Professional indemnity insurance (PII) has become a bone of contention in the conveyancing market over the last few years as firms have found it harder and more expensive to get coverage. However, this year, more than ever, many areas within and outside of the property world have found themselves struggling to find suitable, affordable cover. Coupled with the harsh effects from the pandemic, many businesses from conveyancers to the construction industry have found themselves vulnerable.  

Why is this? 

Insurers, for their part, had been flagging for the last few years that the market was hardening. This has been due in significant part because of the challenge for the insurance market to become more profitable as well as fears around certain types of claims in relation to past conveyancing transactions. Consequently, criteria have been tightened and some conveyancing firms have found themselves unable to secure cover. This has, understandably, caused not only consternation in the industry but also stress and concern as the most recent renewal season came past in July. 

Aside from the pressures imposed by Covid and Brexit, insurers continue to be under pressure to improve profitability. Insurers also have concerns about the potential for claims arising from the very busy period created by the stamp duty land tax (SDLT) holiday.  

While we have been vocal about the sector facing unnecessary punishment from insurers, we have also been keen to engage with insurers to ensure a productive and open dialogue between all parties in the property sector in the hope of creating more successful outcomes next year. 

Our recent discussion with insurers and brokers highlighted the main areas which raise red flags for them, and steps the industry can take to mitigate the effects. 

Buyer-funded developments 

Buyer-funded developments, also known as fractional developments, are proving to be a major red-flag to insurers. They involve the use of individual deposits of as much as 80% to fund the purchase and build of the development, instead of the developer sourcing commercial finance. They are unlike traditional deposits put down on new-build developments, where the conventional 10% is held in an escrow account. 

These developments come in many forms – from car park spaces and storage pods to holiday apartments, hotels and student accommodation – and are often for investment purposes themselves, as the owner is attracted by the opportunity to rent out what they buy. 

However, there have been multiple examples of the developers failing and the deposit money being lost. In some cases, the whole scheme was essentially a scam. Conveyancers are often used to provide a veneer of respectability and can find themselves on the receiving end of claims in the event of a development’s failure. 

We advise anyone to undertake a high level of due diligence before becoming involved in any scheme of this nature and, if you are in in any doubt at all about the nature of the scheme, we would advise you not to act.   

New-build developments 

This won’t be news to the industry, but new-build developments continue to be of concern to insurers. A recent report by broker Lockton says that traditional new-build development work remains an ongoing concern as there have been a number of large losses experienced through repetition of a single error across multiple units within a development. 

Break clauses 

Lockton also cautions that break clauses in leases are proving to be problematic. It said: “Claims frequently arise from the miscalculation of the date for service of a notice, drafting errors and advice provided to clients on the terms to allow the break to be effectively exercised.  

“We anticipate the commercial property sector is likely to be heavily impacted by the pandemic and therefore a source of claims. In particular, claims arising from lease drafting and break clauses are likely to become more prevalent. Businesses are now reviewing their property portfolios thoroughly and break clauses will be meticulously studied.” 

For both new-build developments and break clauses the best course of action for conveyancing firms and mortgage brokers to protect themselves is to ensure you are rigorous in checking the source and independence of all information provided. If in any doubt, queries must be raised at the earliest possible opportunity. 

‘Dabbling’ in private client work 

Any area where a client is seen to be ‘dabbling’ i.e. only undertaking a very small amount seems to induce insurer anxiety. In this industry that is often when insurers see conveyancers handling small amounts of trust and probate work and it being viewed as a ‘sideline’ interest.  

We recommend firms who this applies to ensure that they are rigorous in ensuring that they only accept instructions and act in relations to matters which fall well within their professional competence. 

What next? 

We have been working closely with insurers and brokers over the last couple of years, and in particular, we have asked for them to issue more comprehensive proposal forms, this would reduce the need for follow-up questions and allow for a more efficient process. We have also asked them to consider creating service levels for responding to proposals, to try and avoid situations where firms submit in plenty of time, but don’t hear until just before the deadline, leaving little time for firms to seek alternative cover or have time to close down in an orderly manner.   

We launched a call for evidence on the operation of the PII market for CLC-regulated firms back in June and are now taking the results of that forward in discussions with brokers and insurers with the aim of seeing a smoother renewal season in 2022.  

Our overriding advice to all businesses at this time though is to ensure you submit as early as possible, be very clear and disclose as much as possible in your proposal to reduce the need for follow up questions, and if in doubt seek guidance from your regulator.  

Stephen Ward is director of strategy at the Council for Licensed Conveyancers