What is PI Insurance?
Professional Indemnity Insurance is also referred to as Professional Liability Insurance or PI. PI provides cover for legal costs and expenses and compensation payable to a third party in the event of a claim for professional negligence.
Why do I need it?
PI is usually taken out to satisfy the following:
- Redress scheme code of conduct
- Trade bodies
- Contractual reasons
- Marketing purposes
PI is often seen as a unnecessary evil, however, it is extremely important. A PI policy will cover the insured firm for costs and expenses in defending a claim, regardless of whether the claim has any substance. This is particularly relevant as often the costs involved in defending a claim can outweigh the damages being claimed.
No Win, No Fee law firms target students requesting sight of their tenancy agreement in return for a possible payout if they find any breaches. Oliver Wharmby, Lonsdale.
We trade in an environment that is increasingly litigious and therefore we are all exposed to litigants who want to take advantage of your PI policy regardless of whether you have breached your duty of care.
We are seeing a rise in serial litigants trying their luck, which is not aided by ‘No Win No Fee’ law firms. Recent legislation has brought in a new and very real risk of claims being brought against property professionals.
Some of the legislation:
- Consumer Rights Act 2015
- Immigration Act 2015
- The Smoke and Carbon Monoxide Alarm (England) Regulations 2015
- The Consumer Protection from Unfair Trading Regulations 2008(CPRs)
Combining the new legislation and the influx of No Win No Fee law firms, it is now easier than ever for clients to pursue a claim. We have seen a noticeable rise in claims brought against letting agents in student towns. The No Win No Fee law firm will target student rental properties requesting sight of their tenancy agreement in return for a possible payment should they find any reaches and make a successful claim against the agent’s PI.
Unfortunately, many students tend not to hold their landlords and letting agents in high regard, therefore the prospect of earning free money at their expense can be appealing, so word spreads fast and because they have nothing to lose, students are actively pursuing the No Win No Fee law firms if they do not get to them first!
The first graph shows the PI claims correlation between Lettings /Property Management and Estate Agency Sales. Over three quarters of claims derive from Lettings / Property Management activities compared with Estate Agency.
We have broken down the Lettings / Property Management claims in to various categories as shown below. The nature of each claim is often very different, therefore it does not make it easy to categorise. What you can see is that personal injury claims contribute a reasonably high percentage and this is largely due to the influence of No Win No Fee law firms.
Claims Case studies
Example One: The Insured was managing agent of various properties, one tenant fell down the stairs resulting in injury and blamed this on a faulty light in the stairway which had been previously reported. Tenant sued the landlord, who sought to recover loss from the managing agent as in his opinion it was their job to maintain the common parts of the property.
This was reported to insurers in good time, which allowed the insurers to consider the claim. The insurers actually managed to defend this claim putting the onus back onto the landlord.
Whilst no claim was paid out, insurers would have paid costs and expenses in defending the claim.
Example Two: A lettings executive handed keys over to a tenant who had passed the reference checks, performed by an external referencing company. The tenant emailed a scan of their passport, later identified to be a counterfeit. The agent never saw the original. The tenant also managed to persuade the lettings executive (a part-time Saturday employee) that they would pay all monies including the rent and deposit via same day bank transfer in their office which they did using a false web page showing monies leaving their account. Of course no funds were ever received and by the time the agent realised, it was too late, the tenant was in the property.
Unbeknown to the letting agent, the tenant had previously taken up three tenancies with other local letting agents using false documentation and information.
Further background information revealed that the tenant had also served a prison sentence for fraud. The landlord brought a claim against the agent and some six months later the tenant was evicted and the estimated cost of loss of rent, legal fees and refurbishment for the property amounted to between £25k-£30k.
The letting agent only paid his £500 Excess and the rest was picked up by the insurers.
Whilst it is impossible to totally remove the risk of a claim, there are measures and systems that can be put in place to help mitigate the likelihood of a claim.
1. Keep accurate and updated records
It is particularly important to keep written communication and telephone notes. Claim Example One relates to a claim brought by a tenant who had injured themself and sued the agent. The insurers successfully defended this claim, however the success was largely down to excellent record keeping.
We all trade in an increasingly litigious environment and are exposed to litigants who will take advantage of your PI policy regardless of whether there is any breach of duty of care.
We need to remember that insurers viewpoint differs from the insured. Whilst you may feel aggrieved and want to defend yourself, Insurers may take a more commercial approach if they cannot mount a robust defence with good written evidence due to poor record keeping. This may result in a settlement regardless of whether the insured is at fault.
Should you find yourself with a paid claim against your policy through no fault of your own, you will have to disclose this at each renewal and depending on the claim value, you may see your premium increase.
The importance of keeping records up to date and accurate is crucial should you be faced with a claim.
2. Have a risk management plan.
Points for you to consider:
- Consider the type of instructions you are prepared to take. Some may expose you to more litigious clients.
Example – a claim occurred against a letting agent for an inappropriate tenant where the tenant passed the reference checks but was known to the authorities (The RSPCA) and would appear in search engines. He subsequently caused damage to the property and vacated the premises leaving live and dead animals, cages etc. The landlord lost six months rent, incurred costs to repair the damage and could not sell the property afterwards. This resulted in a £50k claim against the agent with £25k costs.
- Have a training plan for staff to keep up to date with the
- Have a process to ensure that the correct procedures are followed eg checklists and spot checks, internal audits, diary reviews, file reviews.
- Keep a complaints register and have a written complaints handing procedure for staff to follow and to send to your clients.
- Terms and Conditions – obtain independent legal advice to ensure you have robust terms and conditions to use with your clients.
3. When should you notify?
All PI policies require the policyholder to notify a circumstance that may give rise to a claim. Identifying a notifiable circumstance is not easy and especially if you have multiple offices with many employees. The terms of a PI policy will state that all notifications have to be made as soon practicable and usually within 28 days.
Late notification is often the main reason for insurers avoiding cover and is usually due to the policyholder or staff not being aware of the policy terms.
To avoid any non-disclosure, It is crucial that staff are educated to bring any complaint or matter they are aware of to the attention of a manager in accordance with the internal systems in place.
If you are unsure of whether to notify a potential claim, you should contact your broker or insurers. Often, policyholders choose not to notify through fear of premium increases.
If the claim amounts to nothing, insurers should not be penalising you and therefore, if you are in any doubt, NOTIFY. If you choose not to notify and the matter develops in to a claim, it will be too late and insurers will reserve their rights to avoid providing cover due to nondisclosure.
This information has been provided by Lonsdale Insurance Brokers Ltd for information purposes only. It may not be used by any third party without prior permission.
T: 0207 8160028 www.lonsdaleib.com