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Professional Liability

From inflation to limitation, we offer our international experts’ predictions on the opportunities and challenges that the professional indemnity market may face in the coming year and beyond.

Professional Liability predictions
#1 Accountants: Turbulent economic conditions will lead to increased exposure

Accountants will face increased exposure to audit negligence claims as the current challenging economic conditions lead to more insolvencies. Twelve months ago, the economy was creaking back to life with growth a realistic possibility, but now the economy is heading towards a recession with massive inflation forcing up interest rates. In addition to operating in this difficult market, many UK companies are also struggling with COVID-19 induced hangovers. While we believe audit quality has improved, faced with fiercer regulatory intervention over the last five years by the Financial Reporting Council and the Institute of Chartered Accountants in England and Wales, we predict more audit negligence actions as insolvency afflicts a proportion of these companies. Not only have auditors always been an obvious target for liquidators but also where there is any hint of financial impropriety or fraud behind corporate failures, it is easy to allege auditors should have done more to uncover the impropriety.

#2 Accountants: Audit registration will formalise an increasingly two-speed environment for underwriting and claims

Interventionist regulation by the Financial Reporting Council (FRC), with its Audit Quality Review inspections and large enforcement team, has changed the accountancy underwriting landscape. The costs of dealing with FRC investigations and sizeable fines is now a principal driver behind higher professional indemnity insurance premiums. With the FRC moving to establish a register of firms deemed capable of auditing public interest entities (PIE) (broadly, PLCs with securities traded on major markets), underwriters will increasingly focus on registration when assessing underwriting risk. It is PIE audits where the FRC focuses its regulatory enforcement and it is also these audits which can lead to the biggest civil claims. Underwriters will have a useful proxy for assessing the risks of insuring an audit firm: is the firm on the FRC’s register, or isn’t it? Postscript: will the costs of appealing a decision to remove a firm’s registration (and consequent loss of revenue) become an insurable risk?

#3 Accountants: An overly complex tax system and high tax take will continue to fuel claims

Tax planning has never been so important and claims involving tax issues are likely to continue to be an issue for advisers. In 2021, we predicted an increasingly complex tax system with an increasing tax burden for a greater proportion of the population, until there was political gain to heed the calls for simplification. We anticipated more claims about tax and that is what we have seen. We are expecting this trend to continue. We now know, given the market’s reaction to the mini budget in September 2022, that political will alone is insufficient to alter the status quo unless the markets are on board. We also know that, in order to fill the black hole in public finances, there is going to be a higher tax burden for many. With this objective given primacy, it is likely that the intricate interrelationships of different taxes and complex reliefs (many of which are designed so as not to entirely stifle growth) will remain entrenched in the system for the short to medium term. The need for expert tax advice is paramount and the consequences of errors in that advice will become more costly as the tax at stake increases.

#4 Construction Professionals: Adjudications will be used more frequently in challenging times

In times of difficult economic conditions, cash remains king in the construction sector and an upward trend of adjudications against construction professionals, including architects, engineers and quantity surveyors, may well be the upshot. While adjudication may not be the ideal forum within which to resolve complicated allegations of professional negligence, it may be increasingly turned to due to its speed and the prospect of making even a partial recovery. Insurers may have mixed feelings about adjudications and they will need to consider the scope of cover afforded by their policies carefully. On the one hand it may offer a quicker resolution to a claim which would otherwise go down the Protocol route. However, the downsides can include significant irrecoverable costs, the lack of flexibility over involving other culpable parties, and the professional firm finding itself on the end of rough justice.

#5 Construction Professionals: Resurrection of time-barred claims will lead to practical difficulties

Some of the first provisions to come into force under the Building Safety Act 2022 (BSA) are likely to have an immediate and substantial effect on construction professionals. From 28 June 2022, limitation periods for claims under the Defective Premises Act 1972 (DPA) and the Building Act 1984 are extended prospectively from six years to 15 years. But the BSA also extends the limitation period under the DPA retrospectively to 30 years, dramatically shifting the goal posts. Claims once considered time-barred may be resurrected and construction professionals (including design and build contractors) and their insurers could find themselves facing new limitation dates into the future. Investigating such claims will give rise to serious practical difficulties. Witnesses will have moved on; papers will have been lost or destroyed; and increased expert input will be required to piece together the evolution of a development. At best, defending these claims will be expensive. At worst, it may be impossible.

