Risk Management Module 2015 - The Next Steps
Five Things You Can Do to Eliminate
1Liability Risk for Valuers
By David Leggatt, Partner, DLA Piper Australia in conjunction with DLA Piper Australia Partners Nationally2
Table of Contents
1.
Introduction ... 2
2.
The Basics of Legal Liability for Valuers ... 3
3.
Scope and Purpose, Why It's So Important ... 5
4.
Report Writing - Qualifications and Disclaimers ... 10
5.
Proportionate Liability and the Capped Liability Scheme ... 11
6.
APIV Claims Data - Common Problems and Current Issues ... 17
7.
Common Problems ... 20
8.
The Key Three Steps to Clarity and Reason ... 22
1
Almost
2
1. Introduction
1.1. The Risk Management Module (RMM) commenced for valuers in 2003. It was an initiative of Lindsay Joyce, a former valuer, and, partner of Phillips Fox now DLA Piper Australia. Lindsay is the author of Valuers Liability in Australia which remains the definitive text that covers this field. Lindsay was also the primary author of the "RMM Document" which is available for download on the API website3 which deals comprehensively with all legal issues relating to valuers. For
lawyers and valuers alike, that document is everything a valuer, lawyer and insurer needs to know about the legal liability of valuers in Australia.
1.2. This document has been prepared at the request of the API, to provide a concise summary of the practical steps valuers personally and through their businesses, can take to manage their liability risk. It is mandatory reading for those completing RMM 2015.
1.3. My colleagues and I have had the good fortune of acting for valuers for well over 20 years in hundreds of litigated cases and occasionally disciplinary hearings. People, who attend the face to face sessions for RMM 2015, will see video feedback from clients and senior valuers which shows how important valuers are to business in Australia, but also how highly regarded good valuers are. Like all professions, the valuation profession is difficult. It requires courage, endless curiosity and an unwavering desire to get it right.
1.4. For the last 12 years, the RMM has been conducted amidst enormous changes in the valuation industry. In truth, the valuation profession was all but uninsurable during the late 1990s as litigated cases against valuers following "the recession we had to have" consumed all insurance capacity in the Australian market. Since 2003, we have seen significant legislative amendments to address that unfunded liability risk, but also a huge consolidation of valuation firms which has altered the market considerably and, dare I say, improved valuation standards and the
profession's negotiating position with clients.
1.5. Presently, Australia has an increasingly diverse and difficult asset class, exciting technological innovations and more than ever, the need for an independent voice of reason in property finance transactions and commercial reporting, and, well, property generally.
1.6. What this paper endeavours to achieve is to address the three fundamentals of managing legal liability which should be just as relevant in the next 12 years, as they have been in the last 12. They are:
Exclude as much liability risk as possible in your retainer agreement;
be crystal clear about the scope and Purpose of any job you do;
don't Assume your client's risk - use clear qualifications and disclaimers in a clear report you're proud of.
"EPA" if you need a hook.
2. The Basics of Legal Liability for Valuers
2.1. Before you can understand how effective each of these steps outlined above will be, you need a basic grasp of how a Judge will decide a case brought against you.
2.2. The vast majority of cases against valuers have three limbs. They are:
A contract claim, alleging breach of an implied term to take reasonable care.
A misleading and deceptive conduct claim4 for representing your opinion as competent, when reasonable care was not taken.
A negligence claim, which alleges that the work done by you fell below a reasonable standard of care.
2.3. Lawyers call each of these types of claims contract, misleading & deceptive conduct and negligence separate causes of action. At the heart of all these claims, is the same issue an alleged lack of reasonable care. There are volumes of jurisprudence on what constitutes the standard of care to be expected of the professional person. In Australia, legislative reforms that commenced in 2005 in each State, have now provided various statutory definitions. The key points are:
The standard of care is to be determined by expert evidence. Guidelines are important, but not definitive.
The expert evidence must examine the relevant circumstances as at the date of the alleged negligence and not a later date.
A professional is not negligent if the manner in which the professional service was provided, was widely accepted in Australia as competent professional practice5.
