«c Copyright 2015 [Please consult the author] Notice: Changes introduced as a result of publishing processes such as copy-editing and formatting may ...»
This is the author’s version of a work that was submitted/accepted for pub-
lication in the following source:
Cradduck, Lucy M.
Professional indemnity insurance, performance and pre-emptive negli-
gence: The impact of ‘non-claims’. In
Proceedings of the Paciﬁc Rim Real Estate Society 21st Annual Confer-
ence, Paciﬁc Rim Real Estate Society (PRRES), Kuala Lumpur, Malaysia,
This ﬁle was downloaded from: http://eprints.qut.edu.au/83501/ c Copyright 2015 [Please consult the author] Notice: Changes introduced as a result of publishing processes such as copy-editing and formatting may not be reﬂected in this document. For a
deﬁnitive version of this work, please refer to the published source:
21ST ANNUAL PACIFIC-RIM REAL ESTATE SOCIETY CONFERENCEKUALA LUMPUR, MALAYSIA, 18-21 JANUARY 2015
PROFESSIONAL INDEMNITY INSURANCE, PERFORMANCE AND
PRE-EMPTIVE NEGLIGENCE: THE IMPACT OF ‘NON-CLAIMS’
LUCY CRADDUCKFaculty of Law, QUT, Brisbane, Australia
Notification of a potential claim, whether or not the notification crystallises into an actual claim, also can have an impact upon the insured’s claims history and premiums. The Global Financial Crisis continues to impact upon business practices and land transactions both directly and indirectly. The Australian valuation profession is not exempt from this impact. One example of this ongoing impact is reflected in a worrying practice engaged in by some financial institutions in respect of their loan portfolios. That is, even though the mortgagor is not in default, some institutions are pre-emptively issuing notices of demand regarding potential losses. Further, in some instances such demands are based only on mass appraisal valuations without specific consideration being given to the individual lot in question. The author examines the impact of this practice for the valuation profession and seeks to provide guidance for the appropriate handling of such demands.
Keywords: professional indemnity insurance, negligence, valuation practices
INTRODUCTIONWhile Australian valuers are subject to Stated-based, as opposed to a national, licensing regimes, consistently these require professional valuers to maintain a level of professional indemnity insurance in order to practise. This requirement is in addition to those relevant to the acquisition and maintenance of core skills and competency as evidenced by the separate obligations regarding continuing professional development. Maintaining the requisite level of insurance covers imposes a level of obligation that is separate to that enforced by the State-based regulators and professional bodies. A core feature of any insurance cover is that the insured has an obligation to notify their insurance provider of both actual and potential claims. This obligation, as the paper discusses, also is a feature of professional indemnity insurance policies. An actual claim clearly will impact upon future policy acceptance and, if the prospective insured is accepted for ongoing coverage, the premiums paid. Notification of a potential claim, whether or not the notification crystallises into an actual claim, also can have an impact upon the insured’s claims history and premiums.
As Blake and Eves (2012) identified over a number of years financier and investor clients often have ‘knee jerk’ reactions to fluctuating property markets and property prices. This is one issue requiring attention by the professional valuer as many of the identified reactions resulted in litigation against a valuer. Recent reactions by financiers have moved in a slightly different direction. Financiers appear not to be content to wait for losses to crystallise, acting instead pre-emptively. What this paper considers is this more recent and it is suggested more worrying practice as it removes the consideration of issues of liability from the Courts, transferring it instead to insurance companies.
One example of this recent practice by some financial institutions is seen in respect of their commercial loan portfolios.
That is, even though the mortgagor is not in default, some institutions are pre-emptively issuing letters of demand regarding potential losses. This action is based, seemingly, on purely paper values when no mortgagee is in default.
Further, in some instances advised to the author (X, 2014); demands are based only on mass appraisal valuations without specific consideration being given to the individual properties.
The author examines the impact of this practice for the valuation profession and seeks to provide guidance for the appropriate handling of such demands. A detailed consideration of the law of torts in Australia as it relates to valuers, however, is outside the scope of this paper and the reader is directed to other authors1. Further, the issue this paper considers cannot be addressed by capping liability under, for example, the legislatively approved API State schemes.
While this paper considers the GFC’s ongoing affect from an Australian perspective, other jurisdictions’ valuation professions are not immune. The paper commences by providing context for valuer liability by reference to examples. It then identifies an insured valuer’s insurance disclosure obligations by reference to specific professional indemnity insurance policies. After identifying issues of concern it concludes by providing suggestions for future practice.
1 For example see – Blake and Eves, 2012; Boyd and Irons, 2002; Murdoch and Kincaid, 2002.
CONTEXT It is a well establish principle of Australian law that valuers owe a duty of care to parties who seek to rely upon the valuations prepared by them and as such valuers are required “to exercise due skill and diligence” in performing their role (NAB v Hann Nominees Pty Limited  at ). Part of a valuer’s professional duty requires the valuer to consider and account for both positive and negative property factors (Spencer v Cth ). This will require the valuer to inspect the property as part of the valuation process. As such mass appraisals by means of utilisation of on line data only is, it is suggested, only appropriate for valuations used for limited purposes such as land tax or rating calculations.
Use for other purposes, particularly when the client is seeking to hold a professional valuer liable for a loss arising from an alleged diminished value, is questionable.
