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WATCH YOUR BACK AGAINST FRAUD AND ……. YOUR INSURER?

AN ARTICLE by Peter Scrafton FIRRV, FCIArb, MRSA(Hon) Solicitor (Non-Practising)

September 2011.

On 20th July a slightly unusual event took place in the High Court in Birmingham when Mortgages Plc and Mortgages 1 Ltd served Notice of Discontinuance of their action numbered 0BM30423 against Edward Rodgers FRICS IRRV for the alleged carrying out negligent house valuations or mortgage faculties in 2006. What was unusual about the discontinuance was its timing: there had been a four day substantive hearing with expert witnesses’ reports, and witness statements of fact, bundles of documents, skeleton arguments and the whole performance and the case had been adjourned until 1st August for closing speeches to be delivered and judgment to be given. The withdrawal took place days before the claimants’ closing argument was ordered to be filed.

This is more than just a little victory for the sole practitioner by reason of the way in which the claimants went about their action. Ordinarily, one would have expected them to have sued the company of which Mr Rodgers and two others were the directors. Instead, the claimants sued the directors individually – which is possible but rather harder to make “stick”. As it happens, the other two directors caved in relatively quickly (they seem to have had their own reasons); and the claimants achieved judgments against them for a total of £45,000, leaving them to turn their wrath on the surviving defendant, whom they proceeded to attack for the balance of the original claim of over £700,000, which claim was reduced to something like £330,000, in fairly short order.

One of the points for surveyors to watch is the tactic employed by claimants before they issued their various claims. What these people did was to noise it abroad in the insurance fraternity that they were about to commence negligence proceedings against a surveying practice within which practised an individual who had been, at the time when the allegedly negligent acts were committed, been a principal in the surveying practice within which the allegedly negligent acts were committed. The earlier practice had been wound up by the time the claims were notified to the new practice’s insurer Although there had been no proof of negligence offered, this notification caused the insurer to cancel professional indemnity cover, forthwith and to refuse renewal; and it prevented the individuals affected from obtaining cover elsewhere either that year or in subsequent years. This brought about the closure, without doubt, of this defendant’s practice. Undeterred, the mortgage lenders sued the three former directors of the earlier (and by then dissolved) practice company.

Without going into details of the case in all of its particulars, the claim was that a duty of care was owed by the individual valuers (rather than their parent organisations) to the mortgage lenders, when the valuations were commissioned by brokers and packagers, where s13 Building Societies Act did not apply and even though the lenders had no contact with the individual surveyors at all.

Although his two former fellow-directors settled the claims against them for an aggregate amount of les than 5% of the sum mentioned in the claim, Mr Rodgers, being made of sterner stuff, resolved to resist and has devoted something like two and a half years of his life and energy to taking on and beating these claims which he has now done. He is now proceeding to recover his costs and to look at ways in which he may both seek to rehabilitate himself with the insurance market (in order that he may work professionally again) and to secure compensation for the losses which he has sustained as a result of the action brought by Mortgages Plc and Mortgages 1 Ltd.

Apparently, the chartered surveyors’ professional indemnity insurance market is run in a somewhat different way from that of other insurance markets. If, for example one were a solicitor or an accountant being sued, then, if the circumstances giving rise to the claim arose in (let us say) year 1, but the claim was not issued in court until year 4, then I understand that the insurer in year 1 would be liable to deal with the claim. This is not so with chartered surveyors. In order for an insurer to be liable, the circumstances giving rise to a claim and the issue of that claim must arise in the same insurance year. There is, it seems, a kind of retrospective “run off” cover in these policies, so if current cover is cancelled, the “runoff” cover goes with it - and this was the route which the claimants were able to exploit in order to remove financial security from those against whom they wished to proceed.

Accordingly, a defendant in the position of Mr Rodgers finds himself uninsured and heavily exposed. Mr Rodgers was obliged to raise a mortgage on his home and generate to scratch around (but not to practise doing any of the work reserved to a chartered surveyor whether by the Red Book or otherwise), until the matter was dealt with. He has also had to borrow from family in order to keep going.

This strikes me as being a wholly unacceptable approach to professional indemnity cover which seems to be unique to the contracts recommended by RICS. If I have misunderstood this, or if you have any experience yourself of being on the wrong end of a claim like this, please do write and let me know. I am aware that there are other surveyors whose careers as valuers have been terminated by claims of this nature.

Quite a few surveyors seem to think that what has happened to Mr Rodgers couldn’t possibly happen to them. They are wrong. There was a recent case in which a rating surveyor agreed the assessment of an office building in the centre of a large town. The surveyor was understandably quite pleased with himself by having persuaded the Valuation Office Agency to reduce the assessment by 10%. It subsequently emerged (and in fairness neither the surveyor then acting nor the Valuation Officer had realised this) that the building fell, for certain reasons, to be treated as exempt from rating. After a lot of heavy of negotiation with the denizens of Wingate House, the new rating valuer (as it happens Mr Rodgers!) secured the exemption of the building and the backdating of that exemption so as to give the ratepayer a refund of over £500,000 and, incidentally, to let the negligent surveyor off the hook.

This is but one example; but had the exemption been discovered at a later date and had it not been capable of being backdated as and when it was backdated, then the original surveyor could have found himself, some years down the line, with a claim against him for £500,000 and an insurer smiling benignly but shaking his head and saying that cover had expired and would not now be renewed.

Do not think that real property fraud is going away. We know of the lady surveyor recently sent down for ten years, and of the troubles within the City valuations department at a well-known and highly-respected firm of surveyors. It is reported that a prominent Association footballer has filed a bankruptcy petition after discovering that he has been the victim of a property fraud. Then, it emerged that Barclays Bank and its private client arm are suing a number of mortgage brokers, valuers, solicitors and guarantors over an alleged mortgage fraud which they claim has cost them £12.7m.

Barclays might want to talk to Mr Rodgers, whose own efforts to interest West Midlands Police in what he saw as the fraudulent elements in his cases, proved futile, as he had not, as they said, lost anything. Oh no? Did you know that a litigant in person is limited by Court Practice Direction to a recovery rate of £9.25ph, unless he/she can show some apparently unprovable circumstances. Now that Mortgages Plc and Mortgages 1 Ltd have seen fit to report matters to the constabulary, more interest might be taken. In fairness to the lenders, they now admit that Mr Rodgers may have suffered, albeit indirectly, from the frauds which they now allege.

What of the insurers? I do not wish to imply for one moment that they have been party, in any way, to any of these frauds. I do suggest, though, that the tendency to settle cases without investigating the facts fully, often in the face of their policyholders’ wishes, has caused a deal of suffering, as well as the payment of claims arising from fraud.

I am keeping a close eye on this issue. Watch out for the seminar in the New Year…. I’ll be speaking!

Peter Scrafton

©J.P. Scrafton, 2011

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