Professional Indemnity Insurance

Question 1

What is professional indemnity insurance?

Answer 1

PII covers the policy holder for the costs of legal action made against them in respect of financial loss which occurs due to negligence, error or omission in professional advice or services provided

Question 2

Has RICS published any information on PII requirements?

Answer 2

The UK Professional Indemnity Insurance Requirements

Version 9 (effective 1st April 2022)

Question 3

What is the purpose of having professional indemnity insurance?

Answer 3

• Ensures that if the firm faces a claim, it is protection from financial loss that it cannot meet from its own resources
• Protects the insured member or firm against the consequences of its liability to pay damages to third parties for breaches of professional duty that it commits through its professional activities
• Ensures that the firm’s clients do not suffer fianancial loss, which the firm cannot meet.

Question 4

What is the difference between ‘any one claim’ and ‘aggregate’ policies?

Answer 4

• ‘Any one claim’ and ‘aggregate’ refer to the basis of cover on a professional indemnity policy.
• ‘Any one claim’ policy provides cover up to the full limit for each individual claim made.
• An ‘aggregate’ policy provides cover up to the full limit for all claims made in the period of insurance

Question 5

What is a fully retroactive PII policy?

Answer 5

• PII policies work on a ‘claims made’ basis meaning the policy covers claims that are first made against the insured during the period of insurance (regardless of when the negligent act occured).
• If the retroactive date of the policy is stated as ‘none’ then the policy is fully retroactive and all former work carried out by the firm will be covered.

Question 6

What measures do you take to avoid professional indemnity insurance claims?

Answer 6

• Keep detailed records of meetings, communications etc.
• Record recommendations and advice given
• Use proper letter of engagement, appointment contracts and follow the scope of services
• Avoid providing advice on specialisms outside my field of experience / knowledge
• Follow RICS guidance and professional statements
• Avoid excessive workloads
• Follow RICS Rules of Conduct
• Follow company procedures and policy

Question 7

What was Merrett v Babb? (Court case in 2001)

Answer 7

• Babb completed a valuation as an employee of a company for a house purchased by Merrett
• The valuation was later found to be negligent
• The original company no longer existed and the PII policy had been cancelled
• The Court ruled Merrett could pursue the individual (Babb) for losses

Question 8

What are the minimum limits of indemnity for regulated firms?

Answer 8

£100,000 or less firm turnover in preceding year = £250,000 minimum level on indemnity

£100,001 to £200,000 firm turnover in preceding year = £500,000 minimum level on indemnity

£200,001 and above turnover in preceding year = £1,000,000 minimum level on indemnity

Question 9

What is the maximum level of uninsured excess for regulated firms?

Answer 9

£10,000,000 or less firm turnover in the preceding year = the greater of 2.5% of the sum insured, or £10,000

£10,000,001 or above firm turnover in the preceding year = no limit set

Question 10

If you make a mistake, what would your PI insurance company expect you to do next?

Answer 10

• Notify them at earliest opportunity
• Comply with any conditions and procedures set out in the insurance policy
• Advise the client of the error
• Assess the level of mistake and take steps for correcting

Question 11

Assuming you are MRICS, how would you deal with the following situation?

A friend asks for your help on a house extension - they ask for technical advice for free, outside business hours…?

Answer 11

• My firm’s PII would not cover me for private advice, therefore I would politely decline
• I would also need to consider a potential conflict of interest (giving professional advice to a friend)
• I would suggest my friend contacts the firm I work for in business hours to discuss a formal appointment

Question 12

What is professional indemnity insurance run-off cover?

Answer 12

‘Run-off’ is a form of PII which covers the historic liabilities after it ceases to trade (the policy covers legacy issues).

Question 13

How long should PII run-off cover be in place?

Answer 13

RICS expect run-off cover to be maintained for a minimum period of six years from the cessation of the practice.

Question 14

What benefits does PI insurance provide for the professional?

Answer 14

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

Question 15

What benefit does PI insurance provide for the client?

Answer 15

The client is able to recover their financial losses

Question 16

On what basis is PI insurance underwritten in the UK?

Answer 16

On a claims made basis

Question 17

In the context of PI insurance, what does a ‘claims made basis’ mean?

Answer 17

The insurance policy that is in place at the time the breach is discovered is responsible for providing the indemnity, not the insurance policy in place whent the breach was made.

Question 18

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

Answer 18

• 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 19

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

Answer 19

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

Question 20

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

Answer 20

• 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 21

How can you limit your liability when agreeing terms of appointment with a client?

Answer 21

• Base the appointment on reasonable care and skill rather than fitness for purpose which is more onerous
• If the client’s requirements are performance-based, this may imply fitness for purpose. It is advisable to request a clause limiting the appointment to a reasonable skill and care only
• Run off cover must be in place
• Execution of hte appointment under hand will result in a reduced liability period for 6 years instead of 12