02 Insurance

Question 1

What is PII and what is its purpose?

Answer 1

Professional Indemnity Insurance (PII):

1. Protects firms against losses resulting from professional negligence, errors and/or omissions which cause financial loss to a third party
2. Ensures a firm’s clients do not suffer financial loss which the firm cannot meet

Question 2

What does the RICS state about PI insurance?

Answer 2

Rule 9 of the RICS Rules of Conduct for Firms requires all regulated firms to be covered adequate and appropriate PII which meets the standards approved by the Regulatory Board

Question 3

What should a PII policy contain?

Answer 3

1. Must be on a claims made basis
2. Must be on an each and every claim basis or aggregate plus unlimited round the clock reinstatement basis
3. Policy wording is written on a full civil liability basis
4. Underwritten by a listed insurer
5. Covers past and present employees
6. Run-off cover
7. Minimum level of indemnity required by the RICS

Question 4

Explain the term ‘claims made basis’.

Answer 4

The policy at the time the claim is made will respond, not the policy in place at the time of the negligence

Question 5

Explain the term ‘each and every claim basis’.

Answer 5

The limit of indemnity covers each claim individually (instead of a accumulatively for that year, which is referred to as ‘in the aggregate’)

Question 6

What does having the PII policy written on a full civil liability basis mean?

Answer 6

A full civil liability basis means if a claim isn’t specifically excluded, it’s included (as opposed to a ‘negligence only’ policy, where if a claim is not specifically included, it’s excluded)

Question 7

What happens to PII when you retire?

Answer 7

Run-off cover ensures firms, members and customers are not exposed to financial detriment in the period following a firm ceasing to trade or a member’s retirement

Question 8

How would you determine what is sufficient in terms of PII runoff cover?

Answer 8

Should be for a minimum of 6 or 12 years, depending on how the contract was executed, however negligence claims can be made up to 15 years after work was undertaken - advice from an insurance broker should be sought as to whether to maintain for the full 15 years

Question 9

What are the minimum levels of PII based on?

Answer 9

Minimum level of indemnity is based on the firm’s turnover in the previous year (or estimated for a new firm)

Question 10

What are the minimum levels of PII required?

Answer 10

1. £100,000 or less turnover = min. £250,000 indemnity
2. £100,001 to £200,000 turnover = min. £500,000 indemnity
3. £200,001 and above turnover = min. £1,000,000 indemnity

Question 11

What is meant by the term ‘maximum level of uninsured excess’?

Answer 11

The part of each claim the firm must pay itself

Question 12

What are the levels of maximum uninsured excess?

Answer 12

1. Up to and including £500,000 indemnity = the greater of 2.5% of the sum insured or £10,000
2. Over £500,000 indemnity = 2.5% of the sum insured

Question 13

What is generally excluded from PII cover?

Answer 13

1. Material damage
2. Theft
3. Personal injury
4. Damage to third party property
5. Work carried out prior to the inception of the policy
6. Insured v insured claims (i.e. a company suing an employee for professional negligence)
7. Insolvency

Question 14

What is the RICS Assigned Risk Pool?

Answer 14

1. Insurance facility for regulated firms that find themselves unable to obtain PII in the normal market
2. Firms can remain in the ARP for a maximum of 3 years, where they will be audited and guided in how to amend their business procedures/practices ready to obtain market PII again

Question 15

What should you do in case of a potential claim on your PII?

Answer 15

Must notify insurer in the event of:

1. An actual claim
2. A written or verbal threat of a claim
3. Any circumstance that the firm has reason to believe may result in a claim
4. Any complaint notified via the firm’s CHP

Question 16

How can negligence claims be avoided?

Answer 16

1. Good communication
2. Clearly understand client’s objectives and confirm precise details
3. Check you are competent to perform the instruction
4. Undertake work in accordance with any relevant RICS guidance
5. Keep up-to-date notes
6. Be aware of changes in legislation
7. Try and resolve any complaints as soon as possible

Question 17

What were the implications of the Merrett v Babb case?

Answer 17

1. A professional surveyor was found to be personally liable for advice he gave
2. Usually, the claim would have been brought against the surveyor’s company, who would have had PII in place to cover the claim, however they had since gone out of business and no longer carried insurance
3. Recent case law however has indicated the courts are now favouring professionals and have since rejected the decision in Merrett v Babb on a number of occasions

Question 18

You set up your own business. A client at your old practice is suing them for negligence on a piece of work that you completed. The client decides to sue you as well. Can he do this and what are the implications for your new practice’s PII?

Answer 18

No - decision in Merrett v Babb would apply

Question 19

If the firm conducts general insurance distribution work, what are the additional requirements expected by the RICS?

Answer 19

Required to be registered with the Financial Conduct Authority or RICS’ Designated Professional Body scheme must adhere to the following professional indemnity insurance requirement, which replaces the minimum limit of indemnity

A limit of indemnity equivalent to at least €1,250,000 for each and every claim and at least €1,850,000 in the annual aggregate.

The PII must cover the whole territory of the European Union. This is in line with the requirements of the Insurance Distribution Directive and the cover may be subject to further adjustments in the future to be determined by the European Commission. The cover requirement applies when the policy is taken out, renewed or extended.

Question 20

What is the Run-off Pool?

Answer 20

Firms that are unable to obtain run-off from their incumbent insurer or the open market will be able to apply for coverage to the Run-off Pool.

Question 21

What are the latest requirements for run off cover for consumer claims?

Answer 21

For a consumer (any natural person acting for purposes outside their trade, business or profession) claims, the requirement is for a limit of £1,000,000 in all for a period of six years from the expiry date of the policy in force at the time of cessation. RICS’ minimum policy wording will automatically provide this coverage.

RICS members may deem that it is adequate and appropriate for run-off for consumer claims to be an on an ‘each and every claim’ basis. RICS would expect run-off on this basis to be a maintained for a minimum period of six-years from the cessation of the practice. It may be arranged and paid for on an annual basis, provided that in the event of the policy not being renewed, a minimum limit of £1,000,000 in all for a period of six years from the expiry date of the policy in force at the time of cessation is maintained.

Question 22

What are the requirements for run off cover with non-consumer claims?

Answer 22

The requirement is for firms to have adequate and appropriate run-off, but RICS would expect run-off to be a maintained for a minimum period of six years from the cessation of the practice. Run-off for commercial activity may be arranged and paid for on an annual basis.

Question 23

What current risks are there with respect to PII?

Answer 23

Insurers may impose a fire safety exclusion.

Exclusions vary dependent upon insurer; however, from 1 May 2021 any exclusion will not apply to professional work relating to buildings four storeys or under.

Firms should seek the advice of their insurance broker, as to the impact of such exclusions in their consideration of the appropriateness and adequacy of their insurance on past work and future work. RICS will take into account the current market availability of cover for fire safety and any advice received from the firm’s insurance broker in considering whether a firm has complied with the Rules of Conduct.

Question 24

What is meant by round the clock reinstatement basis? What are the disadvantages?

Answer 24

When that layer has been exhausted the cycle can start again if a reinstatement has been negotiated. The practical disadvantage of “Round the Clock” reinstatements can be that excess layer insurers, if they become primary insurers will handle claims in their own way.