PII proposals and increased risk in modern conveyancing

The Solicitors Regulation Authority (SRA) is proposing to alter the minimum terms and conditions (MTC) of solicitors’ professional indemnity insurance (PII). Whatever the outcome, when you consider these proposals alongside recent case decisions and the growth in cybercrime and other fraud, they illustrate the financial exposure of conveyancers in stark terms. Whether acting in a straightforward house purchase or more complicated development matters, conveyancers manage risk every day.

In reality, wherever the SRA fixes a minimum, this may not provide adequate protection for a client who suffers an uninsured loss where the firm held responsible does not have sufficient cover to meet all claims.

The minimum level of cover required by the MTC distracts from the overriding question conveyancers must address to safeguard the interests of their firm, employees and clients: what precautions should we adopt to protect our firm from the risks it faces?

The proposals

SRA Code Outcome 7.13 states ‘you must assess and purchase the level of professional indemnity insurance cover that is appropriate for your current and past practice, taking into account potential levels of claim by your clients and others and any alternative arrangements you or your client may make.’

In the new SRA proposed codes, the standard for firms will be ‘you must ensure that the body takes out and maintains indemnity insurance that provides adequate and appropriate cover in respect of the services that you provide.’ The code for solicitors reflects the same standard.

The SRA proposes to reduce the minimum prescribed level of cover, from £2m / £3m for partnerships / alternative business structures and other entities, to £500,000, or a higher minimum of £1m, with no distinction for the type of business structure, but the higher level would apply for what is defined as ‘conveyancing’. This would include:

‘Dealing with transfers, conveyances, leases, contracts, deeds, grants, mortgages, charges, licences and other documents in connection with, and other services ancillary to, the disposition, acquisition or creation of estates or interests in or over land and the sale and purchase of companies whose primary asset is an estate or interest in land.’

The breadth of this definition means that in effect, most firms would require a policy addition for the upper minimum level of cover because of some aspect of the work they undertake.

Most firms would require a policy addition for some aspect of the work they undertake

One of the unappreciated merits of the minimum sum required by SRA is that the regulatory system guarantees a minimum level of protection for future claims whenever a claim is made. Here also lies a deeper problem in the proposals: the level of cover maintained needs to be adequate at the point that the claim is made.

The SRA proposals suggest excluding cover for financial institutions and other large business with turnover above £2m per annum. This threshold is low and almost incapable of proper monitoring (save after the event) by the SRA, firms or clients. Risk-aware clients would consider moving their business to larger firms with higher levels of cover. The market would face a major challenge to maintain confidence in small firms and avert separate representation for lenders.

The minimum level of cover required for run-off is to remain at six years. There would, however, be a limit for total claims over this period: £3m for conveyancing firms and £1.5m for others. Compare this with the current minimum of £2 / 3m for every claim during each year of the run-off period. The new proposed minimum may be insufficient for any substantial conveyancing firm. There does, however, seem to be growing appreciation in the market that insurers should be more nuanced when pricing premiums for run-off, since a firm’s conduct and/or manner of close-down has a clear bearing on claims-handling during the run-off period.

The risks

Solicitors have a primary obligation to protect money held in client accounts. The new, proposed SRA Code phrases this in terms of ‘safeguard[ing] money and assets entrusted to you by clients and others’. It is sobering to think that firms engaged in conveyancing, probate and administration will hold amounts in client accounts throughout the year far in excess of the minimum cover required by the SRA, and the entirety is at risk from cybercrime or fraud. (see the National Cyber Security Centre 2018 report).

Any doubts about the level of risk should be dispelled by the opening figures from SRA’s Risk Outlook of 25 July:

• ‘Money laundering reports up 67 per cent in 15 months
• ‘£47.4m reported losses linked to dubious investment schemes since 2015
• ‘£20m of client money lost to cybercrime across two years.’

Recent case law makes it clear that assessing the amount of cover necessary for adequate protection will be far from simple.

Recent litigation has tended to focus on whether:

1. there is an insured party to meet the claim
2. there is sufficient insurance cover to meet the full amount of the claim in cases of breach of undertaking by reason of solicitor fraud, or some other negligence
3. a loss should fall on the seller’s or buyer’s conveyancers’ cover.

Bogus firms

In a number of cases, conveyancers acting for a buyer have been tricked by someone impersonating the property owner. Schubert Murphy v The Law Society [2014] EWHC 4561 (QB), for example, concerned the loss of purchase money paid to a fake firm that obviously did not have any cover and did not intend to deliver on its undertakings to discharge a mortgage. The buyer’s solicitors’ insurance bore the client buyer’s loss.

In Nationwide v Davisons [2012] EWCA Civ 1626, the buyer obtained registration, but again, a prior charge was not cleared off, as the purchase money had been sent to an imposter. Here, the court gave relief under section 61 of the Trustee Act 1925, so the buyer lost his claim against the solicitors for breach of trust. Claims brought by lenders against buyers’ solicitors succeed in some but not all cases (see Lloyds TSB Plc v Markandan & Uddin [2012] EWCA Civ 65; and Santander UK Plc v RA Legal Solicitors [2013] EWHC 1380 (QB)).

Conveyancers are now familiar with the need to check out their counterparty firm and may do this via more than one source. However, the point of risk has moved on, and hackers may just as commonly pose as a genuine firm or conveyancer.

Figures from the Law Commission report indicate frauds running at a value of around £11m each year (in these cases, fraud is uncovered after the money has been paid but before registration takes place).