Expert evidence
2.4. Expert evidence is critical in assessing whether or not a claim against a valuer is going to
succeed. In practical terms, there is a relatively easy test for any valuer who is just about sign off on a report. It is to ask this question - "If I gave this report to my colleagues at a RMM, would most of them consider it to be a reasonable job or not?"
2.5. It is at this point that the valuation profession has its biggest cultural problem. A number of valuers acting reasonably can have vastly different opinions as to the value of a particular asset. Obviously the more volatile the asset, the wider the variety of opinion. There is not a problem with that. For many property assets, reasonable minds can differ significantly. Unfortunately, both valuers and clients alike, tend to hold opinions of value quite passionately, such that anyone who expresses a different opinion is usually "on drugs", "an idiot" and, most certainly, "negligent".
2.6. Of course this is not the case and more maturity is required. There is no so called "10% rule". Anyone who does compensation cases would know that if valuers are starting within 200% of each other, you are doing well. Each case turns on its own facts. The critical issue is whether or not the opinion reached by the valuer is reasoned. In other words, has the valuer done the same job you would expect and reached a different conclusion? If so, that is a competent job and reasonable care has been exercised even though the opinion expressed might be vastly different to your own.
2.7. On this score, the Australian Valuation Standards Board has just issued a technical information paper which contains guidelines to valuers when giving retrospective opinions which critique the work of another valuer6. The simple message is that in doing such a job, you need to work hard to put yourself in the shoes of the valuer at the time. That is difficult if you were not working in that market at the relevant time. It is also not your role to find fault. The face to face RMM presentations have an excellent video summary from senior valuer Mr Chris Torr, which cogently sets out the proper approach valuers should take when conducting a retrospective critique of a colleague's work. Notably, if Mr Torr is instructed to provide a retrospective opinion, he spends 5
Section 59 Wrongs Act 1958 (Vic); Section 22 Civil Liability Act 2003 (Qld); Section 5O Civil Liability Act 2002 (NSW); Section 42 Civil Law
(Wrongs) Act 2002 (ACT) and Civil Liability Act 2002 (Tas); Section 41 Civil Liability Act 1936 (SA).
two days reading newspaper articles from the relevant time, to recreate in his mind, the market sentiment at the time.
2.8. Avoiding hindsight is therefore extremely difficult. This also makes it extremely easy for expert valuers, often many years after the fact when a property asset has sold at a fraction of a previous valuation, to find fault with the valuation. This has created a culture whereby most lenders have the following checklist when exercising their powers as mortgagee:
Take possession.
Sell property after reasonable marketing campaign.
Bankrupt borrowers and guarantors.
Sue valuer for any shortfall.
2.9. The prevailing view of lenders, is that if the property sells for less than the amount advanced pursuant to a prudent loan to value ratio, then the valuer must have got it wrong. It is then a relatively easy step to obtain a retrospective opinion from a valuer - which will almost certainly be effected by hindsight - that then leads to a claim and many, many thousands of dollars spent obtaining more balanced retrospective opinions that avoid hindsight.
2.10. This is not to say that valuers should decline requests from clients to conduct an expert critique of another valuation on a retrospective basis. Just do it properly. The API has introduced courses for valuers undertaking expert work that is likely to lead to court appearances. It is normally recommended that any valuer wishing to do this work, should undertake that course. And the level of skill requires, means it should not be undertaken by anyone under CPV status.
3. Scope and Purpose, Why It's So Important
3.1. Given the pressure that is put on valuers by clients and colleagues alike when a client suffers a loss, the critical issue at that time when a client is deciding to sue you or not, will be how well your valuation report reads. You want your client to say "yes I suffered a loss, but this was a reasonable report and it’s not the valuer's fault."
3.2. A critical feature of a good report and also good risk management is being clear about scope and purpose. In other words, the report should be clear in establishing:
exactly who your client was (and was not); and
3.3. For example, if an accounting firm asks you to do a valuation of a subject property, find out who their client is and exactly why they need the report. If a bank asks you to do a valuation for a "syndicate of lenders" you need to find out who the syndicate is and who is taking all the risk. If the syndicate includes overseas banks, it is likely that you will not have insurance to cover a claim by an overseas entity, particularly one based in the US.
