Surveyors and PI insurance
Surveying is one of the more established professions and as such is regarded by the PI sector as a 'traditional' profession. All chartered surveyors are members of the Royal Institute of Chartered Surveyors (RICS). The RICS insist all its members carry PI and set out a minimum approved wording which is agreed by insurers.
Not all surveyors are members of the RICS. There are many surveyors who operate outside this professional body and across a wide spectrum of activities. Estate agents who are non-surveyors can also be included under the surveyors type policy wordings, however there is no need for civil liability wordings and policy coverage will not need to meet the standards of the minimum approved wording imposed by the RICS.
When looking for cover wordings written to comply with the RICS minimum, wording will have standard coverage. This means that when comparing premium from one insurer to that of another, the standard of cover is broadly similar. However, whilst cover must meet a minimum standard it is not unknown for some insurers to provide aspect of cover that exceeds the minimum cover.
For none RICS approved wordings, it is more important to look at the policy wording, and it is in these cases that the benefits of dealing with a specialist professional indemnity insurance adviser cannot be overstated. So why do premiums differ so much between one surveyor and another?
How do insurers rate a risk and what do they look for?
Size of practice
One of the major factors that determines the rate and underwriting criteria of insurers is the size of the practice. This can be established in two ways: the first is based on the number of partners and staff, and the second on the gross annual income of the firm. Insurers will evaluate the activities undertaken by the insured and will calculate an applicable rate. This rate will also take into account past claims experience and the underwriter's attitude towards the risk as a whole. This rate is then applied to the fee income, and results in a rate for the cover.
Qualification and experience
In line with underwriting philosophy across the professions, insurers need to satisfy themselves that a surveyor is suitably qualified to carry out the work undertaken on behalf of his client. In the event that the surveyor is unqualified, insurers normally require a CV in order to establish the extent of the surveyors' experience.
Type of work
Insurers will be particularly interested in what type of work the proposer is involved in and the split of annual income derived from each discipline, as it is the type of work which constitutes the potential risk:
- Quantity surveying. Historically this has been considered low risk but has seen increased claims activity recently.
- Building surveying. Building surveyors have the design skills in surveying. They will typically be involved in the design and supervision of standard type buildings such as houses, factories and warehouses, etc. (See also architectural work.) This is seen as medium risk dependant on the contract sizes and extent of responsibilities.
- Residential and commercial estate agency. This refers to the sales function carried out by the surveyor, either by conventional methods or by auction. Claims are infrequent and activity considered low risk.
- Residential property management. Activities may involve the management of leasehold property on behalf of a freeholder or the rental and management of residential property. Low risk, low value and infrequent claims.
- Commercial property management/land management. Following the completion and sale of a development there will be a need to manage it, i.e. ensuring maintenance and services are maintained. Medium risk
- Rent reviews/lease renewals. The management of commercial property sold under lease may require the periodic assessment and review of rental being charged. The surveyors may be appointed by either the landlord or the tenant to carry out this function. Medium to high risk depending on the speciality.
- Land/mineral and hydrographic surveying. This is a specialist surveying area of activity and can include building site setting out, mining work, the analysis of land for mineral, water or pollutants. This is seen as medium risk but may also be viewed as high risk depending on the speciality.
- Planning and development. The formulation of preliminary plans and drawings, and the application for planning permission. Claims are infrequent so low risk.
- Project management. Projects are often managed, administered and controlled by on behalf of the client. High risk
- Architectural work. Design and/or supervision of buildings. This area is seen as a medium risk activity but can also be adjudged to be high risk depending on the contract values and the extent of responsibility. For example, is the work design only, or is it design and full project management?
- Residential and commercial surveys and valuations. The main area of activity for many surveying practices, this involves the investigation and analysis of property in order to ascertain its condition and market value. This is seen as high hazard work, with poor overall claims experience especially in times of property deflation.
- Auctioneering.The valuation and sale of property or goods at auction.
Low risk for property and chattels but high risk for fine art.
High hazard work
Valuations provided by surveyors in the 1980's gave rise to a deluge of claims in the late 1980's and early 1990's following the property crash in the early 1990's. The overheated 1980's property market led to overworked surveyors paying inadequate attention to property condition and comparable property prices, which when added to totally inadequate file maintenance and enthusiastic lenders, led to a disastrous period of claims.
