It is important that you consider adding additional EWS1 limitation wording to your valuation reports to maintain professional indemnity insurance cover as explained below.
COVID-19 and Material Valuation Uncertainty
In light of the global COVID-19 pandemic, upon renewal of professional indemnity (PI) policies, many Insurers are now questioning whether valuers are reporting all valuations on the basis of ‘material valuation uncertainty’ as per the RICS Red Book Global.
It therefore follows that Insurers may be expecting a number of valuation claims to emanate from the current crisis, and are consequently seeking to manage their exposure to this risk. The Royal Institute of Chartered Surveyors (RICS) has published a valuation practice alert, which provides further guidance in this area – however it appears that firms should be considering whether making a material valuation uncertainty declaration is appropriate.
In the event that you undertake a valuation on this basis, RICS have suggested that the following wording be used:
“The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a “Global Pandemic” on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.
Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.
Our valuation(s) is / are therefore reported on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of [this property] under frequent review”
Further information can be found here.
Changes to the RICS Minimum Approved Wording for Professional Indemnity Insurance:
Due to challenging market conditions in the PI insurance market, and more widely issues present in the construction industry, RICS have made a number of important changes to their Minimum Approved Wording for Professional Indemnity Insurance, with the intention of allowing greater flexibility for Insurers to offer terms to RICS members and alleviate some of the difficulties that firms have faced when seeking to obtain RICS compliant cover.
In December 2019, RICS launched a new External Wall Fire Review (EWS) process to be used by valuers, lenders, building owners and fire safety experts in the valuation of high-rise properties (those above 18 metres in height), with actual or potential combustible materials contained in external wall systems and balconies.
The ‘Contractual Liability’ exclusion contained in clause 4.3 of the Minimum Approved Wording has been expanded, and now excludes liability where the valuer has relied upon the EWS1 form and the valuation does not exclude liability to the lender or purchaser for any losses directly and solely caused by the EWS1 Form being incorrect. This exclusion will be applicable to any valuations undertaken after 1 May 2020.
If you are intending to rely on the content of an EWS1 form, you should consider including wording in your valuation report which excludes liability for errors in the EWS1 form. Additionally, such a clause might also be included in the terms of engagement for the valuation.
An example of such a wording was given by RPC Solicitors as follows:
“In arriving at the valuation, we have relied on the EWS1 form, prepared by a professionally qualified third party. In so doing, we are not offering any advice as to the accuracy, completeness or fitness for purpose of the form or its content and neither the individual preparing the valuation nor this firm shall have any liability to you, or to any third party with whom you share the valuation, for any losses or potential losses arising directly and solely as a result of any inaccuracies or errors in, or otherwise in any way related to, the EWS1 Form”.
This wording was given in an article published by RPC which can be found here.
There have been further changes to the definition in the Approved Wording of what falls within the Insured’s ‘Professional Business’. The definition does not extend to include the completion of an EWS1 Form by the Insured, unless such activities have been disclosed to Insurers and agreed by Insurers. In the absence of such agreement, the completion of EWS1 Forms will not be covered by your insurance. If you are intending to undertake this work – it is important to contact your broker to ensure that cover is arranged.
RICS now permit Insurers to apply their own fire safety exclusions to policies without the need for firms to apply to the RICS for dispensation. There are currently a wide variety of such exclusions within the PI market and therefore it is imperative that the breadth of any such exclusion included in terms quoted to you is carefully considered in line with the work that is undertaken by your firm.
BASIS OF COVER
Under the 1st May 2020 changes, Insurers are now able to offer cover with a limit of indemnity on an ‘Unlimited Aggregate Round the Clock Limit of Liability’ basis. Formerly, cover was only permitted on the basis of ‘each and every claim’. The basis of indemnity limit now permitted similarly provides cover up to the total limit of indemnity, on a per claim basis. However, the limit of indemnity of the primary policy is in the aggregate, and when the indemnity limit on the primary policy is exhausted, the excess layer policy ‘drops down’ to deal with the claim(s), until its limit of indemnity is similarly exhausted. This continues until the entire policy programme limit is exhausted, and it should be noted that as the limit basis is aggregate, it is likely that defence costs would be included within the limit of indemnity, rather than being in addition to it.
Once the policy programme limit is exhausted, the limits across the various policies are reinstated, but only for a new claim. This is why the cover is still per claim, despite the aggregation of the limit.
A more detailed explanation of the operation of aggregate round the clock reinstatements cover and the differences with each and every claim cover can be found here.
An excess applicable to Defence Costs is now permitted. This means that firms would have to pay, up to the excess applicable, the costs incurred in defending a claim or circumstance. Only after the excess had been paid in full would further defence costs incurred then fall to the Insurers.
This will mean that firms have to pay the policy excess much earlier as they will initially be funding the legal defence, rather than paying the excess only if the claim is settled. These costs therefore apply regardless of whether the claim ultimately has any merit, provided that the claim is sufficiently advanced that the insurers feel that a solicitor appointment is warranted. The excess would apply to defence costs incurred in respect of each notified matter, so more than one excess payment may be required across the claims and circumstances notified in the policy period.
Therefore, if cover is provided on this basis firms should be carefully considering the level of excess applicable and the relative ease with which the firm may be able to meet one or more of these excesses in the event they are required.