Tom Fleming spoke to David Howles, chief executive of property and construction consultancy Wakemans, about the increased risk of professional indemnity (PI) insurance claims for the property community and the consequences of wholesale cost-cutting in the industry
The economic crisis and credit crunch has changed the construction industry in many ways. The collapse of the housing market has lead to many big name companies folding and the drastic contraction of many businesses has devastated the commercial property sector.
These woes are well documented, but there is another worrying trend that will impact on all consultants and the future success of the industry – PI insurance claims against consultants are rising, premiums are going up and clients are also demanding fee cuts across the board.
Recent research from the RICS indicates that it is in the area of valuations that the most problems have arisen but the number of notifications by surveyors to insurers of potential issues that could lead to legal claims has also risen substantially.
There are a number of reasons why notifications have risen. Clients are facing increasing financial pressure on all projects and taking on board a negligence claim against the contractor involves a lot of legal expense and is often difficult to prove – claiming professional negligence against a consultant is often seen as an easier option.
Notifications in themselves do not always lead to claims but an increase in the number reported to insurers could affect future premiums adversely as they may rise in advance of the conclusion of the matter and potentially continue at an elevated level, even if the notified circumstance comes to nothing.
Some consultants are finding that the insurers, themselves potentially facing the prospect of paying out more in claims than what they receive in premiums, are looking long and hard into the circumstances of any reported incidents before confirming policy coverage and this can increase the risk of a consultant being told that they have not informed the insurer early enough of the fact that they may face a claim or a circumstance leading to a claim.
David Howles, from Wakemans, said: “We are also seeing a scatter-gun approach on some projects, where all the consultants are targeted in the hope that something sticks.
“Defending a claim costs money and, where you have been wrongly accused, there is generally no recourse to recoup costs unless the case has ended up in court, when costs can be awarded and this does not happen in the majority of cases.”
Graeme MacDougall, associate director at Birmingham-based Lorica General Insurance Brokers, added: “Many consultants do not fully understand the notification provisions included within their PI insurance and that in the current market they could be much more at risk from insurers seeking to rigidly enforce the policy conditions of consultants’ insurances, which could result in repudiation of the claim/circumstance.
“Insurers are themselves being hit by significant reductions in investment income, which could arguably focus their attention to claims, especially those which fall into question in terms of compliance with notification protocols.
“Increasing the claims excess on the policy is one way of keeping policy costs down but then consultants can be caught as, although they might believe that they have acted professionally at all stages and with a high level of excess, may decide that it is not worth going through their insurer. If they subsequently decide to refer the matter it can then be too late under the notification provisions.”
According to Mr Howles, the pressure from increased premiums and paying to fight more claims is intensified when at the same time clients are asking for substantial fee reductions across the board.
He said: “In recent months supermarket giant Tesco is reported to have slashed all consultants’ fees by up to 50 per cent and the Republic of Ireland has ordered an eight per cent fee reduction on all service procured with public money from March 1.
“This is a short-term, knee-jerk reaction and an easy way to deliver immediate cost savings, but is not cost effective in the long term and does nothing to encourage contractors and consultants to provide ‘added value’ rather than ‘lowest cost’ based services.
“Lowest cost based services will lead to more claims as projects will not be resourced adequately and mistakes will inevitably occur.
“Cost efficiencies are important for all those involved in the industry but the consequences of cutting back on fee levels too much will be detrimental to the future success of the industry.
“We do not want to lose all the benefits of the progress that has been made in establishing better forms of procurement via partnering or framework agreements by aggressive cost-cutting.
“There is plenty of evidence from the public sector that framework agreements have saved money and we are working with a number of public bodies, advising them on their procurement procedures, who do want to ensure that they are making the best cost savings that they can without exploiting their suppliers.”