Aggregation

Aggregation – where insurers seek to group the claims and group the total sum claimed, to avoid paying each and every claim in full – raises numerous difficulties, leading in many cases to complicated settlements. The SRA’s proposed MTC reduction provides insurers with an opportunity to apply aggregation in many more cases than they presently do.

Every firm needs to assess the potential risk from aggregation which could exhaust the available level of cover

In conveyancing transactions, it is fundamental to understand the risks of accepting any undertakings to discharge mortgages upon completion. In Godiva Mortgages Ltd v Travelers Insurance Company Ltd Willmett Solicitors and ors [2012] EWHC 3615 Comm), a rogue solicitor acting for sellers failed to discharge undertakings relating to mortgages on a number of properties. When the insurers were successful in aggregating the claims, the MTC cover of the seller firm was exceeded, as was the top-up insurance.

Firms should record and internally monitor their outstanding, aggregated total liability to discharge money obligations in aggregate and by fee earner, in order to identify possible problems at an early stage. However, risks outside the conveyancer’s direct control are harder to mitigate. This is relevant when acting for buyers, who may rely on their conveyancer to ensure the seller delivers on the seller’s obligations. When mistakes occur, the buyer’s conveyancer will look to the firm that has breached its undertaking (see Clark and another v Lucas Solicitors LLP [2009] EWHC 1952 (Ch), and Angel Solicitors v Jenkins O’Dowd & Barth [2009] 1 WLR 1220)) and the insurance cover held by that firm.

A risk arises also in cases where conveyancers act for developers of an estate where any negligence or defect in title may affect all buyers, and similarly, where the conveyancer for buyers acts on multiple purchases in the same development.

When considering what may be regarded as one claim, each case turns upon interpretation of the wording in clause 2.5 of the MTC:

1. ‘all claims against any one or more Insured arising from:
   1. one act or omission
   2. one series of related acts or omissions
   3. the same act or omission in a series of related matters or transactions
   4. similar acts or omissions in a series of related matters or transactions and
2. all claims against one or more Insured arising from one matter or transaction will be regarded as one claim.’

The application of this clause is uncertain, as can be seen from the Supreme Court judgment in AIG v Woodman (AIG Europe Ltd v Woodman & Ors [2017] UKSC 18; AIG Europe Limited v OC320301 LLP & Ors [2015] EWHC 2398 (Comm)).

Clearly, every firm needs to assess the potential risk from aggregation which could exhaust the available level of cover. It is impossible for the buyer’s conveyancer to second-guess what cover a seller’s firm would need in the year when a claim might arise.

Seller fraud

In the string of cases featuring Purrunsing v A’Court & Co [2016] EWHC 789 (Ch), and the appeals heard together of P&P Property Ltd v Owen White & Catlin LLP [2018] EWCA Civ 108 and Dreamvar (UK) Ltd v Mishcon De Reya [2018] EWCA Civ 1082, solicitors faced claims in which the seller was an imposter pretending to be the property owner. The underlying question in all three cases was whether the seller’s or buyer’s solicitors’ insurance policy would respond.

The primary responsibility for identifying the true owner of a property to be sold rests with the seller’s conveyancer. It also now appears settled that the buyer’s conveyancer might be interested to be informed that the PII cover held by the seller’s conveyancer exceeds the purchase price. In every claim, interest and costs are incurred in addition to the sum claimed. It is not unreasonable to speculate that, in Dreamvar , the purchase price plus costs might have been close to the minimum level of cover. The amount of cover available could have become an issue if more than one property had been included in the same transaction – or if the new, lower SRA minimum had been the only cover to respond.

Conveyancers need to consider each year a composite of risk factors 

However, the buyer will not know in what circumstances or which insurance year a claim might be made against the seller conveyancer’s policy, or whether cover will be adequate when such a claim is made. Nor can they know whether the insurers will be in a position to seek to aggregate it with other claims, which might then result in cover proving to be insufficient. 

The profession should be familiar with the red flags in litigated cases involving high value, empty or tenanted property, expedited sales, payment of proceeds abroad and so on (see the Law Society mortgage fraud practice note, and the joint Law Society and HM Land Registry note). Also note the interim position issued by the Law Society following the Dreamvar decision.

Very little of the circumstantial background detail (such as banking of the proceeds, the negotiation process, recovery or relationships between sellers and buyers) was discussed in the judgments above. As fraud evolves – and if preventive measures are to be effective – conveyancers may wish to collect more background information on all instructions.

There was a time when the owner of a property returned to the solicitor who acted on the purchase. This established a nexus between ownership and the possession of deeds. While land registration guarantees title for the person on the register, the process of registering a dealing follows after the physical completion, which leaves the burden firmly with the buyer’s conveyancer. Land Registry policy of early completion also leaves conveyancers with the risk of discharging prior charges.

How to mitigate the risks for your firm – some practice points

1. SRA minimum requirements do not determine the overriding objective of self-preservation to give protection for employees and clients.
2. Acting for the same client on multiple transactions in relation to an estate increases the risk of multiple error.
3. Acting for buyers in the same development attracts similar risks.
4. Ensuring that sale proceeds are sufficient to pay off all mortgages and that a credible undertaking is held remain fundamental.
5. Extend anti-money laundering diligence so that your firm has multiple cross-checks even where clients present documents face-to-face.
6. As part of your risk assessment, challenge the background information provided in relation to the transaction. If the sellers are in occupation and meet with agents and buyers, this will provide a measure of assurance on several red flags.
7. Identify and evaluate not only clients but also validate other parties and players in the transaction.

The warning is clear: in order to protect against claims from clients past, present and future, conveyancers need to consider each year a composite of risk factors when fixing their insurance requirements.