Insurers get ready for spike in credit crunch professional negligence claims
02 Apr, 2013
Insurers are bracing themselves for a flurry of last-chance professional negligence claims relating to the build-up to the financial crisis, says RPC, the City law firm.
RPC explains that normally claims for professional negligence have to be made within six years of the alleged negligence taking place. The window for the majority of claims relating to activity in 2007 (just ahead of the credit crunch) therefore closes this year.
RPC says last-minute claims will most likely be from banks, property developers, or individuals and will relate to alleged negligence by solicitors and property valuers arising from property deals agreed in the months before the commercial and residential property markets started to sour in Autumn 2007.
Paul Castellani (pictured), Partner at RPC, says: “Unfortunately, many of the last-minute claims will be opportunistic as organisations or individuals try and beat the deadline.”
“One of the problems with these claims is that they are often launched on the basis that the meltdown in 2007 and 2008 now looks so obvious in hindsight, which misleads claimants into thinking they have a strong case. However, the courts will ask whether the fall in asset values was so clear-cut at the time. On that basis many of these claims will be unlikely to succeed. But even unsuccessful claims cost a lot of money for professional indemnity insurers to defend.”
Typical claims faced by surveyors in relation to the financial crisis include claims they:
- Negligently overvalued commercial premises – e.g. retail, commercial or industrial property – that subsequently collapsed in value because tenants became insolvent in the recession;
- Negligently underestimated the costs of putting a development project on hold or were otherwise over optimistic as to the likely return from property development – there is a good deal of evidence in the market that construction work was put on hold when commercial and residential property prices plummeted and funding was withdrawn;
- Negligently overvalued residential property development sites, particularly in niche markets such as student housing or other buy to let properties.
Paul Castellani adds: “Claims will most likely be related to mortgages or other lending taken out in the months before the property market began to crash in 2007. This was at the peak of the market and property prices still have to recover in many sectors.”
Land Registry data show the housing market in England and Wales peaked in November 2007 when the average house price was £182,165 before plummeting 17% to a low of £151,251 in April 2009.
RPC says that a large number of professional negligence claims have already been made since the financial crisis. For example, earlier RPC research found that major professional negligence claims in the High Court against surveyors alone leapt from no cases between 2004 and 2007, to 25 in 2009.
Alexandra Anderson, Partner at RPC, says: “Since the financial crisis, lenders have already been responsible for many ‘blanket notifications’ of an intention to pursue a claim. These notifications have been made to insurers despite the fact that it is uncertain whether they are sufficient to stop the time limit from expiring.”
“With the deadline for financial crisis claims fast approaching, there will probably be one last push from the lenders in the next few months to trigger professional indemnity policies of valuers. Once we reach August and the six year anniversary of the property market peak is reached, insurers may regard the surveyors’ indemnity market as more benign.”