Professional Risk Associated with Letting Agents
Lonsdale Insurance Brokers Ltd are Lloyd’s brokers specialising in property related risk. The following paper provides a study of the modern day risks associated with UK letting agents and how the current UK professional indemnity insurance market is responding.
What is PI Insurance?
Professional Indemnity Insurance, often referred to as Professional Liability Insurance, PI, PII. PI provides cover for legal costs and expenses and compensation payable to a 3rd party in the event of a claim for professional negligence.
Why do I need it?
PI is usually taken out to satisfy the following:
- Redress scheme code of conduct
- Trade bodies
- Contractual reasons
- Marketing purposes
PI is often seen as a unnecessary evil, however it should not be taken for granted. A PI policy will cover the insured for costs and expenses in defending a claim regardless of whether the claim has any substance. This is particularly relevant as often the costs involved in defending a claim can outweigh the damages being claimed.
We trade in an environment that is increasingly litigious and therefore we are all exposed to litigants who want to take advantage of your PI policy regardless of whether you have breached your duty of care. We are seeing a rise in serial litigants trying their luck which is not aided by ‘No Win No Fee’ law firms.
Recent legislation has brought in a new and very real risk of claims being brought against Property Professionals.
Some of the legislation is as follows:
- Consumer Rights Act 2015
- Immigration Act 2015
- The Smoke and Carbon Monoxide Alarm (England) Regulations 2015
- The Consumer Protection from Unfair Trading Regulations 2008 (CPRs)
Combining the new legislation and the influx of No Win No Fee law firms, it is now easier than ever for clients to pursue a claim.
We have seen a noticeable rise in claims brought against letting agents in student towns. The No Win No Fee law firm will target student rental properties requesting site of their tenancy agreement in return for a possible payment should they find any breaches and make a successful claim against the agents PI. Unfortunately, many students tend not to hold their landlords and letting agents in high regard, therefore the prospect of earning free money at their expense can be appealing and so word spreads fast and because they have nothing to lose, students are actively pursuing the No Win No Fee law firms if they do not get to them first!
The below graph show the PI claims correlation between Lettings / Property Management and Estate Agency. Over three quarters of claims derive from Lettings / Property Management activities compared with Estate Agency.
We have broken down the Lettings / Property Management claims in to various categories as shown below. The nature of each claim is often very different, therefore it does not make it easy to categorise. What you can see is personal injury claims contribute a reasonably high percentage and this is largely due to the influence of No Win No Fee law firms.
Claims Case studies Example One:
Insured was managing agent of various properties, one tenant fell down the stairs resulting in injury and blamed this on a faulty light in the stairway which had been previously reported. Tenant sued Landlord, Landlord sought to recover loss from the Managing agent as in his opinion it was their job to maintain the common parts of the property.
This was reported to Insurers in good time which allowed the Insurers to consider the claim. Insurers actually managed to defend this claim putting the onus back onto the Landlord. Whilst no claim was paid out, Insurers would have paid costs and expenses in defending the claim.
A lettings executive handed keys over to a tenant who had passed the reference checks, performed by an external referencing company.
The tenant emailed a scan of their passport, later identified to be a counterfeit. The agent never saw the original. The tenant also managed to persuade the lettings executive (a part-time Saturday employee) that they would pay all monies including the rent & deposit via same day bank transfer in their office which they did using a false web page showing monies leaving their account. Of course no funds were ever received and by the time the agent realised, it was too late, the tenant was in the property.
Unbeknown to the letting agent, the tenant had previously taken up three tenancies with other local letting agents using false documentation and information.
Further background information revealed that the tenant had also served a prison sentence for fraud. The landlord brought a claim against the agent and some six months later the tenant was evicted and the estimated cost of loss of rent, legal fees and refurbishment for the property amounted to between £25k-£30k. The letting agent only paid his £500 Excess and the rest was picked up by Insurers.
Whilst it is impossible to totally remove the risk of a claim, there are measures and systems that can be put in place to help mitigate the likelihood of a claim.
1. Keep accurate and updated records, particularly written communication and phone notes.
Claim example one relates to a claim brought by a tenant that had injured themselves and sued the agent. The insurers successfully defended this claim, however the success was largely down to excellent record keeping. We need to remember that insurers viewpoint differs from the insured. Whilst you may feel aggrieved and want to defend yourself, Insurers may take a more commercial approach if they cannot mount a robust defence with good written evidence due to poor record keeping. This may result in a settlement regardless of whether the insured is at fault.
Should you find yourself with a paid claim against your policy through no fault of your own, you will have to disclose this at each renewal and depending on the claim value, you may see your premium increase.
The importance of keeping records up to date and accurate is crucial should you be faced with a claim
2. Have a risk management plan.
Below are some bullet points for you to consider.