3.4. You just have to know who your client is, by name and address. Insofar as you can, "one report, one client" is obviously the most desirable. Giving the same report to a range of different clients obviously increases the risk.
3.5. As to the purpose of the valuation, generally valuations are for the following purposes:
First mortgage purposes.
Financial reporting.
Dispute resolution (rental determinations, family law disputes, shareholder disputes).
Acquisition.
Disposal usually mortgagee in possession work.
Expert opinion for use in legal proceedings.
From a private client seeking to obtain finance.
3.6. Expert determinations pose the highest risk, followed closely by valuations for mortgage purposes. Where valuations for mortgage purposes are concerned, development sites are the riskiest asset class by far. Add to this a second tier (or below) lender, and you comfortably have the highest risk area. The other types of valuation barely feature in the claims activity,
particularly as the valuation profession is now accustomed to doing any dispute resolution work on a hold harmless basis.
3.7. Once you are clear on scope and purpose, then you have assessed the risk properly. Confusion with clients is the enemy of any professional practice. Clarity of communication is the hallmark of any expert professional and in valuation practice, it is critical.
3.8. The problematic claims valuers have experienced over the last few years bear this out. For example:
purpose of the valuation. Had he known, he should have done the job pursuant to a hold harmless clause as he was providing an expert determination.
Providing a market valuation of a development site, when the financier was actually
providing construction finance and advancing over 500% of the current market value. Whilst the scope was understood because the identity of the financier was clear, the purpose was not, because the valuation was used to fund construction finance, rather than lend a proportion of the current market value.
3.9. Once the scope and purpose is sorted out, then you have the risk profile sorted out. You can now approach the job accordingly.
Expert determination work
3.10. For expert determination work, all valuers should conduct this work on a no liability basis. Example retainers are available on the API website as part of the RMM materials7 and, for example, the Small Business Commissioner in Victoria at least, has recommended release and indemnity clauses for valuers doing rental determination work.8 In providing an expert
determination, you are effectively acting judicially. Put simply, you cannot sue judges for making decisions. Similarly, you should not be able to sue an expert valuer for providing a
determination. There are avenues to overturn a determination, but that is something that can happen without the valuer being involved, or incurring any liability or legal costs.
Limitation of liability clauses
3.11. The other risk management tool you can use is a limitation of liability clause. Any professional dealing with a sophisticated client, which valuers almost always have, can limit their liability to, say, $1, a refund of fees, $20,000, $39,220, $1,000,000, $3,000,000 etc. It is a sensible
discussion to have with high risk clients, particularly when you are undertaking high risk work. These clients need a valuation report from a reputable firm, to have credibility with investors. They need you more than you need them. A sample retainer agreement whereby you can significantly limit your risk is part of the RMM resource materials.9
7 http://www.api.org.au/menuitem/professional-development/risk-management-modules-resources 8 Link to Small Business Commissioner's website.
3.12. The option to limit your liability by contract, is not to be confused with the statutory cap you have on your liability pursuant to the Capped Liability Scheme (if you are a member of the APIV). More on that later.
Loss and damage claimed in legal proceedings against valuers
3.13. As the vast majority of claims concern valuations for mortgage purposes, I will only deal with assessment of damages in those cases. The purpose of this exercise is to show you how unfeasibly large these claims can become despite relatively minor errors.
3.14. The overriding principle of a claim for damages, is to put a plaintiff in the position they would have been in but for the lack of reasonable care on the part of the valuer. A common scenario is as follows:
Assume a valuer prepares a PropertyPro format valuation dated 1 August 2010. The valuation is for $1,150,000 and is provided to a private lender. The lender has a portfolio of loans of some $30 to $50 million. The lender advances 65% against the market value expressed in the report, which is rounded up to $750,000.