Borrowers with financial difficulties defaulted and lenders found that the depressed price achieved on subsequent sale was often inadequate to cover the outstanding loan. Insurers fear a return of the 400% loss ratios experienced in the early 1990's, so now look closely at the level of valuations carried out by a surveying practice. They look at the amount of valuation business, its location geographically, the average and highest values, and the claims experience.
The claims experience is a very important determining factor in the assessment of a risk. This information usually reflects the type of work carried out by a practice. It also reflects the quality of the practice's work, staff, internal risk management and experience.
Examples of claims
- Negligent survey report.
Residential survey failed to identify cracking in ground floor wall adjacent to tree. Following purchase property required substantial underpinning. Claim settled £22,000.
- Residential valuation.
This claim was pursued by a lender against a surveyor following repossession and subsequent sale of property. Claim settled £55,000
- Commercial valuation.
A lender caught out in a mortgage fraud recouped £2,000,000 from the valuer who had provided the valuation on a nursing home, despite not knowing the borrower and having no experience of commercial valuations.
- Planning failure.
A surveyor was instructed in a planning and development role in respect of the development of an industrial unit to be used as a storage and distribution depot for a major food manufacturer. Development of the site was abandoned and a claim for costs pursued against the surveyor after it emerged that the correct approaches were not made to the local authority regarding access roads and a local brown-field site earmarked for residential housing. Claim settled £43,000.
- Sale of commercial office.
A claim for costs was pursued by tenants for alleged failures in property specification following a leasehold agreement they had entered into. Allegations included the failure of the surveyor and property owners to adequately provide temperature control and lighting conditions for electronic and laser equipment. Settled costs only £12,000.
- Quantity surveying.
A quantity surveyor over-valued works completed by a contractor. Cost £500,000.
- Alleged negligence following condition survey report.
Surveyors were instructed to inspect the condition of residential property, draw up a schedule of repairs and refurbishment work, and invite tenders. During the refurbishment work contractors discovered that major structural timber supports required replacement in order to successfully complete the work. It was argued by the claimant that if this information had been available, the client would not have proceeded with the work. Claim settled £15,000.
Main bodies with PI rules*
(* Current at September 2010. Please check with your professional body for a more comprehensive summary of their requirements.)
All chartered surveyors in private practice are obliged by the rules of the RICS to take out professional indemnity insurance, with an approved insurer. The RICS publishes a list of approved insurers annually. It is essential that brokers ensure that this mandatory requirement is adhered to.
*The rules require a minimum wording, and minimum levels of indemnity, currently based on the firm's fee income:
Annual fees - Minimum limit of indemnity, on an each and every claim basis
up to £100,000......................…....£250,000
over £100,000 up to £200,000.….£500,000
In addition the rules impose maximum excesses which will depend on the limit of indemnity. Where the limit of indemnity is £500,000 or less the maximum excess should be no greater than 2.5% of the limit of indemnity or £10,000 whichever is the greater. For indemnity limits over £500,000 then the maximum excess is 2.5%.
The RICS provide a list of insurers who offer/provide the minimum approved wording, a list of these insurers can be obtained from us or from the RICS Website.
Fully retroactive. Surveyors PII like all professional PII works on a claims made basis. This means that the policy covers claims that are first made against the insured durring the period of insurance regardless of when the negligent act occurred. The policy may show a retroactive date, this is the date between the present and the start date for work that is covered. If the retroactive date is shown as "none" then the policy is fully retroactive and all past work is covered. If however, you require cover for work undertaken prior to commencing your current business then you need to request such cover from the insurer.
Run-off Cover. The RICS require its members to provide run-off cover for a minimum of six years following ceasing to trade.
Professional services are offered by surveyors who are not members of the RICS, but belong to other professional bodies such as:
- The Association of Residential Letting Agents (ARLA)
ARLA is the only professional self-regulating body to be solely concerned with lettings. PI insurance is mandatory for all members. ARLA requires members to purchase limit of indemnity of £150,000 where fee income is less than £150,000. Where the income level exceeds £150,000 the minimum limit of indemnity purchased must be £500,000.
- The National Association of Estate Agents (NAEA)
NAEA is the leading professional body for estate agents, membership and representation is for individuals rather than organisations. PI insurance is mandatory for principals, partners or directors, but NAEA has no specific requirements on either the level of cover or the quality of cover purchased.
