Valuers' professional indemnity is a challenging, yet improving risk
This article was first published in the August/September 2017 issue of InsuranceNEWS Magazine.
For Professional Indemnity (PI) underwriters, few occupations are as fraught as valuers. Valuers - or appraisers, as they're called in some countries - are responsible for estimating the fair market value of different classes of goods, including land and buildings.
Most specialise in a particular area. In real estate, for example, some valuers specialise in agricultural properties, while others focus on residential housing.
Valuers have historically been a challenging risk. In fact, poor claims performance led to the occupation being almost uninsurable in Australia before 2004.
However, to its credit, the industry in Australia has done a lot of work since then to improve the risk profile of valuers and to make this industry segment more attractive to PI insurers.
Although capacity continues to be constrained, some Australian insurers and Lloyd's markets are active in this space, albeit selectively.
As a general rule, PI insurance serves as catastrophe cover to protect the business in the event its best efforts to avoid losses are unsuccessful; it shouldn't be viewed as a means of transferring high-frequency losses to another party.
This means that appropriate measures to mitigate identified risks are crucial if insurance markets are to have a favourable view of a valuer's risk profile. Some practical steps valuers can take to minimise and mitigate risks include:
- Avoidance - "know your customer" is the most important step valuers can take to mitigate risk. Conducting due diligence on new clients to assess their business practices and potential litigiousness is critical. Valuers should avoid accepting engagements from non-regulated lenders as well as those identified as having poor lending practices or who have shown a propensity for litigation.
- Reduction - valuers should also consider measures that reduce their risk profile. One option is to diversify the business mix by reducing the business' reliance on income derived from "high-risk" valuation activities. Further diversification could be achieved by increasing the focus on non-valuation activities in related fields, such as property research and consultancy services.
- Risk transfer - seek appropriate advice around risk transfer. External legal advice regarding contractual indemnities and appropriate use of disclaimers and other qualifications in valuation reports is useful. Engage an insurance broker with experience in valuers' PI to advise on available markets and scope cover. Given the limited nature of the PI market for valuers, an insurer with long experience in this area is more likely to offer consistent coverages and pricing, plus, perhaps most importantly, claims handlers who are knowledgeable about this class of business.
- Retention - carry an acceptable level of risk or excess. This will vary depending on the nature of the activities, but as a general rule it should be pitched at a level that is meaningful in the context of the size of the business. Setting retentions at an acceptable level will improve claims history and improve the ongoing availability of PI insurance. It also provides an incentive for implementing practical and effective risk management practices.
For all of these, it's important that the principals of the business monitor adherence to these practices by practitioners, especially if it has multiple offices.
What do Pl insurers want to see?
Most PI insurers in this sector assume that potential insureds have formal risk management procedures in place. Those that do not may have difficulty finding adequate PI insurance or, at worst, be considered uninsurable. An important aspect that should be reinforced by such procedures is a robust culture of peer review throughout the business.
PI insurers are especially interested in due diligence processes: how does the valuer assess new clients to determine if their corporate values and practices are aligned? Not all clients are good clients and factors such as litigation history, lending practices, borrower selection and third-party reliance should be considered carefully before accepting new engagements. Clear terms of engagement are paramount and should specify the basis of valuation required; the identity of those who will rely on the valuation; and the purpose for which the valuation is required.
The nature of ongoing commercial relationships between a lender and its clients should be understood; for example, lenders and property developers. These relationships can be significant because there may be an intention or willingness to transact regardless of the valuation report. For example, the valuation may have been sought to protect the lender by establishing a means of recourse in the event the deal goes "south". Clearly, such relationships can give rise to potential conflicts of interest, and it is important that the business understands how these conflicts are managed, or avoid the engagement entirely.
Individual engagements should be matched to individual valuers having the appropriate expertise in the relevant property type or marketplace. For example, where a business is engaged to undertake a valuation for a purposed development, it is obviously important for the valuer to be experienced in this kind of engagement, and to appreciate the significance of "as is" or "as if' as the basis o f a development valuation. An "as is" valuation will provide the lender with some kind of "baseline" valuation on which to formulate their decision to advance funds for a project.
One of the misconceptions held by many clients is th at PI insurers don't want to see notifications and they will be penalised on renewal for notifying. On the contrary, PI insurers prefer to see businesses demonstrate that they have robust procedures for the identification and notification of potential claims in place, because this provides a level o f confidence that the business is on top of its exposures.
Early notification increases the likelihood that such matters can be dealt with before significant costs are incurred by either party. This will also provide insureds with early access to the insurer’s claims team. These procedures also enable the business to apply the lessons of the past when reviewing procedures to avoid the re-ocurrence of similar matters.
Although the valuation profession has done a lot of work to improve its risk profile over the past decade, it remains a volatile class when it comes to Pl insurance. Few insurers are prepared to enter this space and the experience of many insurers that have has been negative. To secure consistent PI outcomes, valuers need to demonstrate that they have, or are prepared to implement, sound business practices and work with their PI insurer to establish a long-term relationship.
They should also be willing to provide insurers with a significant level of detail regarding the business operations and risk management procedures that have been implemented - good-quality valuers need to set themselves apart from inferior quality risks.
In that way, both parties can work towards establishing a collaborative environment in which the client and the insurer enjoy a long-term relationship and work in partnership to best manage the transfer of acceptable risks while providing consistency around the scope of cover and pricing.