The interest rate is 13% and the loan is provided for 12 months interest only. Some $90,000 in interest is prepaid and the sum of $660,000 is drawn down by the borrower. Twelve months later, on 1 August 2011, the borrower misses the first payment and the lender takes possession. An extensive battle between the borrower and lender ensues, which it often does as between second and third tier lenders. The lender spends $100,000 in legal fees taking possession of the property, then spends another $50,000 on agent's fees and advertising selling the property. The sale is completed by 1 August 2014. The property is sold for $700,000, which is significantly less than the valuation of $1,150,000 three years earlier.
The loss of principal is only $50,000 10. The lender obtains a retrospective opinion from another expert, who criticises the valuation report and says it should never have been valued at more than $700,000. The lender argues that it:
would not have entered into the transaction had it received a "proper" valuation; and usually earns a net 11% return on money advanced under its mortgage portfolio.
The claim for damages is then presented as follows:
Item Amount
Loss of principal $50,000
Sale costs $50,000
Legal costs in taking possession $100,000
Interest on loss of opportunity on investing $750,000 at 11%
since 1 August 2010 on another transaction (now 4 years ago) $330,000
Less interest paid by borrower $90,000
Total … $420,000
That is a ridiculously high claim for a valuation done in PropertyPro format for about $300 to $400. There are many arguments your defence lawyers can raise to reduce the damages claim, but you can see why your clients are incentivised to sue you. Claims like this resemble a magic pudding because lawyers advising high risk lenders have a gift that keeps on giving - fees on the initial transaction; fees on recovery action against the borrower and now the joy of suing you.
3.15. In short, if you are going to do work for high risk lenders, and you should know who they are,11 then you can limit your liability by not working for them. But if you do want to service this asset class, you can structure your retainer agreement on a cascading basis (often called a waterfall clause) that seeks to:
Provide a full release from liability, so that you are doing all work on a fully hold harmless basis;
Limit your liability to a capped figure; and/or
Expressly agree with your client that they cannot pursue you for any claims for "loss of opportunity" or "loss of use" interest.12
11 If you don't, do your profession a favour, stop valuing and get a job in IT
4. Report Writing - Qualifications and Disclaimers
4.1. Disclaimers and qualifications are two very simple, but frequently misunderstood concepts. They are not some legalese compressed in eight point font at the conclusion of a report which operate as a "get out of jail" clause for any mistakes you make.
Disclaimers
4.2. A disclaimer has one purpose only. It is to say who your client is and who your client is not. You do not need a lawyer to draft a disclaimer for you. Here are some examples:
This report is confidential and solely for the use of XYZ Pty Ltd. It is not to be read or relied upon by anyone else.
This report has been prepared for Mortgage Broker Pty Ltd. Whilst we understand that Mortgage Broker Pty Ltd will show this report to its client and also to potential lenders, we accept no responsibility to any other party. If you are not Mortgage Broker Pty Ltd, you are not to rely on this report for any purpose, unless you have expressly instructed us in writing and received a report that is expressly addressed to you.
This report is addressed solely for the use of the Bank. Whilst we anticipate that this report will be shown to other lenders for the purposes of syndication, we do not accept
responsibility to any other party other than the Bank. Any syndicated lender wishing to instruct us, should do so in writing and request a report to be addressed specifically to them. 4.3. The ways to effectively communicate this message are limitless. Obviously the disclaimer clause
needs to be consistent with your quotation, retainer letter and report.
Qualifications
4.4. A qualification is again a very simple concept. It is a key part of your report writing, not legalese. It is a way for you to clearly spell out the risk your client is taking, rather than take on the risk yourself.
4.5. For example:
are wrong your valuation figure is likely to be significantly different. Say this in your report, in simple language. Make sure your client appreciates the risk13;
You have been provided with details of construction costs from a builder, that have not been vetted by a quantity surveyor. Explain that if the construction costs are higher than you have assumed, the current market value of the property could be significantly impacted.
A farmer advises you of the amount of cropping land on a property. Explain that you have relied on those instructions and cannot verify them without the benefit of an agricultural report. Explain that your opinion of value could be significantly different if the amount of crop and land turns out to be less than what you have been instructed.
