Professional Indemnity Insurance for Property Valuers

This article sets out the nuances of professional indemnity cover for property valuers. It identifies key issues for valuers to navigate insurance cover that is:

1. Adequate (compliant with laws and regulations)
2. Appropriate (responsive in the event of a claim)
3. Cost effective (competitively priced).

Professional indemnity for property valuers

The cover generally provided by professional indemnity policies is set out here.

For valuers, professional indemnity policies cover  any alleged or actual liability that may arise from undertaking valuations. The indemnity available under such policies includes cover for legal defence costs, and if the valuer is found liable, will also cover damages (including claimant’s legal costs and expenses).

Critically, professional indemnity polices are written on a “claims made” basis. This means the policy responds to facts, matters and “circumstances”, and any “claim” which the valuation practice becomes aware of and is notified to its insurers during the period of insurance.

Relevantly, “circumstances” are indications that a “claim” (a written demand for compensation alleging failure to properly perform a valuation) is likely to, or may materialise based on the belief of a reasonable person in the same situation. This distinction is important for the purposes of complying with disclosure obligations to notify insurers under a policy, namely the terms and conditions of the policy at the time of notification – not the terms and conditions of the policy which was in place when the valuation was performed.

It is critical for valuers to understand the nuances of “claims made” contracts. The claims made nature of professional indemnity presents some tricky issues to navigate for valuers. Particularly where there has been a trend in changing “valuers” extensions, exclusions and conditions applied by insurers. For valuation practices that consistently change insurers, this issue is even further exacerbated.

Structure of professional indemnity products for valuers

Every insurer has its own suite of insurance products. Each insurer provides different policy language and policy structure conferring different obligations and benefits to policyholders. Every valuation firm may indeed also have its own terms and conditions specific to its risk profile. Property valuers’ professional indemnity products are ordinarily structured in two ways:

1. Bespoke wordings relevant to valuers’ risk that are incorporated in the body of the policy extensions, exclusions from cover, and conditions required to be met for cover to enliven.
2. A standard or “miscellaneous” professional indemnity policy that has added “endorsements”. Each endorsement applies exclusions, extensions and conditions to the existing policy wording.

It is important to understand the scope of “valuers specific” endorsements that are applied by insurers,particularly in light of the claims made nature of professional indemnity insurance.

Adequacy: compliance with law and regulations

The Australian Property Institute Valuers Limited (APIV), a professional membership organisation for property professionals, created the Professional Standards Scheme (‘the Scheme’) which sets out the insurance obligations for valuers. That guidance is available here. The APIV standards apply nationally and where a claim is made successfully under the Scheme it operates to cap liability of the valuer.

In administering the Scheme, APIV must ensure minimum insurance standards are adhered to. Compliance with such is required in order for corporate and participating members to be the beneficiary of the Scheme in the event of a claim.

It is a common misconception that insurers who underwrite valuers’ professional indemnity mirror or maintain the requirements set by the APIV. They do not. Many of the policies we have reviewed do not comply with the minimum requirements mandated by the Scheme.

The following are issues to consider by valuation firms in the context of minimum insurance requirements set by APIV:

1. Scope of cover

Policies must indemnify against ‘Occupational Liability,’ meaning civil liability arising (in tort, contract or otherwise) directly or vicariously through its employees or subcontractors from anything done, or omitted, to be done in the performance of the relevant ‘Occupation’ and ‘Occupational Services.’ The key consideration here for policyholders is whether or not the definition of ‘Professional Services’ within their policies adequately covers the work performed so as to meet the meaning under the Scheme Instrument. We regularly review policies with insufficient Professional Services definitions, which fall foul of the minimum standards, and therefore have the ability to not only prejudice claims outcomes, but also the policyholder’s ability to benefit under the Scheme.

