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Last July Arlington wrote about the effects of the hardening PI insurance market and the impact we were seeing on property and construction professionals.

Now, all professions are being impacted by the consequences of the Covid 19 lockdown: either in a financial sense with increased premiums or by insurer capacity, with lower limits of indemnity, restrictive wordings or in some cases, certain professions may not being able to obtain renewal terms at all. In this article we will look at the reasons and what businesses can do to prepare themselves.

For over a decade, most professionals have seen stable (and sometimes decreasing) PI premiums: obtaining renewal terms was a relatively easy process with firms often being promised discounts from competing brokers or insurers. However, those firms who have recently renewed their PI insurance (or who are in the process of obtaining renewal quotations) may have noticed that things are changing.

Increased premiums and higher excesses

Insurers have reviewed the business they hold and concluded that the claims that are likely to arise from many professions due to the impact and after-effects of Covid 19 mean they are no longer target business. This is particularly true of firms that are exposed to economic recessionary pressures such as the property, financial and investment sectors.  

Whilst some clients may find their 2020 PI premium increase may be negligible, others may find they are being offered similar premiums for say, £1,000,000 of cover in 2020 as they did for £2,000,000 in 2019. 

Also, where there has been a significant decrease in a practice’s gross fees, this may no longer equate to any premium reduction whatsoever for 2020. 

Policy excesses are also increasing, as insurers seek to protect themselves from future claims.

Reduced insurer capacity

Many insurers are now quoting lower limits of indemnity to ‘cap’ or restrict their underwriting exposure. They may only offer a 50% coinsurance share when quoting renewal terms, meaning that other insurers need to be approached to write the balance; this not only leads to rises in premium but delays whilst additional insurer capacity is sought. 

This has been particularly true on some Accountants (quoted company work or historic tax scheme exposure), Asset Managers, Investment Managers, IFAs etc. where there may now only be a handful of insurers UK-wide able to offer cover. Architects, Surveyors and many property professionals will see full cladding and fire safety/combustibility exclusions imposed on their policies.     

Insurers asking additional questions

Covid 19 questions are becoming the norm on PI policies with insurers checking whether a business’s day-to-day operations have been affected by Covid 19 to the detriment of their clients. For example:

• How is quality and service being maintained?
• How is the workload being managed by fewer ‘hands on deck’?
• Have any staff have been furloughed?
• Are there are any immediate plans for staff redundancies and if yes, for what roles.

Why is this relevant?

Unqualified staff may have previously been working in an office under close supervision but are now likely to be working from home without supervisory controls. This can lead to errors and in turn, PI claims.  Mistakes may happen when no one else is around to observe or notice work processes – which can be difficult if there isn’t anyone around to refer matters to or give a second opinion. Junior or administrative staff may have been furloughed, leaving directors who are not used to administrative functions being responsible for their own diary actions and correspondence.

Where there is interaction with clients via videoconferencing (for example Zoom or Team meetings), the same standard of vigilance and attention to detail should be maintained as would be expected in a face to face meeting and full notes and records kept of such client interactions.  

There are also additional risks to remote working/working from home, which can lead to Cyber security issues.

Cyber

The speed in which lockdown was imposed meant that few firms had the chance to fully test their Business Continuity Plans (BCPs) and had to set up remote working practices in very little time. Those firms who had tested their BCPs would never have envisaged working from home for a 4- month period.  Many firms may not have had sufficient time or resources to provide laptops or webcams for their staff with many employees having no option but to use their own PCs when working from home. Personal computers may contain non-audited software and apps which may lead to an increased risk of hacking or phishing. 

Extra security measures are also needed to ensure Cyber security and safety. Action Fraud (the UK’s national fraud and cyber reporting centre) stated there had been a 400% increase in coronavirus related fraud reports during March 2020.

PI insurers may ask businesses about any additional Cyber Security measures they have recently  implemented to counter the enhanced risk posed by remote working, and how businesses ensure data on their employees’ own PCs is secure and virus free. Employees need to be alert to phishing scams or unusual emails. Online payments should be thoroughly checked and preceded by phone calls to verify.

Uncertain times ahead 

Unfortunately there is little likelihood of seeing any improvement in the PI market for remainder of this year and probably into 2021: the PI market continues to harden, premiums are increasing, insurers are ceasing to write certain professions whilst the number of insurers is likely to shrink as firms come under increased financial scrutiny in terms of their liquidity.

What can businesses do to help themselves?

