Professional liability - market insights Q3/Q4 2024

Ghost Broking: a 21^st century problem on the rise 

Ghost brokers are fraudsters who set out to sell cheap insurance deals where the policies either don’t exist at all or are not valid. They tend to target the vulnerable consumer and over the past few years have operated mainly in the motor insurance market. However, ghost brokers can now be found across most lines of business and there are.

We are currently seeing claims where a sub-broker is instructed by a broker to find a particular policy for a client. The sub-broker unwittingly subcontracts the job to a ghost broker who provides a fraudulent policy, seemingly to meet the client’s requirements. The client may have a claim against the original broker in negligence asserting that it failed to undertake proper due diligence in respect of its sub-brokers or have any appropriate systems in place to ensure that the downstream broker was legitimate. This practice is increasing.

Looking ahead, rapid developments in AI are likely to increase instances of ghost broking, not least because of the sophistication by which fraudsters dupe innocent members of the public by creating false policies. Consumers affected may seek remedy under the Online Safety Act 2023 whereby providers of online content owe a duty to ensure fraudulent content is swiftly removed from their platforms, failing which providers can be held liable for substantial fines. 

Insurers can also look to increase investment in education to ensure that their policyholders and consumers are aware of the issue given the findings of a recent ABI survey which found that 90% of people have not heard of the term “ghost broking” and did not know what it is. 

We have also identified ghost broking as a key update in the Fraud and Property section.

SuDs – Sustainable drainage systems 

After a delay of 14 years, mandatory sustainable drainage systems (SuDs) in new developments will be implemented later this year (via Schedule 3 of the Flood and Water Management Act 2010). Unlike traditional drainage systems, SuDs are designed to manage the water runoff from properties and developments created by surface water floods.  They do so by slowing and holding back water flow whilst allowing pollutants to be broken down through natural processes via permeable surfaces, wetlands and grassed areas which absorb heavy rainfall. SuDs therefore lower the risk of flooding. At the same time, they offer much needed green space in urban areas.   

For construction professionals, the design proposals and build times will need to align with the implementation of new planning policy under Schedule 3.  It may be prudent to provide design advice earlier in the planning process to avoid or minimise claims for errors and delays. Given that SuDs are a fairly new technology, there may be a shortage of specialist designers and contractors familiar with the system. Training will be necessary to avoid claims for delay against designers with no or very little experience of SuDs.  It is hoped that the new Skills England Bill announced at the Kings Speech in July may help to fill skills gaps identified by industry.  

Grenfell Tower Inquiry - Phase Two Report

The Grenfell Tower Inquiry published the final part of its report on 4 September 2024.

The 1,571-page document presents 59 recommendations for enhanced fire safety for high risk buildings. If implemented, these changes will significantly impact the construction environment, especially those involved in building and/or managing high rise structures.

Focusing on policy change, the report recommended that fire safety policy is developed “in an holistic and coherent way”. Bearing this in mind, key recommendations include:

• The creation of a single construction regulator to report to a single Secretary of State responsible for fire safety within construction
• The construction regulator to oversee a new, independent body whose remit will cover:
  • The regulation and testing of construction products
  • The licencing of contractors for work on high risk buildings
  • The mandatory accreditation of fire risk assessors/engineers
  • Building control oversight
• A review of the definition of high risk buildings in the Building Safety Act 2022.

For construction professionals to meet the recommended building control oversight, the report recommended a statement from the principal design team that all reasonable steps have been taken to ensure that, on completion, the building as designed is safe as required by building regulations. If implemented, this will increase the risk profile for the project architect, engineer and design team generally.   

For the construction industry on the whole, the report has recommended a significant “shift in culture and behaviour in the built environment sector”. The report envisages that the proposed new legislation and government policy will spur this transition.

We have also identified the Grenfell report as a key update in the Crime & regulatory section.

Changes to the policies in the UK and Ireland 

As of 1 July 2024, RICS has revised its policy wording relating to fire safety to minimise fire safety risk. Listed insurers must now provide prospective fire safety claim cover in the UK and Ireland for professional services carried out on buildings of five storeys or more on the following basis: 

• Negligent act, error, or omission 
• Professional services undertaken on or after 1 July 2024
• Cover can be in the aggregate, with defence costs included in the limit of indemnity
• The uninsured excess may be applicable to defence costs.