2. Policy limit (‘limit of indemnity’)

The Scheme imposes a minimum limit of indemnity that members are required to hold, being $1,000,000. In addition to the minimum standard, the Scheme then provides a tiered style limit requirement on members, which is determined pursuant to the assessed value or indicative values, or category of valuation, as below:

The following restrictions may vary the minimum limit of indemnity requirements for policyholders under the above tiered approach:

1. The Scheme requires that a policy contains at least one automatic reinstatement or has an aggregate limit of indemnity which is two times the amount required to comply with the minimums as identified above.
2. The Scheme requires that where the policy is costs inclusive, the minimum limit of indemnity is required to be increased by $500,000.
3. The Scheme requires that where a policy is written on a ‘costs in addition basis’, it must contain a defence costs sub-limit of no less than $500,000

3. Excess / deductible structure

Similarly to the above, the Scheme imposes a tiered excess structure, which provides the maximum excess a firm can have, determined according to their annual fees, as below:

Further, prudent policyholders should ensure that their policy provides a requisite aggregation clause in respect of claims for connected/interrelated claims.

4. Retroactive date

Policyholders must ensure that their policies are not impacted by the imposition retroactive dates, which restrict cover for the insured services to be provided to after the commencement of the policy.

5. Relevant insured persons

The Scheme requires that policies provide indemnity to relevant persons within the insured organisation. These being any past, present or future partners/employees and any office holders of the insured.

6. Relevant persons and sub-contractors

The Scheme imposes that all present officers, partners and employees (who are eligible) are participating members of APIV. This requirement is also extended to sub-contractors of the insured, however there is an additional nuance requiring policyholders to ensure that sub-contractors are the beneficiaries of a professional indemnity policy which also complies with the minimum APIV standards.

Appropriateness: Insurers and markets

Valuers are obliged to hold cover with an insurer who is regulated and/or authorised by APRA under the Insurance Act 1973 (Cth) to write professional indemnity insurance in Australia. There are very few exemptions to this requirement, where policies can be placed with unauthorised foreign insurers.

Further, policyholders must be cognisant of exclusion clauses which could result in their policies failing to cover material portions of claims likely to be made against them. The following are exclusions that may impact the minimum insurance requirements:

1. Non-Bank Lending

• With the rise of private credit in Australia non-bank lending exclusions are something that policyholders need to be acutely aware of.
• Exclusions in relation to non-bank lenders are typically imposed by way of clauses utilising language which exclude claims in relation to valuations provided to ‘managed investment schemes,’ ‘non-ADI approved entities’ and for the purposes of ‘primary investment production.’
• We have seen these exclusions remedied with a writeback, which insists valuers, where undertaking work for said purposes, include a ‘prudent lender’ clause in their reports. It is important policyholders are aware of any conditions of cover such as the insertion of ‘prudent lender’ clauses and amend practices accordingly. We direct policyholders to the APIV Insurance Standards which provides the recommended writeback clause.

2. Property development and ‘as if complete’ valuations

• Broad exclusions and specific conditions in relation to property developments, particularly those which are conducted on an ‘as if complete’ basis are commonly imposed on valuers’ policies.
• These clauses have been widely implemented due to the considerable claims against valuers mostly in the context of exacerbated “as if complete” valuation amounts on failed developments. Notably “development”, “planning”, “construction”, “selling” and “agent” risk are all considerable factors as to why insurers have limited appetite for exposure to this work.
• It is critical that policyholders consult their policies to ensure they are aware of and adjust practices to comply with conditions imposed by insurers on these forms of valuations.

3. Delayed valuations

• Delayed valuation exclusion clauses are similarly drafted on a threshold basis. Whereby, commonly valuation reports provided to instructors more than 90 days (by way of example) are excluded from cover.
• Writebacks to said exclusions typically will require the imposition of a ‘market movement’ clause to be inserted in valuation reports which clearly articulates the risks associated with reliance upon the valuation given the circumstances under which it has been conducted. We direct policyholders to the APIV Insurance Standards which provides their recommended market movement clause.
• Again, it is critical that policyholders consult their policies to ensure they are aware of and adjust practices to comply with any such conditions.

