Publicity surrounding the Dreamvar Court of Appeal judgement has left law firms reeling with many questioning how well protected they actually are when it comes to professional indemnity insurance.
Headlines recently revealed the Court of Appeal judgements in Dreamvar Ltd v Mishcon de Reya and P&P Ltd v Owen White & Catlin, but what does this mean to firms from a professional indemnity perspective?
In this article, Richard Grayson, Director for the PIB Insurance Brokers (PIB) Professions team, has highlighted how the high-profile case has left many firms asking the key question: “are we actually insured under our SRA compulsory cover for the types of claims advanced?”
They have outlined that, to most law firms, negligence and breach of contract are assumed to be covered under the SRA’s Minimum Terms and Conditions (MTC) compulsory insurance, but what about claims against the firm for breach of undertaking, breach of trust and breach of warranty of authority?
Grayson, who is also a former practising solicitor, has revealed the answer lies in the wording of the insuring clause required to be present by the MTC in all compulsory layer policies. It states that “the insurance must indemnify each insured against civil liability to the extent that it arises from private legal practice in connection with the insured firm’s practice”.
Grayson said: “The key point here is the phrase ‘civil liability’. Essentially, firms are covered for claims arising from the work solicitors do, ie, ‘private legal practice’, and any form of civil liability claims arising therefrom. So, in short, the types of claims advanced in Dreamvar should be afforded cover under the firm’s compulsory primary MTC insurance both in terms of the actual claim itself and for attendant defence costs.
“The nature of the cover provided by the MTCs is worth reiterating as we have experience of firms who have assumed that they were not covered for claims arising from, for example, a breach of warranty of authority and indeed wasted costs. Consequently, we would always recommend you seek advice from your broker should you be in any doubt about the cover you have purchased.”
What of Dreamvar itself and how the insurance market is reacting?
The issue at stake in the combined appeals was a fairly fundamental one, namely: “Who ought to bear the risk of loss when a fraudster pretends to sell a property?” The Court of Appeal’s answer is that the loss should be shared across the solicitors for the buyer and seller. Reiterating all of the technical legal argument which drove this result is unnecessary as it has been well rehearsed but how will the insurance market respond and will it affect premiums?
Insurers look at statistical trends and actuarial analysis to assist in determining their pricing structure which, in essence, means areas of law that attract the most claims in terms of volume and value will inevitably be on the higher risk side for insurers. Consequently, property work has always been rated as high risk in stark contrast to criminal work where comparatively few claims arise.
According to government figures, there are approximately 1.2 million residential conveyancing transactions per annum, representing a value of over £300 billion and according to figures from the Land Registry published in the Financial Times* last December, “the value of property identity fraud cases has more than tripled since 2013 when it was £7.2m, hitting £24.9m in the year to April 2017”.
The Land Registry has a counter fraud team which works closely with the police and other agencies to reduce the risk of property fraud. Since September 2009, it has prevented frauds on 254 applications; representing properties valued in excess of £117 million.
Grayson added: “Insurers have generally collected around £225 million per annum in premium from the profession for the compulsory MTC cover. The reality therefore still remains, using the most basic maths, that these types of fraud are relatively rare in number and we can reasonably assume that not all funds were irrecoverable and that not all of the cases mentioned above led to claims against law firms.
“The leading question, therefore, is will Insurers look to increase premiums for those firms who undertake conveyancing?
“Each Insurer will have their own claims statistics, relating to their own portfolio of Insured firms, which they will consider when setting premium levels but they will also look at risk more generally and the statistics mentioned above might suggest that although Dreamvar in isolation created a storm, it may well be in the proverbial tea cup.”
Property claims continue to hit insurers not least from cyber-related fraud but also investment-led, high yield, property transactions such as student accommodation, nursing home units, etc, and this, combined with Dreamvar and a more general concern about a property crash around Brexit, may lead to much more scrutiny around conveyancing practice and premium levels.
Grayson concluded: “Our advice to clients is to look carefully at your conveyancing risk management protocols around client selection and identification, review your cyber fraud and banking risk and, in Dreamvar terms, look for the transactions which may show red flags toward a possible fraud. For example, unmortgaged, vacant at the time of possession, high value and the seller is living abroad and wants a speedy completion.
“Insurers will, in all probability, want more detail from firms about these issues so in one sense, Dreamvar has provided an opportunity to consider your conveyancing risk profile more carefully and in readiness for a renewal (if you have one) on the 1st October.
“Speaking as a former practising solicitor who undertook property work, I know that those who work in this field are resilient and innovative. There have been innumerable threats to property lawyers over the past three decades be it for example, claims trends, economic upheaval or digitisation and invariably the profession has risen to those challenges and drives on. I expect the same post-Dreamvar.”