• Insurers are taking longer to respond with renewal quotations: you should therefore return your proposal renewal forms a minimum of 4 weeks prior to your renewal date.
• The proposal form is you ‘selling yourself’ to insurers so please take extra care in your renewal presentation and provide supplementary information that explains pertinent issues to insurers.
• Be prepared for additional questions from insurers and be patient for terms to be released. You may not get as much time to consider quotations as you did in previous years. 
• Be aware that there may only be one insurer’s renewal quote. Many insurers no longer have the time to quote business that is ‘non-target’ or that they know they will be uncompetitive on.  
• Be prepared for your PI insurance to cost more: forewarn and talk with your financial director, decision makers and key clients, particularly if certain levels of PI cover need to be maintained for contractual reasons.  
• Do not be surprised if policy extensions of 14-30 days are granted by insurers (this is in line with most professions’ regulatory requirements)   
• If you are struggling to obtain compliant PI cover, you should speak to your professional body in good time regarding dispensation, if necessary.

If you would like to discuss any issues raised in this article or are interested in Professional Indemnity or Cyber insurance cover, please contact our Bristol office:

Verena Cole       0117 387 8880   [email protected]

Anna Lloyd         0117 387 8881   [email protected]

As many of our property and construction clients will be aware from press articles and communications with their professional bodies, the cheap PI rates experienced in the “soft” UK insurance market for over a decade have come to an end and professionals and contractors are now feeling the impact of increased PI premiums and in some cases more restrictive cover.

What has caused this? 

Lloyd’s of London conducted a review of its worst performing lines of business in 2018 with PI insurance being the second worst performing class (USA property business was the worst). In 2017 Lloyd’s Syndicates incurred £272m in claims but only collected £170m in premium for Architects, Engineers and construction risks; a situation which is unsustainable.

Several Lloyd’s Syndicates and specialist insurers have withdrawn from the PI market during 2018 and 2019 and no new entrants have taken their place, so there is reduced capacity.

The Grenfell Tower fire has led to concerns about the construction industry in general, both in terms of building regulations and fire safety, which has led to greater regulatory scrutiny. PI insurers have reported difficulties in being able to pass claims for construction projects down the line to designers and consultants. This has led to an increasing number of insurers scaling back on capacity or withdrawing from the PI insurance market entirely. Consequently we are now in a “hard” insurance market.

What effects are we seeing? 

• Insurers increasing their rates with the result of significant increases in PI premium levels as the costs are being passed to businesses.
• Insurers being more diligent and proactive with their risk assessment before quoting or offering renewal of PI cover.
• Punitive terms are being imposed, such as reduced limits of indemnity, higher excesses, restrictions in cover or cover exclusions.
• In some cases, insurers are declining to offer renewal terms in the event of significant risk exposure or where there are existing claims or notifications.
• Slower response times from insurers as insurers are inundated because more firms are looking for alternative PI cover in the hope they can find more competitive renewal premiums.

Insurers may now be declining to quote risks or professions where they would have been eager to provide terms in previous years.  2019 renewal premiums in some cases may be up by 25% or more. This can be hard to understand, particularly for businesses which have not had any claims and where turnover has remained stable.  Many property related professionals (not just Architects and Design & Construct risks) may experience challenges in renewing their PI insurance at terms that they consider are suitable or affordable. 

Which professions is this affecting?

The following professions have so far experienced the greatest impact:

• Architects
• Design and Construct
• Surveyors (particularly those involved in mortgage/lending valuations)
• Building and Engineering Contractors
• Property Managers
• Commercial Investment Agents

However, it is anticipated that premium increases will filter through across all professions during the second half of 2019 and there is likely to be a continued impact on availability, cost and capacity over the next few years.

How will this impact and what can be done?

• There may be delays in insurers response times and unexpected premium increases and/or restrictions in cover.
• Don’t assume that renewal of your PI insurance will be a simple formality and that terms will remain similar to last year. The low premiums of recent years are a thing of the past.
• Allow plenty of time before renewal to prepare. As a minimum submit your renewal presentation at least 3-4 weeks prior to your renewal date.
• Provide a comprehensive insight and detailed information into the running of your business together with details of new projects, changes to activities and any variations to your directors and partners.
• Keep the information clear, concise and consistent. Make your renewal presentation with care and demonstrate that you have a clear vision of the outlook for the future and where the firm is going.

For more information regarding your PI needs, please contact Verena Cole or Anna Lloyd at our Bristol office on 0117 387 8880/8881.

At Arlington we specialise in Professional Indemnity insurance for Accountants and deal with all types of firms, ranging from sole practitioners to businesses with 20 partners or more. Here, we look at the importance of documentation in not only preventing claims, but also in responding to claims should any allegations be made against a firm.