As mentioned above, the RICS have set minimum standards concerning the level of PI cover required by their members.
- Civil liability
All RICS member wordings must be underwritten on a civil liability basis. In view of the fact that cover underwritten on this basis is so wide, there are a number of additional exclusions, not found under, 'negligence' policies and to which attention must be paid.
Wording in respect of non-RICS members, where a surveyors wording is being used, could be on a standards negligence basis where the same minimum requirements do not apply.
The RICS minimum wording sets out the basis of the excess, however those businesses operating in the estate agency and property market who are not RICS members may be offered cover on a different basis.
- The cover
The RICS mandatory requirements ensure that the limit of indemnity will be 'each and every claim'. Legal costs will usually be in addition. The excess will not normally apply to insurers' costs and expenses. Being on a civil liability basis unless specifically excluded (which is unusual), cover would include negligence, liability for dishonesty, liability for lost documents, libel and slander, breach of warranty of authority, etc.
Other exclusions may be applied - particularly if a non-RICS wording is tailored to a specific business. For example, if you declare that you are not involved in surveys and or valuations. It is therefore important that you do not fall foul of an exclusion applying to work you have historically done but do not do now.
The Assigned Risk Pool
The RICS insist that its members maintain Professional Indemnity Insurance. There are however times when a member firm may not be able to purchase cover for reasons possibly beyond its control. In conjunction with its panel of listed insurers the RICS have facilitated the Assigned Risk Pool, an insurance facility which will provide cover for those firms unable to purchase cover on the open market. See link below.
Presenting your proposal for insurance
The presentation of your business to insurers is very important both in respect of the facts i.e. the things for which cover is required, and the way in which you do your business, both of which influence an insurer's perception of your business and the risk it poses to them.
We would always recommend that in addition to the proposal form you are asked to complete, you provide supporting documents with your proposal such as:
- A CV showing the principals qualifications and experience in the areas of business to be covered
- Any Terms of Business or terms of engagement you use
- A copy of your corporate brochure
- Details of your website
- An insurance history listing all material changes to your business since you first had professional indemnity insurance. For example, mention any previous businesses for which you require cover. It is possible you may be asked for a claims history from the previous business or a copy of its last completed proposal form.
Don't forget to include the names of any businesses with which you have merged, or any that you have acquired, as these will need historic cover. Likewise you may have ceased to offer certain services for which cover is still required.
Keep a written record of all requests for cover to be extended and any historic or material changes to your business. This information can be updated each year and provided as an addendum to the proposal. Any certification the business may have i.e. accreditation by a governing or standards council, is also well worth disclosing.
Keep your presentation neat and tidy. Bear in mind that an untidy presentation may be construed as an untidy business. Allow yourself time to complete the presentation and remember that a hard copy always look better that a faxed one sent in at the last minute.
The Professional Indemnity Insurance market is relatively small so at the point of renewal, concentrate on asking only one or two specialist brokers to quote. Bombarding the market with requests can result in your proposal being locked out of some markets.
Renewal is an ideal time to review your insurance requirements. As your business grows and your contract values increase, it is wise to consider what could go wrong and how much it may cost to settle a claim - and also cover the attendant legal costs. Some policy wordings provide a limit of indemnity with legal costs in addition to the limit. Others provide limits of indemnity which include the legal cost. However, the cost of litigation is high and can eat into the limit of indemnity provided if costs are inclusive.
Many professionals are obliged to carry PI by their professional bodies. Many of these bodies not only have specific requirements in respect of policy wording but also on the limits a professional must carry and the excesses they are allowed. Renewal is an opportune time to check your cover both in respect of your own requirements and those of your professional bodies.
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The leading weekly newspaper for the UK's commercial property market.
Royal Institution of Chartered Surveyors (RICS)
RICS is the world's leading professional body addressing all aspects of land, property, construction and the associated environmental issues.
The Association of Residential Letting Agents (ARLA)
ARLA is the only professional self-regulating body to be solely concerned with lettings.
The National Association of Estate Agents (NAEA)
The NAEA has about 10,000 members and is the largest, leading professional body in estate agency and is represented through its members in more than 60 per cent of estate agency offices in the UK.
Download and return a signed copy of this PI Proposal Form