, almost half of SMEs were reporting that they were unprepared for the end of the Brexit transition period.
History has also taught us that there is a correlation between recession and claims against professionals, so as the economy weakens, a resurgence in claims seems inevitable. Against this somewhat gloomy background, we consider the future faced by a number of professions.
Solicitors
The press has been pessimistic about small high street firms and law centres surviving the pandemic. Many small firms were struggling before COVID-19. Staff absence, changing work types and the need for significant investment in technology to enable homeworking may have been the last straw for some.
While few claims were issued in the second and third quarters of the year, notifications of claims against solicitors increased sharply, particularly in private client and real estate.
Claims associated with poor supervision (including home working), the use of unfamiliar technology, rapid legislative change and remote hearings are likely to focus on missed time limits, confidentiality/data breaches, delayed or failed completions and document errors, including incorrect execution. In the longer term, complex new rules for the remote witnessing of wills may give rise to claims relating to incorrect execution, identification issues and undue influence. Reductions in the nil rate band for SDLT may also give rise to claims if solicitors' actions delay completions, and additional tax becomes payable.
Finally, we anticipate claims arising from the reduced need for commercial property; a business that wishes to reduce its office space may make a claim if it discovers that there is no break clause in its lease.
Construction Professionals
The Grenfell tragedy will continue to have repercussions throughout the construction industry, with the spotlight on the practices of those involved in the specification, manufacture and testing of cladding materials. COVID-19 will also continue to have an impact, both in relation to delays caused to projects (and who should pay for them) and the extent to which they should be classed as force majeure, particularly as the construction industry did not close down, even during the national lockdown. COVID-19 has also led to excess office capacity and an acceleration in the demand for conversion to residential, with the increased risk of disputes and claims that such change of use brings.
The hard insurance market faced by consultants seems unlikely to soften and they continue to face the challenges of increased premiums and restrictive exclusions, causing concern as to how they can remain in practice and comply with their professional obligations to maintain adequate insurance. However, the impact of sharply increased premiums has now largely been felt and, barring any other unforeseen global catastrophe, the hope is that the industry can re-align. The previous widespread difficulties in securing renewal due to a combination of reduced capacity and a hostile liability environment have given rise to a real appetite for brokers to assist their policyholders in mitigating the worst effects of these trading conditions, whilst insurers who are underwriting these risks have a renewed interest in risk assessments and in taking sensible risk management steps. The ongoing industry movement towards BIM level 3 and the widespread digital agenda encourages a more collaborative and less confrontational approach to construction. Meanwhile, off-site and more modern methods of construction leading to the incorporation of factory construction items, mean that the risk profile of all construction team members needs to be reassessed.
Valuers
Litigation against valuers is a traditional solution when property markets are stagnant. As businesses close, commercial lenders will seek to recover sums lost when borrowers default. With the move to homeworking affecting both the demand for office space and satellite retail premises, such as coffee shops, it may be harder for lenders to offload commercial premises and they may look to valuers to recoup some of their losses.
In the housing market, while the £500,000 SDLT nil rate band has been extended to 30 June 2021, it will then reduce to £250,000 until 30 September 2021 and return to its customary £125,000 thereafter. This may cause a bubble as purchasers scramble to buy before the nil rate band reduces, followed by a slump as the reductions kick in. Residential lenders have been advised not to commence or continue repossession proceedings at this time; however, COVID-19 related payment holidays must end by 31 July 2021. A surplus of repossessed property and disappointing auction results may lead to claims that properties were overvalued.
The private rental sector is also in difficulty as rental receipts disappear, leases cannot be enforced but maintenance and repairing obligations remain. We expect to see a spike in claims against agents who do not take steps to protect their property owner clients and the buildings they manage.
Brokers
An FCA survey into the financial resilience of firms shows that the cash liquidity of brokers has dropped by 30% since February 2020, leading to concerns about their liquidity.
The COVID-19 pandemic has led to widespread claims under business interruption policies. In the aftermath of January's Supreme Court judgment in the FCA's business interruption test case, we expect claims against brokers arising out of their duties and obligations to advise pre-inception. Where the claimant is an individual or small business, claims may be dealt with by the Financial Ombudsman Service. If the disputed policy renewed after 1 April 2019, FOS's increased £355,000 limit will apply.
IFAs
On an individual level, investors are likely to be feeling poorer. Declining share and property prices resulting in reduced investment income and lower capital values are likely to drive claims, particularly where FOS is free at point of use.
Pension transfers remain an issue. The number of enforcement actions involving IFAs is anticipated to increase, particularly as the FCA has said that it will be looking at smaller firms and those which consistently fail to meet its standards.
Accountants
In recent years we have seen a growing disconnect between a company's expectations of its auditors and the audit role, resulting in increasing claims and demands for regulatory change. While a combination of Brexit and COVID-19 has meant that many audit reform recommendations were placed on hold, regulatory reform remains a priority and one which is firmly on the agenda for 2021.
In terms of case law, in August 2020 the Court of Appeal handed down their judgment in AssetCo Plc v Grant Thornton UK LLP, concerning scope of duty and legal causation in the context of auditors' negligence cases, and the application of the SAAMCO cap to auditors' negligence cases generally. The case demonstrates that where an auditor negligently failed to identify in its audit the dishonest concealment of the claimant’s insolvency, it was liable for the trading losses resulting from the claimant continuing to conduct its insolvent business.
Recent financial pressures on business leading to fraud and/or business collapse have further worsened the situation and we also expect increasing numbers of audit-related claims where fraud or insolvency is a feature.
This article was originally posted on dwfgroup.com.