02 Insurance

Question 1

What is PII and what is its purpose?

Answer 1

Professional Indemnity Insurance (PII):

1. Protects firms against losses resulting from professional negligence, errors and/or omissions which cause financial loss to a third party
2. Ensures a firm’s clients do not suffer financial loss which the firm cannot meet

Question 2

What does the RICS state about PI insurance?

Answer 2

Rule 9 of the RICS Rules of Conduct for Firms requires all regulated firms to be covered adequate and appropriate PII which meets the standards approved by the Regulatory Board

Question 3

What should a PII policy contain?

Answer 3

1. Must be on a claims made basis
2. Must be on an each and every claim basis
3. Policy wording is written on a full civil liability basis
4. Underwritten by a listed insurer
5. Covers past and present employees
6. Run-off cover
7. Minimum level of indemnity required by the RICS

Question 4

Explain the term ‘claims made basis’.

Answer 4

The policy at the time the claim is made will respond, not the policy in place at the time of the negligence

Question 5

Explain the term ‘each and every claim basis’.

Answer 5

The limit of indemnity covers each claim individually (instead of a accumulatively for that year, which is referred to as ‘in the aggregate’)

Question 6

What does having the PII policy written on a full civil liability basis mean?

Answer 6

A full civil liability basis means if a claim isn’t specifically excluded, it’s included (as opposed to a ‘negligence only’ policy, where if a claim is not specifically included, it’s excluded)

Question 7

What happens to PII when you retire?

Answer 7

Run-off cover ensures firms, members and customers are not exposed to financial detriment in the period following a firm ceasing to trade or a member’s retirement

Question 8

How would you determine what is sufficient in terms of PII runoff cover?

Answer 8

Should be for a minimum of 6 or 12 years, depending on how the contract was executed, however negligence claims can be made up to 15 years after work was undertaken - advice from an insurance broker should be sought as to whether to maintain for the full 15 years

Question 9

What are the minimum levels of PII based on?

Answer 9

Minimum level of indemnity is based on the firm’s turnover in the previous year (or estimated for a new firm)

Question 10

What are the minimum levels of PII required?

Answer 10

1. £100,000 or less turnover = min. £250,000 indemnity
2. £100,001 to £200,000 turnover = min. £500,000 indemnity
3. £200,001 and above turnover = min. £1,000,000 indemnity

Question 11

What is meant by the term ‘maximum level of uninsured excess’?

Answer 11

The part of each claim the firm must pay itself

Question 12

What are the levels of maximum uninsured excess?

Answer 12

1. Up to and including £500,000 indemnity = the greater of 2.5% of the sum insured or £10,000
2. Over £500,000 indemnity = 2.5% of the sum insured

Question 13

What is generally excluded from PII cover?

Answer 13

1. Material damage
2. Theft
3. Personal injury
4. Damage to third party property
5. Work carried out prior to the inception of the policy
6. Insured v insured claims (i.e. a company suing an employee for professional negligence)
7. Insolvency

Question 14

What is the RICS Assigned Risk Pool?

Answer 14

1. Insurance facility for regulated firms that find themselves unable to obtain PII in the normal market
2. Firms can remain in the ARP for a maximum of 3 years, where they will be audited and guided in how to amend their business procedures/practices ready to obtain market PII again

Question 15

What should you do in case of a potential claim on your PII?

Answer 15

Must notify insurer in the event of:

1. An actual claim
2. A written or verbal threat of a claim
3. Any circumstance that the firm has reason to believe may result in a claim
4. Any complaint notified via the firm’s CHP

Question 16

How can negligence claims be avoided?

Answer 16

1. Good communication
2. Clearly understand client’s objectives and confirm precise details
3. Check you are competent to perform the instruction
4. Undertake work in accordance with any relevant RICS guidance
5. Keep up-to-date notes
6. Be aware of changes in legislation
7. Try and resolve any complaints as soon as possible

Question 17

What were the implications of the Merrett v Babb case?

Answer 17

1. A professional surveyor was found to be personally liable for advice he gave
2. Usually, the claim would have been brought against the surveyor’s company, who would have had PII in place to cover the claim, however they had since gone out of business and no longer carried insurance
3. Recent case law however has indicated the courts are now favouring professionals and have since rejected the decision in Merrett v Babb on a number of occasions

Question 18

You set up your own business. A client at your old practice is suing them for negligence on a piece of work that you completed. The client decides to sue you as well. Can he do this and what are the implications for your new practice’s PII?

Answer 18

No - decision in Merrett v Babb would apply