I was again today asked by a client, about the liabilities imposed on employees and professionals and in particular with regard to the ongoing liabiltes after the closure of a business.  More often than not the question has been asked following someone hearing about the case of Merrett v Babb which was heard in the courts in 2001.  I have set out the basis of this case below.

In 1992, a firm received instructions from a building society to inspect a property and to prepare and submit a mortgage valuation report based on that inspection. Mr. Babb carried out the inspection on behalf of the firm, where he was employed as a branch manager. Although Mr. Babb framed his report in the first person plural (i.e. on behalf of his firm), and a continuation sheet was written on the firm’s stationery, he gave the personal statement required by the Building Societies Act and signed both the pro-forma sheet and the continuation sheet, adding his own name and professional qualifications. The firm’s principal was made bankrupt two years after the report in question was prepared. Following this, the firm’s indemnity insurance cover was cancelled without run-off cover. After having bought the property, Ms Merrett had reason to find the valuation report was negligent and she sought redress from Mr. Babb as the signatory of the report. Mr. Babb accepted that the purchaser would place reliance on his report but argued that any duty he owed was to his employer and not to the purchaser, and that the latter had in fact relied on the report of the firm and not himself personally. The key question to be resolved, then, in the course of the judicial process was whether Mr. Babb, as an employee of the firm which had been engaged to carry out the required work, owed a direct duty of care to Ms Merrett. It was held that Mr. Babb was indeed the professional person on whom the purchaser relied to exercise proper skill and judgement. This was despite the fact that no reference to Mr. Babb was made in the mortgage report supplied by the building society to the purchaser. 

The RICS have published a webpage “Chartered surveyors in employment” which provides very useful reading on the subject of employees liability including directors of limited companies and those working in partnerships.

The Tenancy Deposit Scheme was introduced in England and Wales in April 2007.  All residential landlords and letting agencies providing an Assured Shorthold Tenancy where the rental income was up to £25,000 per annum following the introduction of the scheme, are obliged to hold their tenant’s deposit in an authorised tenancy Deposit Scheme.

Failure to secure a deposit in a scheme can result in a claim being made by a tenant.  This claim can amount to the return of the deposit, the payment of a penalty of 3 times the amount of the deposit and also any court costs. A Failure to provide information about the deposit, in the statutory prescribed form, can also result in the same penalty.

Letting has traditionally been seen as a low risk profession for Professional Indemnity Insurers, however, in recent years we have seen a marked increase in claims being made against letting agents and whilst many are as a result of “no win no fee” compensation cases they all have to be legally defended which can be very costly if you don’t have insurance.  I read recently that insurers have seen a substantial increase in claims being made against Lettings Agents directly by their tenants but also by Landlords.  The increase in claims is expected to continue as since the 1 October last year, the rental income threshold for the deposit scheme was increased from £25,000 to £100,000 per annum.  This increase means a significantly larger number of tenancies are now required to comply with the provisions of the Housing Act 2004 and the authorised Tenancy Deposit Scheme.

Failure to secure a deposit with a recognised scheme for a tenancy with a rental value of up to £100,000 per annum can result in a significant penalty (tens of thousands of pounds) being awarded against the Landlord of the Agent.  The tenant is also likely to be awarded legal costs.

Whilst Professional Indemnity Insurance does not cover these type of penalties and therefore any direct claim by a tenant against the Letting agent (The insured) will be excluded from cover, claims made from Landlords for damages (where the landlord has had to pay a penalty to a tenant) arising from a breach of duty by the agent should be covered under a PI policy, subject to the policy terms and conditions.

For further details check the DPS website.

There are curently two different insurance premium tax rates:

a standard rate of 5 per cent
a higher rate of 17.5 per cent

Insurance Premium Tax (IPT) was introduced in Finance Act 1994 and came into effect from 1 October 1994.  Certain types of risk such as life assurance are exempt from PIT however, in the case Professional Indemnity Insurance it is currently charged at 5%.

When  IPT was first introduced it was at a flat rate of 2.5% but it was increased on general insurance products to 4% in 1997 and then again to 5% in 1999.  In 1997 a second higher band of 17.5% for certain policies such as travel insurance was introduced.

From the 4th January 2011 the standard rate if IPT is to increase to 6% whilst the higher rate will increase to 25%.  This transition has the potential to cause the industry problems as the Government have not allowed any period of transition as was the case the last time the rate changed.  The tax point will vary depending on how each Insurer deals with IPT in its accounts which could serve to further complicated matters.

Summary of Changes

All travel insurance policy sales after the midnight on 3rd January 2011 will incur a new standard rate of 6% with a higher rate where applicable at 20%

Mid term adjustments will incur the higher rate of tax with the exception of refunds which will be at the original tax rate.

Quotations given prior to the 4th January must be taken up by the 3rd January otherwise the higher rate will apply

This information is provided based on our understanding of the legislation on 11 November 2010

Last year a letter dropped though the door of numerous former employees of Merricks LLP, putting them on notice that, if certain former members had to pay Merricks’ run-off insurance premium of £834,437, they might seek a contribution from Merricks’ former qualified staff (see [2008] Gazette, 10 April, 1).

Law Society Gazette 20 August 2009

The Association of Residential Letting Agents (ARLA) is introducing a licensing scheme for its UK members and a code of practice for letting agents.

Review the original article and return to post your thoughts and comments. 

BBC News UK 5 May 2009