4.6. Again the list is limitless. These are not clauses for lawyers to draft on your behalf. They are for you to get right. There is quite a bit of case law on what qualifications should do, but really it is common sense. For you, a qualification should leave your reader in no doubt about:
what you have done;
what you have not done (and why);
the limitations on your opinion; and
what your client can do to address that risk.14
5. Proportionate Liability and the Capped Liability Scheme
5.1. On 15 February 2001, Australia's biggest insurer, HIH, went into liquidation. A few months later, the terrorist attacks in September 2011 created significant claims on the insurance market. Insurance premiums spiked significantly.
5.2. In Australia, Trowbridge Consulting prepared a report for government on the insurance industry and in particular, its affordability. Most of the publicity around this review, related to personal injury cases and the availability of insurance for recreational businesses like horse riding camps. Doctors also wanted the ability to say "sorry" without fear of admitting to liability.
5.3. Legislative reforms were introduced in most states of Australia. The legislation, insofar as it deals with personal injury claims, seeks to "top and tail" claims by introducing minimum
thresholds of disability before a plaintiff can seek damages for pain and suffering, and similarly has caps on the maximum amount of an award for damages.
5.4. For claims against valuers - which are obviously professional indemnity claims involving a claim for pure economic loss and not for personal injury - three legislative reforms were relevant. They were the introduction of:
statutory standards specifying that the standard of care owed by a professional is the standard supported by a reasonable body of opinion at the time. This is already dealt with above;
proportionate liability defences; and
capped liability schemes.
Proportionate liability
5.5. The proportionate liability amendments introduced a dramatic shift in legal reasoning. They are relevant when there is more than one wrongdoer who has caused an economic loss. In
valuation cases, that is nearly always the case.
5.6. The conventional legal thinking before these amendments was that each concurrent wrongdoer shared 100% of the liability for the same loss. This is referred to as "joint and several liability". The proportionate liability amendments mean that a wrongdoer is only liable for the proportion of the loss they have caused. This requires the court to undertake an assessment to the "relative culpability" of each wrongdoer. In other words, a relative comparison of the extent of departure from a reasonable standard of care of each wrongdoer and the relative importance of the act of the wrongdoer in causing the economic loss suffered. As most of the claims against valuers concern valuations for mortgage purposes, the concurrent wrongdoers are usually (please note each case does turn on its own facts):
the valuer;
a borrower who has often lied about their ability to service the loan or misrepresented a key aspect of the subject property in some way;
a negligent solicitor (less frequently); and
a negligent lender.
5.7. In practice, there is no material difference between "contributory negligence" and
involving valuers, this often comes down to mistakes the lender has made in approving a loan that it should not have. 15
5.8. The RMM resource materials include case notes on all the relevant cases involving proportionate liability. You will see that in these cases, the liability of the valuer has not been higher than 50%. 5.9. The impact of proportionate liability is a significant disincentive for a client to sue you. These
legislative amendments mean that the risk of an insolvent wrongdoer is now "owned" by the plaintiff. For example, if a fraudulent borrower is apportioned 80% of responsibility, then a solvent and insured valuer will bear no more than 20% of the plaintiff's loss. As litigation is expensive, recovering only 20% of your loss will make many legal actions unviable.
Contracting out
5.10. You can contract out of proportionate liability in certain circumstances. This is permitted in New South Wales. If your retainer agreement has New South Wales as the choice of jurisdiction and includes an indemnity clause in favour of your client, then you could well contract out of this legislative amendment which is very much in your favour.
5.11. Your insurers will not cover you if you do. As such, be very careful to avoid the following clause in any retainer agreement or letter of instruction you receive:
"The valuer will not raise any claim of negligence or proportionate liability by the Client or any other person in defence or reduction of a claim under this document".
5.12. Do not agree to or sign an agreement that includes this clause or anything similar.
The capped liability scheme
5.13. From around 2007, each state enacted professional standards legislation which gives
professional associations the opportunity to cap the occupational liability of their members. The gatekeeper for the capped liability scheme in Australia is the Professional Standards Council. The legislation is essentially identical in all states, except Tasmania.