#6 Education: Cyberattacks on educational institutions will increase

Educational institutions continue to be an attractive target for cyber criminals due to the high number of potential access points and the sensitive information and data held. Attacks have increased markedly over the last two years, partly due to the shift to online learning following the pandemic which has given hackers more opportunity to exploit vulnerabilities. The government’s Cyber Security Breaches Survey 2022 provides a clear illustration of the extent of the problem, with 62% of higher education institutions reporting experience of breaches or attacks at least weekly. That same report reveals that awareness of government guidance and initiatives needs to improve dramatically, particularly in primary schools. Insurance can help to deal with the aftermath of an attack but, with the education sector increasingly targeted, it will become more difficult to obtain and more stringent requirements will be imposed. Schools and colleges must make cyber-security a priority and should, as a minimum, ensure that they comply with the cyber-security standards issued by the Department for Education.

#7 Financial Advisers: the FCA’s new Consumer Duty will bring short and longer term challenges

From 31 July 2023, advice firms will be subject to a new principle: they must act to deliver good outcomes for retail customers. The new principle comes with three cross-cutting rules relating to four outcomes covering the key elements of a firm’s consumer duty. In the short term, the implementation work required will present cost and resource challenges for firms, especially where, as distributors, firms will not be receiving information from product manufacturers about their reviews until 30 April 2023. In the longer term, although the Financial Conduct Authority decided not to introduce a private right of action for breach of duty, there is concern about the lack of certainty as to what firms need to do to comply with the duty and the inherent subjectivity in terms of how this will be judged in hindsight, especially by the Financial Ombudsman Service.

#8 Financial Advisers: FCA scrutiny of Defined Benefit pension transfers will continue to be a source of uncertainty for firms and their insurers

There is nothing new about firms involved in Defined Benefit (DB) transfer advice being concerned about complaints, claims and/or Financial Conduct Authority (FCA) scrutiny and 2023 will be no different. At the end of November 2022, the FCA published its decision to impose a consumer redress scheme on all firms that advised members of the British Steel pensions schemes to transfer. It is anticipated that an action group formed by firms impacted will seek to bring a legal challenge against the FCA in early 2023. In the meantime, the FCA has also published an updated methodology for calculating redress in DB transfer cases. The fundamentals of the approach will remain the same but rising yields on government bonds, especially as a result of the market turmoil last autumn, have significantly reduced the value placed on the relinquished DB pension thereby supressing the amount of redress potentially due. Insurers and brokers of advice firms involved in British Steel transfers will need to heed the FCA’s “Dear CEO” letter which sets out its expectations around how information requests and notifications are dealt with.

#9 Insurance Brokers: High rates of inflation creating serous risks of underinsurance may lead to claims against brokers

Underinsurance is likely to be the buzzword in the context of professional negligence claims against insurance brokers in 2023 (and beyond). In the event of a major loss, insureds may discover the sums insured under their material damage policies (in respect of buildings and/or contents) are inadequate. This is primarily due to inflationary pressures which continue to drive up the costs of construction materials, as well as everyday items. As a consequence, insurers may reduce indemnity payments in accordance with the principle of average (underinsurance). The knock-on effect is an expected rise in claims against brokers when the adequacy of the sums insured has not been revisited and where warnings have not been given to clients of the need to check that their limits of indemnity remain appropriate in the current climate. If necessary, clients should be advised to obtain specialist advice, for example from a surveyor on rebuild costs.