5 simple ways for Accountants to protect themselves from having PI Insurance claims brought against them.  

1. Have a letter of engagement: your letter of engagement is crucial and will outline the scope of professional accountancy services you provide (and those you won’t). Ensure that you have a copy on file that has been signed by you and your end client. Don’t rely on the fact that you may have dealt with your client for 30 years without a letter of engagement and ‘there’s never been a problem’. Ensure that letters of engagement are regularly reviewed, updated and reissued if necessary should there be any changes to either the name of your practice or the scope of services you are providing/offering. The members’ area of the ICAEW website can provide samples of such letters.
2. Service creep: be careful of delivering more than you are engaged to do without reviewing or amending your letter of engagement with your client. For example, if you are undertaking bookkeeping and payroll services, be clear to your end client you are not providing full accountancy services. It can lead to issues if a claim arises. We are currently dealing with a claim where an accountant was retained by a charity to undertake an annual Independent Examination. However, the charity understood this to be akin to an audit, and misappropriation of the charity’s funds was missed. Therefore ensure that your client knows and fully understands the extent of your accountancy role.
3. Keep contemporaneous notes: keeping file notes of client interactions is so important, particularly phone notes or meeting notes. Ensure that your clients are given a copy of any meeting notes that document what was discussed, advice given and any recommendations made. PI claims usually arise years several years after professional advice was given and courts will struggle to side with the accountant if there are no documented file notes.
4. Include a limitation of liability in your letter of engagement – ensure this doesn’t exceed your limit of PI cover and obtain independent legal advice if needed.
5. Third party engagements: accountants often have relationships with third parties such as financial planners and tax advisers etc. Ensure that these parties also issue a letter of engagement with your client that clearly distinguishes the separate relationship and responsibilities. Ensure that your letter of engagement excludes advice performed by any third party specialist advisors.

To discuss your PI needs please don’t hesitate to contact Verena Cole on 0117 387 8880 or Anna Lloyd on 0117 387 8881 or email  [email protected] or to get a quote online click here.

In an online era, individuals are increasingly being asked to review and comment on services they have received, whether this is eating out at local restaurants or finding a hotel to stay in on the other side of the world. Reviews are in the public domain for all to see and are frequently relied on and used by others as a recommendation on what is good – or a warning of what should be avoided.

Similar reviews can be left for tradesmen and now more commonly for professional firms themselves via sites such as Google and Trustpilot. Historically, a professional firm may have received a letter or email regarding a complaint of poor service and the contents of this would have remained private. These days a disgruntled client may leave a negative comment or criticism online which can potentially be viewed by millions of people and which may prove very difficult to remove, leading to reputational damage to the business.

Please click here to see a recent article by one of our legal partners, DWF LLP that looks at the challenges of monitoring and dealing with online comments, and whether a derogatory post regarding a firm’s professional services can trigger a requirement to notify PI insurers or any other relevant insurance that the professional may hold.

In summary:

• It’s important not to overlook contract terms that set out the terms of a project’s delivery as these could form the basis of a dispute.
• The standard of care refers to how much care a contractor must exercise and sets the benchmark for the quality of service.
• There are two types of standard of care:
  • Reasonable skill and care
  • Fitness for purpose (more onerous)
• Reasonable skill and care contracts are more common and require that a contractor demonstrates they have acted with reasonable skill and care when undertaking services.
• Fitness for purpose contracts require that the project is fit for its intended use when completed.
• It is less easy to get professional indemnity insurance cover for fitness for purpose contracts and consultants should therefore be very wary of agreeing contract terms that include these.

When a professional consultant or design and build contractor enters into contract, its focus will be on establishing key terms central to any commercial arrangement, such as the scope of work and payment terms.

Along with these are terms which describe the required standard of care to which the relevant services are subject. It is against these terms that delivery will ultimately be assessed and, if a dispute arises, these will set the bar when establishing whether there has been a breach. However, despite the potentially significant implications which accompany these terms, they are often overlooked, until an issue arises.

What is a standard of care?

The standard of care is the degree of care and caution which a professional consultant / design and build contractor must exercise when undertaking its services. It effectively sets a benchmark for the quality of services to be provided.

There are two types of standard of care which are explained below:

• Reasonable skill and care
• Fitness for purpose

Reasonable skill and care

In the UK construction industry, reasonable skill and care obligations are usual. To the extent a consultant / contractor can demonstrate that it acted with reasonable skill and care when undertaking its services, it will not be in breach of its obligations. What constitutes reasonable skill and care in a given situation will be assessed against how a reasonable consultant / contractor in the same professional field would have acted.