4. Assigned valuations

• The intention of an assigned valuation exclusion follows a similar approach as the delayed valuations exclusion, insofar as that insurers foresee risk in the re-utilisation of dated valuations which are provided to instructors well past the inspection date.
• Writebacks to said exclusions will typically require the imposition of an ‘assigned valuation’ clause to be inserted in the valuation report which clearly articulates the risks associated with reliance upon the valuation given the circumstances it has been conducted. We direct policyholders to the APIV Insurance Standards which provides recommended writeback clauses, along with the requisite practices that policyholders must follow to ensure compliance with said clause.

5. Revenue projections

• The intent of revenue projection exclusionary clauses is to exclude guarantees or warranties of future valuations. However, we continue to observe broadly drafted language which inadvertently extends the ability of insurers to rely on the wording to exclude claims for ‘information or opinions regarding revenue projects and/or forecasting,’ including ‘possible investment returns.’

6. Investment advice

• Investment advice exclusions, where drafted broadly – which is the case in many instances – may allow insurers to exclude claims brought where a valuation has been utilised for the purposes of assessing feasibility of investments. An example of this is where a valuer proposes an opinion of an assessed value, which is then relied upon by a fund for the solicitation of investments.
• Broad language to be aware of, and relevant to the example above, is where the exclusion contains language such as ‘arising out of or in any way connected with investment advice.’

7. Solicitors & accountants loans

• Certain policies contain threshold exclusions in respect of valuations completed for the purposes of loans provided to solicitors and/or accountants. Generally, solicitors and accountants are offered high Loan to Value (‘LVR’) loans through lending institutions – up to 90%. We have sighted policies which contain an LVR threshold in relation to these loans of 70-80%.
• Whilst we consider these forms of exclusions to be inappropriate and less common, where they are applied, it is critical that policyholders consult their policies to ensure they are aware of and adjust practices to comply with conditions imposed by insurers on these forms of valuations.

8. Restricted assessments

• We have observed policies which contain exclusions which impose conditions upon certain forms of ‘restricted assessments,’specifically being Kerbside Valuations and/or Desktop Valuations.
• Said exclusions generally impose requirements that these forms of ‘restricted assessments’ are completed in strict compliance with APIV or other standards.
• Whilst policyholders should always be compliant with the requisite standard, it is critical to be aware that an inadvertent breach of such resulting in a loss, may be impacted by an exclusion of this nature

9. Consumer protection legislation

• We continue to see exclusions with broad language for breaches of misleading and deceptive conduct provisions under the Australian Consumer Law. Policyholders need to be aware that these broad total exclusionary clauses will place them in breach of the APIV requirements.
• Policies should be reviewed to ensure that they contain language which expressly provides cover for unintentional breaches.

10. Intellectual property

• Given that banks often require the assignment of intellectual property rights for valuation reports conducted at their instruction, policyholders need to be aware as to exclusions for breaches of such.
• At a minimum, cover should be afforded for inadvertent and unintentional breaches.

Directions for valuers

It is paramount to have a specialist intermediary accountable to review coverage and provide objective advice to the valuation firm.

Our unique methodology enables valuation firms to truly understand risk, identify its own risk maturity and in doing so create a pathway to informed risk management and risk transfer.

If the firm has more than one intermediary advising it, then the accountability of the intermediary wanes, and may even be ineffective. Each intermediary can only advise on the coverage it has negotiated: where two intermediaries advise on different offers then the client is picking the intermediary; it is not getting advice as to the most adequate, appropriate and cost-effective insurance coverage.

Select an intermediary to represent you – Contact a Bellrock Advisor to discuss your requirements.

For more information on this topic please review the following articles:
Why having one, exclusively appointed intermediary gets you a better deal in the insurance market;
How to select an appropriate general insurance intermediary.