Since the Grenfell Tower tragedy in 2017, more attention has been paid to the risk of fire in residential properties, particularly high-rise buildings.
This means that the process of inspecting and valuing high-rise blocks is now fraught with difficulty, as it has become clear that many cladding designs or products do not comply with the Building Regulations – whether those applicable when the property was built or as amended in 2018.
Insurers that underwrite professional indemnity insurance (PII) have faced a flood of claims relating to defective cladding and fire-stopping on hundreds of high-rise blocks. The bill for the necessary remedial works is likely to run into billions.
In the meantime Lloyds of London, which regulates many of the insurers that provide PII to surveyors, has reviewed loss-making lines of business for the general insurance market. As a result, many insurers have been forced to cut back on the amount of PII cover they provide, or to stop underwriting PII completely.
This reduction in capacity has caused premiums to go through the roof, excesses to increase, and cover to be reduced – a situation of which any surveyor who has renewed their PII in the past year will be painfully aware.
Adequate and appropriate cover
Every RICS member will be conscious of their obligation to ensure that all previous and current professional work is covered by adequate and appropriate insurance. RICS has set minimum terms that a PII policy must meet in order to be considered "adequate and appropriate".
These have traditionally included obligations for insurers to provide cover for each and every claim made against the insured surveyor during the period of the policy, up to a fixed amount, known as the limit of indemnity. The requirements also stipulate that any excess to be paid by the surveyor for each claim will exclude payment of defence costs, which must be covered by insurers in addition to the cost of any claim itself.
Depending on the type of work undertaken by the surveyor and therefore the level of insurance they require, they may obtain just 1 policy – a primary layer policy – with a limit of indemnity sufficient to cover their potential liabilities in the event of a claim.
Alternatively, they may obtain further cover, with what is known as an excess layer policy to top up their insurance, in case they receive a claim that surpasses the level of indemnity provided by the primary layer.
- The current exclusion from cover for contractual liabilities has been extended to include any liability incurred where the valuer has relied on an EWS1 form for external wall fire review, and their valuation report does not exclude liability for any losses to the lender or prospective purchaser caused solely by the contents of that form being incorrect. This exclusion only applies to valuations made after 1 May 2020.
- No policy will cover any surveyor completing the EWS1 form unless they have sought the insurer's agreement that such activity will be covered, either on a blanket basis before the policy is agreed or on an ad-hoc basis, before the surveyor undertakes the work.
- Listed insurers may now also impose exclusions for claims relating to fire safety.
- The limit of indemnity may now apply on an aggregate basis, subject to what insurers refer to as round-the-clock reinstatements. Such arrangements mean that, as the primary layer insurers pay each claim made against the policy, the limit of indemnity under that policy is used up. Once the limit has been exhausted, any excess layer insurers effectively provide a new primary layer, to cover any further claims made against the surveyor during the period of insurance. If there is no excess layer insurance, the limit of indemnity under the primary layer policy will be reinstated, subject to any terms and conditions that insurers may impose for doing so.
- The policy excess may now apply to defence costs, which means that the surveyor will have to contribute to funding the defence of each claim made against them, and insurers will only be responsible for paying such costs once the surveyor has paid the excess in full.
Practical implications
What are the consequences of these changes for the profession?
First, a surveyor may now face a greater risk undertaking work generally, as they may have to pay the costs of defending a claim even if it is without merit and abandoned without any claim payment being made.
Second, should insurers seek to place an aggregate limit on indemnity that allows for round-the-clock reinstatements, it will be vital to understand the precise conditions proposed, and whether the terms of any excess layer policy exactly match the terms of the primary policy.
Policies offering reinstatements may exclude cover for more than one claim arising from a repeated error, or from the same claimant. It will therefore be important to look closely at the proposed terms to understand how the policy will respond to multiple claims. If the excess layer policy does not match the primary layer, the surveyor may face a gap in cover once the limit of the indemnity under the latter has been exhausted and the former effectively takes its place.
Surveyors may also now have to obtain an excess layer of insurance, or an increased level of cover under their current excess layer insurance, as primary layer insurers seek to delay the point at which cover under their policy is reinstated.
This means that the process of arranging your insurance may take significantly longer than before, so you need to start the discussions with your broker and insurers much earlier to avoid a last-minute rush – or even having to revert to the assigned risks pool for short-term cover.
As to the changes relating specifically to the EWS1 form, if the surveyor has the necessary fire safety expertise to be completing this form, they should provide their brokers and insurers with full details of the systems they have in place to reduce the risk of any resulting claims, including robust terms of engagement with the client.
If a surveyor will be relying on the contents of an EWS1 form prepared by a third party to value a property, it is imperative that they make clear in their engagement letter, in the terms and conditions for their client and in their valuation report that they will not be liable – whether to the client or any third party that may come to see the valuation – for any errors in the valuation caused solely by errors in the form.
Finally, a word about run-off cover. A surveyor may understandably be reluctant to incur the – potentially substantial – cost of obtaining insurance once they have ceased practice. However, not only is it a regulatory requirement for all RICS members to maintain cover for at least 6 years from the date they cease practice, it could also be vital for their future financial well-being.
Should a client bring a claim against a surveyor, the fact they have no insurance will not prevent a court from finding against them and awarding damages that could mean financial ruin for the individual. Even if the claim fails, the surveyor will have had to fund all their defence costs – at least part of which will probably be irrecoverable – which may run to a 6-figure sum. Faced with this possibility, the investment in run-off cover is well worth making.
RICS global building standards director Gary Strong comments: "RICS is acutely aware of the challenges around a hardening PII market and the impact this is having on professionals. We continue to work with the insurance profession, and are pressing the government, to try to ensure the availability of adequate, appropriate and affordable PII cover for surveyors."
"A surveyor may now face a greater risk undertaking work generally, as they may have to pay the costs of defending a claim"