1. Professional Indemnity Cover

Question 1

Tell us about the Merrit V Babb case law?

Answer 1

• This case dates back to 2001 and highlights the importance of having run-off cover in place.
• A surveyor was sued for negligence by a former client.
• Because the surveying firm was no longer in existence therefore the individual surveyor was pursued for damages successfully.
• This caused a big shock in the industry and highlighted the need to ensure that run-off cover is in place for all previous employees.

Question 2

What limitation periods are associated with underhand and deed forms of contract?

Answer 2

• 6 years when executed under hand.
• 12 years when executed as a deed.

Question 3

What does PII stand for?

Answer 3

• Professional Indemnity Insurance.

Question 4

What is the purpose of Professional Indemnity Insurance?

Answer 4

• To provide financial cover in the event a client suffers financial loss as a result of a breach of professional duty e.g. neglect, errors or omissions.

Question 5

What benefits does PII provide for the professional?

Answer 5

• The professional is protected from financial losses.
• The firm does not have to meet the claim from their own assets and resources.

Question 6

What benefits does PII provide for the client?

Answer 6

• They are able to recover their financial losses.

Question 7

On what basis is PII underwritten in the UK?

Answer 7

On a claims made basis.

Question 8

What does On a claims made basis mean?

Answer 8

An insurance policy issued on a claims made basis provides cover for any claims made against the policyholder during the period of insurance.

That can include claims made against the policyholder even if the incident giving rise to the claim happened before the current policy start date.

The caveat is that a claims made basis policy must be active when a claim is made

Question 9

What are the requirements regarding Professional Indemnity Insurance set by the RICS?

Answer 9

• The policy cover must be made on an ‘each and every’ claim basis.
• The RICS sets out the minimum levels of indemnity.
• The RICS sets out the maximum levels of uninsured excess.
• Run off cover must be in place for at least 6 years.
• The policy should include cover for past and present employees, directors and partners.

Question 10

What are the new RICS minimum levels of indemnity and Maximum levels of uninsured excess?

Answer 10

100,000 or less - minimum indemnity is £250,000
100,001-200,000 - £500,000
200,001 and above £1,000,000

Maximum levels of uninsured excess

Question 11

What measures should be taken to try and avoid PI claims?

Answer 11

• Keep full and detailed records of meetings and conversations.
• Record recommendations and advice given.
• Use proper letters of engagement, scope of services and terms of engagement.
• Don’t advise on a specialism outside your field of experience.
• Use RICS guidelines.
• Avoid poor management and excessive workloads

Question 12

If you made a mistake in your cost plan what would your insurance company expect?

Answer 12

• For you to notify them and comply with any conditions & procedures set out in the insurance policy.

Question 13

If an estimate prepared by a QS is incorrect can the client claim damages?

Answer 13

• An estimate that is incorrect in itself will not provide the client with a right of redress.
• The client must demonstrate that the QS warranted the accuracy of the estimate or that it was incorrect due to a lack of reasonable skill and care.
• It could have been incorrect due to reasons outside their control for example market conditions or an item referred to in their exclusions.

Question 14

Why do chartered surveyors have to carry PI insurance? Who does it protect? 

Answer 14

This is because should a charted surveyor cause a financial loss to a client, because of an error in the service they provided, the PI insurance for surveyors policy will protect you. You will be covered for the legal costs and expenses involved in defending a claim.

Question 15

Explain the term ‘claims made basis’? 

Answer 15

Claims made basis is a type of liability insurance coverage that only covers claims made and reported during the policy period

Question 16

What happens to PI insurance when you retire? 

Answer 16

The PI cover will cease and you will need a run off cover following that incase someone does decide to sue you

Question 17

What were the implications of the Merrett v Babb case? 

Answer 17

• Merrett v Babb was a landmark Court of Appeal decision in 2001 that left employed professionals potentially exposed to personal liability claims in respect of advice they gave, or work they undertook, on behalf of their employer.
• The decision was a cause for concern for residential property surveyors as Mr Babb, a professional surveyor, was found to have assumed personal responsibility to the buyers of a house which he surveyed.
• This was despite the fact that the buyer never knew or met Mr Babb, and the fee for the valuation was paid to Mr Babb’s employer rather than to Mr Babb personally.
• In usual circumstances this claim would have been brought against the surveyor’s employer, who would have professional indemnity insurance in place to pay the claim. However in this case the employer had gone out of business and no longer carried insurance

Question 18

Are you aware of any guidances RICS publishes on PII

Answer 18

Yes the UK professional indemnity insurance requirements regulation guide published in Feb 2022

Question 19

What are the levels of indemnity required?

Answer 19

This will depend on firms turn over

Question 20

What ate the maximum levels of uninsured excess?

Answer 20

This depends on the level of indemnity
Up to £500k = greater of 2.5% of insured sum or £10,000
Over £500k = 2.5% of the insured sum

Question 21

What is PII and what is its purpose?

Answer 21

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 22

What does the RICS state about PI insurance?

Answer 22

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 23

What should a PII policy contain?

Answer 23

1. Must be on a claims made basis
2. Must be on an each and every claim 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 24

Explain the term ‘claims made basis’.

Answer 24

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

Question 25

Explain the term ‘each and every claim basis’.

Answer 25

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

Question 26

What happens to PII when you retire?

Answer 26

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 27

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

Answer 27

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 28

What are the minimum levels of PII based on?

Answer 28

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

Question 29

What are the minimum levels of PII required?

Answer 29

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 30

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

Answer 30

The part of each claim the firm must pay itself

Question 31

What are the levels of maximum uninsured excess?

Answer 31

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 32

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

Answer 32

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 33

How can negligence claims be avoided?

Answer 33

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 34

What were the implications of the Merrett v Babb case?

Answer 34

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 35

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 35

No - decision in Merrett v Babb would apply