#10 Pensions: Increasing inflation, turbulent markets and new legislation and regulations will leave pension schemes vulnerable

The increasing raft of responsibilities, tide of new initiatives, escalating threats to employer solvency and the autumn turbulence in the markets have left schemes and advisers at full stretch and exposed to ‘dropping the ball’. The impact of the September 2022 mini-Budget prompted the Bank of England to intervene in the gilts market and The Pensions Regulator to issue an urgent statement on what is expected by trustees and advisers to manage investment and liquidity risk. Although the risks of gilts’ yields rising was well understood and planned for, the unprecedented speed caught most out. Trustees that failed to take advice or delayed acting will be exposed to criticism and claims. Similarly, with corporate insolvencies predicted to increase, trustees need to be vigilant over employer’s contributions and covenants. This is all at the same time as trustees grapple with the implementation of so many new initiatives: the new Defined Benefit funding code, the single code of practice, the updated Defined Contribution guidance, the attempts to reduce pension scams, the innovative pensions dashboard and new ESG (environmental, social and governance) obligations to mention just a few. The key message – engage, take advice and act.

#11 Solicitors: Will global recessionary pressures increase UK lawyer claims?

As the extent, but not the imminence, of a widespread recession is debated across the world, insurers of legal professionals should be alert to increased claims vulnerability. The obvious risk for the legal profession is that recessionary pressures lead to secured lending defaults, repossessions, property market falls, lender losses, and ultimately, lender claims. This is not always inevitable; the management of interest rates following the 2008-9 credit crunch undoubtedly minimised the ultimate impact for domestic professional indemnity insurers. But with mortgage rates now unstable and forecasts of increasing defaults and a property market fall, those insuring both lawyers and surveyors will be wary as to the climate for increased claims vulnerability. Adverse economic pressure will also only fuel the sharp increase already being seen in claims brought by liquidators against the legal profession. Liquidators can be tenacious opponents as they have to account to the creditors and, with third party funders often involved, these claims can be difficult to manage.

#12 Solicitors: Regulatory focus on SLAPPs will intensify

In the legal regulatory arena, we are seeing an increased interest in defamation lawyers by the Solicitors Regulation Authority (SRA) given the recent publicity in relation to Strategic Litigation Against Public Participation (SLAPPs). The SRA has stated its intention to conduct a thematic review in this area, so we expect media and defamation lawyers to be under increased scrutiny. At the end of November 2022, the SRA issued an updated Warning Notice telling law firms not to get involved in this abusive litigation and announced that it was already investigating 29 cases involving 17 firms. The SRA wants to see fundamental change in this area and is planning to seek statutory designation under the Public Interest Disclosure Act 1998 to encourage “whistleblowers” to come forward and report SLAPPs to the Regulator. Lawyers need to be familiar with the up to date guidance and to ensure that any litigation conducted does not cross the line from being a justifiable protection of their client’s interests to oppressive litigation aimed at silencing legitimate critics.

#13 Surveyors and Valuers: The sustainability of values will be the most important issue

The sustainability of values will undoubtedly be the single most important issue the surveying and valuation profession will have to grapple with in the short, medium and longer term. The pandemic has brought about a seismic change to working patterns but will the surge in demand for more rural locations be maintained? Will the pressure on those in the High Street serving commuter needs remain? How will current office repurposing play out in terms of space needs going forward? With many economies now heading into recession and inflationary pressures unlikely to ease anytime soon, matters are compounded by the risk that real estate values may fall as businesses and consumers alike struggle to fund borrowing costs after a decade of ultra-low interest rates and the retail/leisure sectors find themselves squeezed as belts tighten. Finally, and perhaps most significant of all, is the impact that the current energy crisis, coupled with the crucial need to address climate change, will have on the entire sector in terms of attributing a value to any particular building’s energy efficiency capabilities. Never has the phrase ‘valuation uncertainty’ appeared more appropriate.

#14 Technology Professionals: Challenging economic circumstances may lead to more tech E&O claims

Rising inflation and the increased cost of energy, resources and wages is likely to lead to an intensified search for technological/IT solutions to optimise production and to enable companies to stay competitive. As with any new and potentially untested technology, there will be risks. Expectations may be high but with constrained budgets the opportunities for testing and development may be limited. There is also a real risk that these technological solutions are oversold or fail to meet expectations during development or deployment, leading to claims against technology advisers or providers. Claims can also be expected in respect of projects which, with the passage of time, have become obsolete or economically unviable due to the changing economic environment.

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