5.14. You can access details of all of the professional standards schemes that apply in Australia on the Professional Standards Council website.16 You will see from the website that there are
15
approximately 20 different professional associations that have organised such schemes involving accountants, IT consultants, valuers, lawyers, engineers and surveyors.
5.15. The relevant scheme for API members is the Australian Property Institute Valuers Ltd (APIV) Scheme which commenced on 1 September 2010 and expires on 1 September 2015. An application to extend the APIV Scheme for another five years has been submitted to the Professional Standards Council.
5.16. The professional standards legislation provides a number of ways by which a professional person can limit its occupational liability. The APIV has chosen to limit the liability of its members by reference to its insurance arrangements. As such, the APIV has, in conjunction with the PSC, developed APIV insurance standards. If you:
are a member of the APIV;
disclosure your involvement in the Scheme to your clients17; and
obtain at least the minimum standards of insurance mandated by the APIV standards,18
then your occupational liability should be no more than the insurance you have available to meet any claim.
5.17. In the event that you receive a claim which is higher than your limit of occupational liability, your lawyers will plead in your defence that your liability is capped under professional standards legislation. The point should then be conceded by the plaintiff but if not, will be another issue for trial.
Impact of the capped liability scheme
5.18. A great benefit of the APIV Scheme is that it standardises the amount of insurance valuers are required to obtain. This should smooth out the premiums paid by valuers year on year. A volatile market for professional indemnity insurance premiums is not in the interests of valuers, nor their clients, nor their insurers.
16
www.psc.gov.au
17
The API website has clear information on how to do this.
18
5.19. The APIV Scheme is also designed to remove the personal liability of individual valuers. Any valuer who has had a claim knows that it is common for a claim to be made against the firm that employed them, but also against the individual valuer personally. Valuers, like any professional person, owe a personal duty to their clients. And this personal exposure is often a disincentive to talented people wanting to become valuers.
5.20. The capped liability scheme is designed to remove that personal liability, by limiting your occupational liability to the amount of insurance you have.
5.21. For the APIV Scheme to apply, you had to be a member of it and at the time you did the valuation, and to have made the appropriate disclosures to your client about your membership of the Scheme. As valuers' claims have a long-tail liability, whereby you are often defending valuations done five or six years prior, it is only recently that a Defence has been filed on behalf of a valuer which pleads the cap. As such, there is very little judicial consideration of the professional standards scheme. Presently whether or not the theory behind the legislation will take effect in practice remains to be seen until we have some case law. But it should work.
Key documents
5.22. There are three key documents that govern the operation of the APIV Scheme. They are the:
APIV Scheme Summary;
APIV Scheme Document; and
APIV Insurance Standards.
5.23. Valuers will readily see from a review of these documents that the Professional Standards Council will effectively reward a profession with capped liability, if that profession shows that it has sound risk management processes, high professional standards and effective complaints handling and disciplinary procedures.
What is the ceiling on occupational liability?
than $40 million. The monetary ceiling specified is for each claim with one reinstatement19. The effect is as follows:
Class Description Upper End
Value Monetary Ceiling Aggregate Ceiling Maximum Excess (per claim) 1 Category A Member
$0 < $5 million $2 million $4 million $30,000
2 Category B Member $5 million < $10 million $3 million $6 million $50,000 3 Category C Member $10 million < $15 million $4 million $8 million $50,000 4 Category D Member $15 million < $40 million $5 million $10 million $50,000 5 Category E Member
> $40 million $10 million $20 million $100,000
Reporting claims data
5.25. Valuers wanting to rely on the Scheme need to be a member of the APIV, and also need to comply with the Scheme's membership requirements. Relevantly, this requires each valuer to provide a copy of its insurance policy to the APIV to confirm compliance with the APIV Insurance Standards. In addition, members wanting to rely on the Scheme must also comply with the regulatory requirements imposed by the Professional Standards Council, including to report claims data annually. This claims data is analysed by the APIV and included, on a de-identified basis, in the APIV's annual reports to the Professional Standards Council.
