Professional Negligence

Oliver Wharmby, of Lonsdale Insurance Brokers, discusses the professional risks
associated with letting and managing residential property.

Professional Indemnity Insurance provides cover for legal costs and expenses and compensation payable to a third party in the event of a claim for professional negligence.

PI is often seen as a unnecessary evil, however it should not be taken for granted. A PI policy will cover the insured for costs and expenses in defending a claim regardless of whether the claim has any substance. This is particularly relevant as often the costs involved in defending a claim can outweigh the damages being claimed.

We trade in an environment that is increasingly litigious and therefore we are all exposed to litigants who want to take advantage of your PI policy regardless of whether you have breached your duty of care.

We are seeing a rise in serial litigants trying their luck which is not aided by ‘No Win No Fee’ law firms. Recent legislation has brought in a new and very real risk of claims being brought against property professionals.

Combining the new legislation and the influx of No Win No Fee law firms, it is now easier than ever for clients to pursue a claim. We have seen a noticeable rise in claims brought against letting agents in student towns. The No Win No Fee law firm will target student rental properties requesting site of their tenancy agreement in return for a possible payment should they find any breaches and make a successful claim against the agents PI.

Unfortunately, many students tend not to hold their landlords and letting agents in high regard, therefore the prospect of earning free money at their expense can be appealing and so word spreads fast and because they have nothing to lose, students are actively pursuing the No Win No Fee law firms if they do not get to them first!

Claims Statistics

Over three quarters of claims derive from Lettings / Property Management activities compared with Estate Agency. 60% of lettings claims against letting agents are for 4 reasons:

• Breach of Duty
• Property management
• Tenancy disputes
• Personal injury

Case studies

Example One:
Insured was managing agent of various properties, one tenant fell down the stairs resulting in injury and blamed this on a faulty light in the stairway which had been previously reported. Tenant sued Landlord, Landlord sought to recover loss from the Managing agent as in his opinion it was their job to maintain the common parts of the property.

This was reported to Insurers in good time which allowed the Insurers to consider the claim. Insurers actually managed to defend this claim putting the onus back onto the Landlord. Whilst no claim was paid out, Insurers would have paid costs and expenses in defending the claim.

Example Two:
A lettings executive handed keys over to a tenant who had passed the reference checks, performed by an external referencing company. The tenant emailed a scan of their passport, later identified to be a counterfeit. The agent never saw the original. The tenant also managed to persuade the lettings executive (a part-time Saturday employee) that they would pay all monies including the rent & deposit via same day bank transfer in their office which they did using a false web page showing monies leaving their account. Of course no funds were ever received and by the time the agent realised, it was too late, the tenant was in the property.

Unbeknown to the letting agent, the tenant had previously taken up three tenancies with other local letting agents using false documentation and information. Further background information revealed that the tenant had also served a prison sentence for fraud. The landlord brought a claim against the agent and some six months later the tenant was evicted and the estimated cost of loss of rent, legal fees and refurbishment for the property amounted to between £25k-£30k.

The letting agent only paid his £500 Excess and the rest was picked up by Insurers.

Minimising Risk
Whilst it is impossible to totally remove the risk of a claim, there are measures and systems that can be put in place to help mitigate the likelihood of a claim.

1. Keep accurate and updated records, particularly written communication and phone notes.
Claim example one relates to a claim brought by a tenant that had injured themselves and sued the agent. The insurers successfully defended this claim, however the success was largely down to excellent record keeping. We need to remember that insurers viewpoint differs from the insured. Whilst you may feel aggrieved and want to defend yourself, Insurers may take a more commercial approach if they cannot mount a robust defence with good written evidence due to poor record keeping. This may result in a settlement regardless of whether the insured is at fault. Should you find yourself with a paid claim against your policy through no fault of your own, you will have to disclose this at each renewal and depending on the claim value, you may see your premium increase. The importance of keeping records up to date and accurate is crucial should you be faced with a claim.

2. Have a risk management plan.
Below are some points for you to consider.
Consider the type of instructions you are prepared to take. Some may expose you to more litigious clients.
Example – a claim occurred against a letting agent for an inappropriate tenant where the tenant passed the reference checks but was known to the authorities (RSPCA) and would appear in search engines. He subsequently caused damage to the property and vacated the premises leaving live and dead animals, cages etc. The landlord lost 6 months rent, incurred costs to repair the damage and could not sell the property afterwards. This resulted in a £50k claim against the agent with £25k costs.

• Have a training plan for staff to keep up to date with the regulations.
  Have a process to ensure that the correct procedures are followed e.g. checklists and spot checks, internal audits, diary reviews, file reviews.
• Keep a complaints register and have a written complaints handing procedure for staff to follow and to send to your clients?
• Terms and Conditions – Obtain independent legal advice to ensure you have robust terms and conditions to use with your clients.

3. When should you notify?
All PI policies require the policy holder to notify a circumstance that may give rise to a claim. Identifying a notifiable circumstance is not easy and especially if you have multiple offices with many employees. The terms of a PI policy will state that all notifications have to be made as soon as practicable and usually within 28 days. Late notification is often the main reason for insurers avoiding cover and is usually due to the policy holder or staff not being aware of the policy terms. To avoid any non-disclosure, It is crucial that staff are educated to bring any complaint or matter they are aware of to the attention of a manager in accordance with the internal systems in place. If you are unsure of whether to notify a potential claim, you should contact your broker or insurers. Often policy holders choose not to notify through fear of premium increases. If the claim amounts to nothing, insurers should not be penalising you and therefore, if you are in any doubt, NOTIFY. If you choose not to notify and the matter develops in to a claim, it will be too late and insurers will reserve their rights to avoid providing cover due to nondisclosure.”

The full article: Professional Negligence, by Oliver Wharmby of Lonsdale Insurance Brokers can be read here https://www.lonsdaleib.com/images/Professional_Negligence__March_2016.pdf

Oliver works for Lonsdale Insurance Brokers Limited

If you need any help with your insurance, you can contact him on +44 (0) 203 7133 860 or at www.lonsdaleib.com

This article was originally published March 2016 in The Negotiator magazine https://thenegotiator.co.uk