There won’t always be an ambulance at the bottom

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Edward Donne of specialist Professional Indemnity Insurance (PII) broker Howden sets out his views regarding the current relationship between Conveyancers and the PII market. He examines the most common causes of claims and provides guidance on how to avoid them.

“We like to build a fence around the top of a cliff, rather than station an Ambulance at the bottom” Professor Richard Susskind OBE, speaking at the 2016 Conveyancing Association Conference.

According to the SRA’s analysis of PII trends, 26% of claims notified to insurers from SRA regulated firms arose from Residential Conveyancing, 14% from Commercial Conveyancing and a further 11% from “unspecified” Conveyancing.

These figures vindicate the decision by some insurers to steer clear of underwriting firms with a conveyancing exposure. They also explain why those insurers who continue to participate battle year after year to make a profit.

The good times won’t last forever

Capital is currently flooding into the insurance market as investors try to generate profit at a time of historically low-interest rates. This has led to an increase in competition amongst insurers and a noticeable reduction in PII rates for most professional services firms. Conveyancers are no exception and many firms will be breathing a sigh of financial relief after the costly years of 2009-2012. However, this will not continue if interest rates rise, as capital will be diverted from the insurance market into more lucrative sectors.

Combine a precarious economic backdrop and slim, if not nonexistent, underwriting profits with the fact that insurers face an increased exposure to loss, as property values continue to rise, and it’s easy to understand why competitive PII premiums cannot last forever. A wise conveyancing firm should, therefore, be trying to protect themselves from a future shock rise in premiums by ensuring they are managing their PII responsibly and are in the best position to differentiate themselves from firms with a poor approach to risk management.

Developing strong risk management is partially predicated on an understanding of where claims commonly arise. It’s also important to note that whilst claim volumes increase significantly following a downturn, these issues continue to arise irrespective of the prevailing economic conditions. While this list is not exhaustive, the following points highlight where conveyancers commonly go wrong.

  • Whilst a report was obtained on the possible effects of HS2 on a property, it was not shared with the client
  • A failure to ensure that the correct Title was transferred
  • Proper checks were not carried out to establish that the client was indeed the property owner, and entitled to the sale proceeds
  • The conveyancer wrongly advised that a lease was 99 years when in fact it was 15 years shorter
  • It is erroneously stated that correct planning permission is in place when it is not
  • The client’s email was hacked. The fraudsters supplied alternative bank details for the transfer of the sale proceeds
  • Failure to address or advise on Rights of Way
  • Failure to include parking spaces
  • Acting without client authority
  • Failing to remove a charge or mortgage
  • Failing to obtain consent on ‘change of use’
  • Acting in a conflict of interest
  • Requisitions and lender requirements

Preventing claims

  • Ensure business culture engenders, rather than discourages, a good approach to risk management
  • Invest in technology that wherever possible forces the adoption of a standard process. This should improve efficiency, minimise the risk of claims and enhance customer service
  • Make sure links to databases, such as the Local Authority, Land Registry etc. are up to date
  • “Peer Review” complicated or unusual transactions, especially where the property is located in an area outside of your usual geographic focus
  • Make sure there are robust systems in place to establish client identity
  • Never accept a change in a client’s bank details during the execution of the transaction, without comprehensively checking the request to alter the bank details
  • Remember that one of the best defences to a claim is to be able to evidence that you followed the correct methodology

2017 and beyond

In addition to the above litany of exposures, no commentary on this sector and the insurance market can be complete without reference to Cyber Liability.

There is a common misconception that, owing to the breadth of the SRA or the CLC PII wording, the policies will respond to all possible claims arising from the conduct of professional business, whether first party or third party. However, when the approach to Solicitors PII was first formulated the world was a very different place, and losses arising in relation to data and/or IT were not considered a sufficient threat to warrant specific coverage.

Whilst you should continue to look to your PII policy for indemnification from breaches of professional or fiduciary duty, a Cyber Liability policy is a useful addition to your insurance portfolio, providing immediate access to the specialist expertise you will need to minimise the impact of a systems or data breach. Furthermore, PI policies will not respond to first party losses as result of, for example, an interruption to your systems which severely impacts your business.

Defined by criminals threatening to “freeze”, or indeed actually “freezing” a firm’s computer system, Ransomware attacks increased by 35% in 2015. Hackers will offer to “free up” the system in return for a cash payment; interestingly the amount demanded is relatively small, it’s only once you have made the mistake of paying the ransom demand that your details are shared throughout the “Dark Web”, leading to further problems. A cyber policy will provide you with emergency access to specialist incident response teams that will handle both the hackers’ demands and the requirement to get your system back up and running as quickly as possible.

It is anticipated that the increase in these incidents will lead to Cyber Liability insurance costing a great deal more in the future, with policy cover constantly being restricted rather than extended.

According to information provided by the Insurer, QBE, and based on research with their own Insureds, 2015 saw 150 successful “Friday Afternoon” frauds and astonishingly 10 times that number of unsuccessful attempts. In order to re-emphasise the scale of the problem, over 25% of firms have experienced a client attempting to use a conveyancing transaction to commit a financial crime.

From an Insurer’s standpoint, fraud is the most frustrating loss, given that the risk has been highlighted constantly across the media and by regulators. Yet month after month, very sophisticated criminals target the conveyancing industry. They will try to approach everyone in an attempt to remove funds from the conveyancing chain, from the managing partner to the reception team. Security experts believe that the conveyancing industry must make interfering in a transaction so difficult that fraudsters move on to another source of easy money. This will only be achieved if all the stakeholders involved in a property transaction collaborate.

Competition

Continuing competition for conveyancing instructions has lead to, in some case, firms cutting fees to seemingly non-viable levels. This means that there is little or no money left to invest in staff training and systems. This will inevitably lead to an increase in the likelihood of a negligence allegation arising as a result of both individual errors and, more worryingly, systemic problems.

A glance at the web will bring up a tranche of seemingly attractive offers. However, to an informed external commentator, it appears that an offer to carry out a conveyance for under £100 and the further attraction of perhaps not having to produce original verification of ID, is a sign that not all firms are offering a professional service supported by a robust approach to risk management.

According to the SRA PII analysis, underinvestment in a firm leads to:

  • Work carried out by unqualified staff without suitable supervision
  • Inadequate risk practice
  • Pressures to complete large volumes of work under severe time pressures

Good risk management facilitates growth

The British obsession with property is unlikely to abate and values will continue to rise if our housing stock remains at its current level. Even in the current quieter market, there were approximately 1,200,000 conveyancing transactions in 2015. Inevitably, some transactions will go wrong because that is life, and that is why we buy insurance to protect our clients and our firms.

However, there are risks that can be addressed by investing in your firm, training your staff and by maintaining awareness of risk and in turn, responding to it. Good risk management does not need to be counter-productive. Done well, it will benefit your business and your bottom line and it will ensure that you remain insured.

Please note that this article was written for Modern Law Magazine and can be found here.

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