The extent of the duty owed by the valuer is “largely [to] be determined from the terms of the instructions given to them by their client” (Provident Capital Limited v John Virtue Pty Ltd (No 2)  at ) but may extend to third parties depending on the particular circumstances. More recently, in disciplinary proceedings brought by the Valuers
Registration Board of Queensland the Queensland Civil and Administrative Tribunal observed:
It is settled law that a person such as Mr Conroy owed a duty of care to the person who had requested the valuation. The duty is to take reasonable care as a trained professional valuer to give a reliable informed opinion on the open market value of the land in question at the date of valuation. It is also now settled that a valuer may owe a duty of care to a third party receiving a valuation containing a negligent misstatement which causes economic loss. For example, in this case, the finance company or companies which Mr Conroy acknowledges on the face of the valuations are entitled to rely on the valuations. (internal references omitted) (Valuers Registration Board of Queensland v Conroy t/as Bevan Conroy & Associates Valuers  at ).
The Australian position is consistent with that articulated by courts internationally (Webb Resolutions Ltd v E.Surv Ltd  at ). Simply - valuers will be held accountable for inaccuracies in their reports (Boyd and Irons, 2002). In some instances this translates into involvement in litigation when an affected party, more commonly but not always the party who commissioned the valuation, sues to recover an alleged loss in property value. While history shows that there is a greater propensity for litigation for declined values as a consequence of falling markets (Blake and Eves, 2012), this by itself should not give cause for concern. Valuers, generally, are not liable for subsequently declining property valuers, unless agreed to at the time of accepting the instructions. As McHugh J observed in the High Court’s
judgement in Kenny & Good Pty Ltd v MGICA :
Whether a valuer is liable for a subsequent decline in the market will depend on the terms of the valuation arrangement. Ordinarily, however, the valuer will not be liable for the monetary difference between true value of the property and any lesser price obtained because of a market decline, notwithstanding that declines in market values are reasonably foreseeable in a general way. The reason for this conclusion is that, in so far as a decline in the market was reasonably foreseeable, it will already be factored into the assessment of the true value of property as at the date of valuation. In so far as the market decline was not reasonably foreseeable, any loss arising from the decline must be regarded as outside the contemplation of the parties to the valuation arrangement and not recoverable in an action for negligence or breach of contract. (at ) A certain degree of valuation error is permissible. However, while a degree of error per se has been held not to be a breach of the required duty owed (Flemington Properties Pty Limited v Raine & Horne Commercial Pty Limited and Anor ), whether there was in fact a breach would depend, it is suggested, upon the exact circumstances of the relevant valuation process. A step that would be central to this consideration was whether a physical inspection was undertaken, as well as the advised purpose for the valuation report.
Valuers are acting as professionals when providing valuation reports (Blake and Eves, 2012). This recognition, while imposing obligations, is significant. If a valuer has acted in a professional manner (as described in the relevant Act) then most Australian States and Territories’ civil liabilities legislation provide they will not be held negligent for subsequent loss.2 However, a judicial finding of negligence is not necessary before issues arise. The nature of insurance contracts, particularly those for professional indemnity insurance, are that absent any finding of liability, or any likelihood of such a finding, the insured valuer has enforceable contractual obligations triggered by the actions of their financier client. A failure to fulfil those obligations places the valuer at an unacceptable risk regarding potential loss.
2 Protection is provided by Ss. 5O and 5P Civil Liability Act 2002 (NSW); S. 22. Civil Liability Act 2003 (Qld); S.
41Civil Liability Act 1936 (SA); S. 22 Civil Liability Act 2002 (Tas); and Ss. 59 and 60 Wrongs Act 1958 (Vic).
However, S.5PB Civil Liability Act 2002 (WA) applies similar provisions only for ‘health professionals’; and the Civil Law (Wrongs) Act 2002 (ACT) and Personal Injuries (Liability and Damages) Act 2003 (NT) are silent on this issue.
21st Annual PRRES Conference, Kuala Lumpur, Malaysia, 18-21 January 2015 2
INSURANCE OBLIGATIONSSamples of commonly available professional indemnity insurance policy documents were reviewed in order to better understand the obligations imposed upon professional valuers as the insured party. Two policies will be examined for the purpose of this discussion; however, the policy providers will not be identified. These policies are a general professional indemnity insurance policy (Policy A) and a valuation industry specific policy (Policy B). It is important to note that these policies are indicative only of general practice and it is necessary to specifically review any policy wording carefully to identify the actual notification obligations of the insured under that policy.
Policy A is a general professional indemnity insurance policy that provides cover for loss incurred by the insured party subject to stated exceptions and limitations. Loss is defined to mean payment made pursuant to any legal obligation regarding a claim, as well as the costs of any defence (as defined). Policy A defines claim by reference both to formal legal process and as “the receipt … of any written demand for civil compensation or civil damages or non-monetary civil relief”. The insured has an obligation to provide “written notice” of any claim “as soon as practicable”. Relevant documentation must be provided to the insurance company as soon as possible and in any event not later than 90 days after the end of the period of cover.
Policy B is a policy that is targeted to property valuers and is stated to provide cover (to an agreed maximum) for claims made arising out of conduct by the valuer in breach of their professional duty to their client. The sum insured by the policy extends to include the reasonable costs of investigation and defence of any claim. This policy also is subject to a number of limitations and exclusion provisions as well as requiring the use of specifically worded disclaimer clauses in certain types of valuations.