Given that fire risk is the top risk for the property and construction sector, these changes have been welcomed by RICS members and brokers. 

Potential exodus from the Solicitors PII market 

In July 2024, a survey conducted by the IUA found that almost 40% of insurers are considering exiting the Solicitors PII market. This is due potentially to the Court of Appeal judgment of Discovery Land Co LLC v Axis Specialty Europe SE [15.01.24] which held that insurers were not entitled to rely on the aggregation clause to link the two claims. 

The ruling has raised concerns about the restrictive aggregation of claims under the minimum terms and conditions set by the SRA that affect the limit of indemnity, and it has been difficult for insurers to group claims together.  This has created a capacity issue with primary layer insurers paying more for individual claims while excess layer insurers are less affected.  A significant exodus from the market may leave solicitor firms in difficulty upon renewal of their policies.  

New government bills

• Draft Audit Reform and Corporate Governance Bill
• Skills England Bill
• Planning and Infrastructure Bill

How will the new construction related Bills included in the King’s Speech impact PI insurance claims?  

The Planning and Infrastructure Bill 2024 has the potential to significantly impact construction professionals at all levels, where the aim is for projects to move from planning to construction quicker. The Bill aims to streamline and speed up the process for the delivery of new infrastructure, which should increase demand in the industry. Alongside this, the Skills England Bill has been announced to address the UK-wide skills gap and worker shortage. This should therefore, increase responsiveness to the demand in the construction industry.

From a professional indemnity perspective, it will be important to consider that a higher volume of projects, with target completion dates of before 2030, may also lead to higher potential for design error. Given the aim of streamlining the construction process, there may be an increased risk of errors arising also as a result of rushed workmanship. In light of this, professional indemnity insurers may see a potential increase in the amount of claims when these Bills are passed through Parliament. The devil is in the detail and we will consider the impacts further once the Bills are laid before Parliament.

Case developments 

Supreme Court provides clarity on diminution of value caused by Japanese Knotweed 

Davies v Bridgend County Borough Council [08.05.24] 

This case was brought before the Supreme Court to determine whether Mr Davies residual diminution in value claim was caused by the Council’s breach of duty in private nuisance, namely the failure to put in place a reasonable and effective Japanese Knotweed treatment upon encroachment. 

The Supreme Court found for the Council and held that a claimant must prove that the defendant’s breach has caused a loss of amenity and/or interference with the use and enjoyment of the claimant’s land and not just the encroachment of Japanese Knotweed alone. This decision will be welcomed by local and public authority landowners and other organisations when faced with claims involving the alleged encroachment of Japanese Knotweed and should serve to knock out a significant element of damages routinely claimed. 

We also discuss this case in the Public sector section.

Loss of chance in broker’s professional negligence claims

Norman Hay Plc (in Members’ Voluntary Liquidation) v Marsh Limited [08.05.24]

The appeal in professional negligence claim is scheduled to be heard by the Court of Appeal in January 2025. The claim concerns Marsh’s attempt to strike out/obtain summary judgment.

The insured issued proceedings for breach of contract and/or negligence against Marsh when advising, placing and renewing their worldwide insurance cover based upon a failure to consider the use of hire cars by employees when travelling.

The Commercial Court Judge dismissed Marsh’s application to strike out/for summary judgment. The Judge held that in an insurance broking claim presented by an insured, there is scope for broader enquiry as to what would have happened but for the negligence. This required an assessment of chance.

The Judge further distinguished between liability on the balance of probabilities and a loss of chance. Where a claimant can prove that, on the balance of probabilities, they would have recovered under the policy but for the broker’s negligence, then the claimant will recover in full. If this cannot be established but the court concludes that the claimant has nonetheless been deprived of the chance to recover had insurance been in place, then there will still be a recovery, However, recovery will not be in full and will be arrived at on a loss of chance (and so percentage) basis.