Surveyors: Changes to the RICS minimum Professional Indemnity insurance policy
The RICS have amended the terms of their minimum Professional Indemnity insurance (PII) policy wording. This is due to the unprecedented conditions in the PII market and also to provide increased flexibility to insurers, to avoid further contractions in the market and to ensure the continued availability of PII to its member firms.
These changes are effective from 1st May 2020 and include:
- Removal of RICS prescribed fire safety exclusions and allowing Insurers to impose their own exclusionary language.
- An exclusion of liability around completing the EWS1 form
- An extension of the contractual liabilities exclusion to capture any liability incurred where an EWS1 Form has been relied on and the valuation report does not exclude liability to the lender or prospective purchaser
- Allowing Insurers to amend the Policy excess to be applicable to the defence costs of a claim
- Allowing Insurers to amend the basis of the limit of indemnity to “aggregate plus unlimited ‘round the clock’ reinstatements”, as opposed to “Any One Claim”
With these changes considered and the continued difficulties in the PII market, firms need to ensure that they are communicating with a broker well ahead of time before renewal. There has been significant improvements made in risk management across the surveying industry and it is critical to give yourself time to be able to evidence the good measures that make your firm a suitable and profitable risk for insurers to accept.
Law firm, RPC, have produced very helpful guidance on the implications of the RICS changes which you can find below. This is part of a series of articles for surveyors and valuers looking at the challenges in the current climate.
If you are concerned about how these changes may affect you or how to best prepare for renewal at this challenging period, then please do speak to us.
RICS Guidance and Key Developments for Surveyors: Changes to the RICS Minimum Terms
Surveyors and their Professional Indemnity brokers will be well aware of the obligation to ensure that all previous and current professional work is covered by adequate and appropriate insurance cover.
The RICS has set in place various requirements that a Professional Indemnity Insurance (PII) policy must meet, in order to be considered 'adequate and appropriate': the RICS "Minimum Terms". These requirements have traditionally included obligations for the policy to provide separate insurance cover for each and every claim and for the excess to be paid by the member for each claim to exclude payment of defence costs.
Since the Grenfell tragedy in June 2017, there has been increased focus on the risk of fire in residential properties, particularly in high-rise buildings. The process of valuing high-rise blocks has become fraught with difficulty, as it has become clear that many of the cladding designs, or the products used to clad these blocks, do not comply with the requirements of the Building Regulations. This problem has caused significant disruption to the residential mortgage market, as valuers have been unable to advise lenders, or prospective purchasers, whether remedial works will be required to a particular building and, if so, how much those works will cost and what impact that cost will have on value. In order to address this problem, the EWS1 form was launched in December 2019. The form is used to help inform lenders and purchasers as to whether there is an issue with the external walls systems of a particular building. Its progress is being closely monitored to ensure it can evolve to reflect any issues that have arisen since its implementation and we will be looking more closely at the from in a subsequent article.
In the meantime, the insurers who write PII business have faced a tsunami 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 hundreds of millions, if not more. Set against this background, and in order to ensure that there is still sufficient capacity in the insurance market to provide PII to all member firms, the RICS has been in discussion with the listed insurers to agree amendments to the minimum terms. Those amendments can be summarised as follows:
- The current exclusion relating to contractual liabilities has been extended to cover any liability incurred where the valuer has relied on the EWS1 Form and the valuation report does not exclude liability to the lender or prospective purchaser for any losses solely caused by the contents of the EWS1 Form being incorrect. This exclusion will only apply to valuations undertaken after 1 May 2020.
- The policy will not provide cover for any surveyor completing the EWS1 Form, unless they have sought the insurers' agreement that such activity will be covered, prior to inception of the policy.
- Listed insurers may now also impose exclusions for claims that relate to fire safety.
- The limit of indemnity may now apply on an aggregate basis, subject to 'Round the Clock' reinstatements. In effect, as the limit of indemnity under the primary policy expires, any excess layer insurance will effectively become the primary layer insurance; or, if there is no excess layer insurance, the limit under the original policy will be reinstated, but subject to any terms and conditions that insurers may impose for that reinstatement.
- The policy excess may now apply to defence costs
So what are the practical implications of these changes for surveyors and what particular issues should their brokers bear in mind? Firstly, a surveyor may now have a greater risk from undertaking work generally, as they may have to pay the costs of defending a claim, even if that claim is abandoned without any claim payment. Secondly, should insurers seek to place a limit of indemnity that is expressed to be in the aggregate with 'Round the Clock' reinstatements, it will be very important to understand the exact proposed conditions of reinstatement and whether the terms of any excess layer policy exactly match the terms of the primary policy. Policies offering reinstatements may exclude cover for the purpose of paying more than one claim arising from a repeated error, or from the same claimant, so it will be very important to look closely at how the proposed terms in order to understand how the policy will respond to multiple claims. And if the excess layer policy does not match the primary layer policy, the surveyor may face a gap in cover once the limit of the indemnity under the primary layer has expired and the excess layer policy effectively takes its place.
As to the changes relating specifically to the EWS1 Form, if the surveyor has the necessary fire safety expertise to be completing the form, it will be key for them to provide their brokers/insurers with full details of the systems they have in place to reduce the risk of claims arising from this activity. Brokers should ensure that the insurers' prior approval to undertake this work is obtained so as to be certain that any claims that might arise are covered.
If a surveyor will be relying on the contents of an EWS1 Form prepared by a third party in order to value a property, it is imperative that they include both in their engagement letter and terms and conditions with their client and in their valuation report a term which makes it clear that they will not have any liability either to the client or any third party who may come to see the valuation for any errors in the valuation caused solely by errors in the EWS1 Form. Surveyors may wish to consider including the following wording:
"In arriving at the valuation, we have relied on the EWS1 form, prepared by a professionally qualified third party. In so doing, we are not offering any advice as to the accuracy, completeness or fitness for purpose of the form or its content and neither the individual preparing the valuation nor this firm shall have any liability to you, or to any third party with whom you share the valuation, for any losses or potential losses arising directly and solely as a result of any inaccuracies or errors in, or otherwise in any way related to, the EWS1 Form".
If you have any questions about anything in this article specifically, please feel free to contact Alexandra Anderson or Katharine Cusack from RPC.
Greg Harrison - Larger practices
Greg is an expert in Professional Indemnity for property and construction professionals. He works with clients from across the sector, including engineers, surveyors, and architects. If you have any questions about PI – or any other insurance that affects the property and construction industry – just drop him a line.