5.26. Failure to comply with these obligations, could lead to the Professional Standards Council cancelling the Scheme.
APIV Insurance Standards
5.27. The APIV Insurance Standards are available on the API website.20 They mandate cover for past, present or future partners or employees of any member;21 ensuring that all subcontractors have
19 In insurance terms, this is usually expressed as, say "$5,000,000 any one claim and $10,000,000 in the aggregate". 20 The APIV Insurance Standards are available on the API website.
adequate professional indemnity insurance22 and also approving particular exclusion clauses relating to market movement, prudent lending, assigned valuations, kerbside valuations, solicitor loans and managed investment schemes23.
5.28. In the current insurance market, valuers are able to obtain insurance in accordance with the APIV Insurance Standards. A valuer that is not able to obtain this insurance can apply to the API for an exemption. Again, details of how to do so are on the website. 24
Claims data
5.29. One of the great advantages of the APIV Scheme is that it requires routine reporting of claims data by members. This provides the APIV with a unique risk management opportunity, whereby trends in claims can be analysed and proactively dealt with.
6. APIV Claims Data - Common Problems and Current Issues
6.1. Professional indemnity insurance for valuers - as with all professionals - is written on a claims made basis. This usually means that for a 12 month period, you are covered for any claims made against you.
6.2. A claim is usually a Writ or letter of demand. You can also confirm your insurance coverage by notifying a circumstance which may give rise to a claim. For example, when a client tells you that they have suffered a loss and are going to sue you or a client writes to you, advising that a property has sold at significantly less than your valuation, and asks you to review your file. It is important to valuers to adopt a conservative approach when notifying circumstances or claims. Basically, if you think you might need to notify then you probably should.
6.3. The key date is the date of your insurance renewal. If you are aware of a circumstance that passes into a new policy year, the application of a known circumstances exclusion could give your insurers a right to deny indemnity for the claim. A standard known circumstances exclusion which is included in your insurance policy is part of the RMM resource materials.25 Generally, for every 10 notifications, there are between one and two claims where Underwriters actually raise a reserve.
22
Standard 6.
23 Standard 7.
24 Link to the API Website.
6.4. Presently, there are some 10 or 12 insurers that underwrite business for valuers in Australia. Obtaining comprehensive claims data from all insurers is not feasible. However, obtaining comprehensive claims data is critical to the operation of the APIV Scheme. This is why it is of paramount importance that all APIV members complete the compulsory annual compliance questionnaire (declaration).
6.5. There is no precise data on the premium pool for valuers.26 But it is estimated at between $23 million to $25 million, which is roughly 5% of the estimated total revenue for valuers in Australia of $500 million. Once commissions and selling costs are deducted, the conventional break even point for an insurer, is at a loss ratio of 65% - 75%. Above that and the insurance book is unlikely to be profitable, which may impact on the availability and affordability of professional indemnity insurance cover available for valuers.
6.6. Over the past decade, there have been in excess of 100 claims against valuers, most of which have been resolved. Very few claims against valuers run to trial and judgment.
6.7. The following chart gives a high level overview of recent claims activity;
6.8. Mortgage valuation work continues to be the most risky area of valuation practice with the three key subsets of mortgage valuation practice featuring heavily in claims as follows:.
Property Pro valuations; 27
Commercial / industrial valuations;
Commercial development project valuations.
26
A premium pool refers to the total amount of premium paid by valuers for professional indemnity insurance in Australia each year.
27 Given the sheer volume of Property Pro valuations performed each year, the claims activity is not particularly high. However, in terms of total
6.9. The three most costly types of claims tend to be:
Commercial / industrial valuations;
Commercial development project valuations;
Valuations performed for banks.
6.10. In more recent times and largely as result of improved risk management practices by firms, there has been a decrease in claims involving expert determination work and claims by second and third tier lenders.
6.11. In 2014, the median claim amount was roughly $650,000 and we estimate that roughly $60 to $65 million in claims has been paid out over the last 10 years. If you assume the premium pool over the last 10 years has been $23 million, claims payments of $65 million against the premium of $230 million would appear to be a relatively profitable business for insurers.