- Consider the type of instructions you are prepared to take. Some may expose you to more litigious clients. Example – a claim occurred against a letting agent for an inappropriate tenant where the tenant passed the reference checks but was known to the authorities (RSPCA) and would appear in search engines. He subsequently caused damage to the property and vacated the premises leaving live and dead animals, cages etc. The landlord lost 6 months rent, incurred costs to repair the damage and could not sell the property afterwards. This resulted in a £50k claim against the agent with £25k costs.
- Have a training plan for staff to keep up to date with the regulations.
- Have a process to ensure that the correct procedures are followed eg checklists and spot checks, internal audits, diary reviews, file reviews.
- Keep a complaints register and have a written complaints handing procedure for staff to follow and to send to your clients?
- Terms and Conditions - Obtain independent legal advice to ensure you have robust terms and conditions to use with your clients.
When should you notify?
All PI policies require the policy holder to notify a circumstance that may give rise to a claim. Identifying a notifiable circumstance is not easy and especially if you have multiple offices with many employees. The terms of a PI policy will state that all notifications have to be made as soon practicable and usually within 28 days. Late notification is often the main reason for insurers avoiding cover and is usually due to the policy holder or staff not being aware of the policy terms. To avoid any non-disclosure, It is crucial that staff are educated to bring any complaint or matter they are aware of to the attention of a manager in accordance with the internal systems in place. If you are unsure of whether to notify a potential claim, you should contact your broker or insurers. Often policy holders choose not to notify through fear of
premium increases. If the claim amounts to nothing, insurers should not be penalising you and therefore, if you are in any doubt, NOTIFY. If you choose not to notify and the matter develops in to a claim, it will be too late and insurers will reserve their rights to avoid providing cover due to nondisclosure.
All businesses are increasingly reliant upon e commerce and no business is immune to cyber-attacks. The Centre for Economic and Business Research estimate that the annual cost of cyber-crime to British business shall be £34 billion.
Cyber policies vary depending on the level of cover you purchase. Some of the key features are as follows:
- Loss of customers data (Data Breach)
- Denial of Service attack -Systems frozen
- Funds being diverted
- Reputational damage through - National/Local Press – report to the Information Commissioners Office.
- Phishing attacks
- Costs incurred in responding to an actual or suspected data breach
- Business interruption following cyber incident, including as a result of reputational damage
- Costs incurred in replacing/repairing damage caused by a hacker
- Costs incurred in the event of a threat to damage or disrupt computer systems, or publish information
- Crisis containment – Public relations support to mitigate reputational damage.
- Virus transmission
- Direct financial loss arising from an external hack.
- Costs of unauthorised telephone calls made by an external hacker following a breach of a company’s computer network.
Cyber-attacks have been well documented in the press in recent years with high profile businesses and institutions having had their systems breached. Property professionals commonly hold sensitive data such as passport details and bank account details. Hackers use this data to sell to third parties which, unless handled properly, will have a detrimental effect on the business reputation. We have recently had clients advising us that their systems have been frozen and unless they pay a ransom the hackers will circulate damaging information to their client base. Often the ransom figures are no more than £5,000 however research suggests that one in four firms are prepared to pay ransoms to avoid a cyber attack . We have also had instances where funds have been diverted during a standard transaction.
Case study – Foxtons suffered a data breach in 2013. The email addresses and passwords of nearly 10,000 of their clients were leaked online. We do not know if they had a cyber policy however they seem to have used a good PR company as this received minimal press coverage with minimal damage to their reputation.
The growing private rental sector has led to fierce competition amongst letting agents. Competition creates pressure within the workplace and is often the ultimate reason behind mistakes being made and subsequent claims being brought for negligence and loss of income.
The above paper demonstrates some of the risks associated with letting agents and how they can manage the potential threat.
Should you have any queries in relation to the content included in this report, please do not hesitate to contact us.
OLIVER WHARMBY 20/01/2016 THE ABOVE INFORMATION HAS BEEN PROVIDED BY LONSDALE INSURANCE BROKERS LTD FOR INFOMRATION PURPOSES ONLY. LONSDALE INSURANCE BROKERS LTD DO NOT AUTHORISE THE CONTENT OF THIS PAPER TO BE USED BY ANY THIRD PARTY WITHOUT PRIOR PERMISSION. 24 Creechurch Lane, London, EC3A 5JX Authorised and Regulated by tel. 020 7816 0028 fax. 020 7816 0029 The Financial Conduct Authority. Lloyd’s Brokers Lonsdale Insurance Brokers Limited Registered address: The St Botolph Building, 138 Houndsditch London EC3M 1JP. Registered in England Company No.03242438