In the absence of express provision within the parties’ contract, a duty to act with reasonable skill and care will be implied (by virtue of s.13 Supply of Goods and Services Act 1982). It is, however, usual that the contract will address this expressly.  By way of an example, the standard NEC3 Professional Services Contract provides that:

“The Consultant’s obligation is to use the skill and care normally used by professionals providing services similar to the services” (clause 21.1).

Similar wording is used in the JCT Design and Build standard form of contract.

Such provisions reflect the common law test for negligence.  A party will not be found to have been negligent if it has carried out its services to the same standard that another reasonably competent member of its profession would have met. This was confirmed in the case of Bolam -v- Friern Hospital Management Committee [1957] 1 WLR. With that in mind, independent expert evidence is required to support allegations of professional negligence.

Fitness for purpose

This requires that when the project has been completed it is fit for its intended use. Such an obligation is considerably more onerous than one requiring only reasonable skill and care. The consultant / contractor effectively guarantee that its design will be suitable for its intended use. It is rare for a contract or appointment to impose such an obligation.

Express wording will generally be required in order for a fitness for purpose obligation to be applied.  Consultants / contractors should be careful, however, to ensure that no such obligation is implied into their contract. For example, where an employer makes clear that work is to be done to achieve a particular purpose, the work is of a kind that the relevant consultant / contractor holds itself out as performing, and it can be shown that the employer relied upon the skill and judgement of the consultant / contractor, there can be an implied warranty that the completed work would be fit for the notified required purpose.

In the case of Greaves & Co. -v- Baynham Meikle [1975] 1 WLR 1095 CA, structural engineers were appointed to design a warehouse floor which would be suitable for the use of stacker trucks. The floor failed, and the engineers were found liable for having breached an implied warranty that the floor would be reasonably fit for the purpose for which the engineers knew it was required.

Particular care should be taken when contracting under the NEC3 standard form. The core clauses require the contractor to provide its works in accordance with the Works Information. Whilst such an obligation does not expressly refer to fitness for purpose, it is acknowledged that this envisages the works will be designed so as to be suitable for their intended use. Consultants / contractors should be careful to select the relevant option requiring only the use of reasonable skill and care.

Particularly in cases where a fitness for purpose requirement is not expressed specifically in the contract, a consultant / contractor may be unaware that it is taking on extended obligations. The contract should be considered carefully as a whole.

Insurance implications

In addition to potentially extending a party’s obligations, and so its potential liabilities, the applicable standard of care can affect its ability to claim under its professional indemnity insurance policy, in the event an issue arises.  It is common for policies to exclude from cover liabilities arising from onerous contractual provisions – i.e. a duty or obligation going beyond that which would otherwise be implied by common law or statute. The rationale behind this is that whilst an Insured can contract on whatever commercial terms it likes, Insurers should not be required to indemnify it for liabilities flowing from such consequent voluntary assumption of risk.  A fitness for purpose obligation will fall squarely within this category.

Some professional indemnity insurance policies will exclude all cover on a project where a fitness for purpose obligation is imposed.  Alternatively, cover might be limited to such losses as would have been suffered had the usual reasonable skill and care obligation applied, with the Insured liable to meet any additional exposure itself.

Parties should therefore be wary of taking on any fitness for purpose obligations in respect of their works or services.

In order to protect themselves as far as possible, professional consultants / design and build contractors should take reasonable steps including the following when entering into contracts:

1. Ensure the contract expressly identifies the required standard of care, to avoid uncertainty and / or to avoid a potential situation in which a fitness for purpose obligation is implied.
2. Be careful to avoid any contractual provisions which might be taken to impose – whether expressly or implied – any fitness for purpose obligation
3. Require that the applicable standard of care is limited to reasonable skill and care (including by ensuring the correct option is selected when contracting under NEC3). If the employer pushes for fitness for purpose, endeavour to understand why that is required. Given the associated risk and the potential implications in terms of insurance cover, consider ultimately whether such an obligation imposes too great a risk and so would be a deal breaker.
4. Establish the insurance position, by seeking to understand whether, and if so how, the policy would respond should a fitness for purpose obligation be accepted.
5. If relevant design work is to be undertaken by a sub-consultant / sub-contractor, consider whether a collateral warranty should be obtained in favour of the employer. By then giving the employer a separate direct contractual right of recourse that may serve to deflect any claim (either in part or entirely).

Parties should be sure not to overlook standard of care requirements in favour of what might appear to be commercially more important contractual provisions. From a liability perspective, these should be at the very top of the contractual checklist.

This article was produced in conjunction with our legal partner, DAC Beachcroft