6.12. However, our estimated settlement costs do not:
include defence costs paid to lawyers in defending claims. These are likely to be in the range of 20% - 30% over and above the settlement claims figure; and
reflect the reserves currently held against open claims, which are yet to be resolved.
6.13. In recent years, the number of claims for the profession as a whole, has been relatively low. This is not however, a reason for complacency, as it also reflects that claims against valuers are cyclical. In addition, there are likely to be further claims which have not been reported to the APIV.
6.14. Many claims arose in 2010 and 2011 as the 2008 / 2009 financial crisis triggered forced sales and losses. A notable feature of the claims data during that time, was volumes of claims issued by Genworth, which is one of two mortgage insurers in the Australian market. The particular issues raised by lenders mortgage insurers are dealt with in the volume residential module. 28
6.15. Currently, as at 2015, the bigger claims from the last market downturn are still in the system. Claims against valuers are rare when the market for that asset is strong, but spike significantly during market disruption. This continues to be the problem for valuers - Underwriters are still likely to suffer significant losses if they underwrite valuers at the wrong point of the cycle. The
aim of the APIV, through its capped liability scheme, is to reduce that volatility and make valuers a good risk in the short and the long term. That is better for valuers and clients alike.
6.16. It is also not difficult, you just have to do things properly and make risk assessment part of everything you do. Knowing the risk you are taking on is critical to profitability. Every good business does that. Whether or not you have a high or low risk appetite is entirely a matter for you.
7. Common Problems
7.1. Lindsay Joyce has prepared an extensive list of "Pitfalls of Practice" which is contained in the RMM document.29 There are of course many ways for any professional to make a mistake, but there has been enormous consolidation in the valuation industry over the last 10 years which has greatly improved professional standards and risk management procedures. In our
experience, "scratch your head" mistakes are not a feature of claims anymore. Usually a valuer will only be sued if their client believes they have advanced too much money; or paid too much for a property in reliance on their opinion. Unsurprisingly, it is usually volatile property assets which lead to claims.
7.2. As of today, some three firms control approximately 75% of the residential valuation market in Australia, with another 7 or so taking up the remaining 25%. Similarly in the non-residential market, the majority of the market is controlled by 10 - 12 firms.
7.3. Rightly or wrongly, the small valuation business doing a wide range of work is now a rare thing and the market is largely polarised between large firms and niche players. This phenomenon of consolidation is not unique to the valuation profession. Most professions have gone the same way over this period, split between larger firms and small niche players.
7.4. One benefit is a greater sharing of knowledge, better negotiating power with clients and better resourced approaches to risk management. Risk management has greatly improved. Valuation businesses know how to do the job right and it is up to each valuer, to ensure that they remain professional and committed to high standards every working day.
Property Pro
7.5. Before dealing with volatile assets, a brief word on Property Pro. This format which was established in 1998 will be dealt with in the Volume Residential RMM, but Property Pro valuations are generally, a low risk business. Given that 1,000,000 residential valuations are done a year, there are relatively few claims. It obviously needs to be.
7.6. Property Pro valuations do have a systemic problem, given the concentration of risk with
mortgage insurers30. That is dealt with separately because outside of claims by Genworth during 2010 and 2011, claims over Property Pro valuations are rare, which has almost certainly been as a result of better industry communication with clients via the Residential Valuation Industry User Group.
Volatile assets
7.7. Any valuer knows that property does not always go up. Whilst the traditional residential market in Australia has long been a creator of wealth and our politicians continue to draft budgets on the ever increasing expectation that residential property values will continue to increase, anyone who thinks "property always goes up" is an idiot. It is an asset like everything else. It is prone to market variations. Its price is always subject to the foibles of human behaviour.
7.8. There is much available data about property prices now. Whereas in the past, valuers who simply collected data had a role to play, more than ever clients want valuers who understand what drives value, as opposed to just checking the statistics as to what the value seems to be, because nowadays, clients can generally do that for themselves.
7.9. If you understand value, then you can assess volatility. The problem areas are:
Mortgage valuations of vacant land or development sites.
Commercial properties with "thin" markets, such as warehouses in rural or semi-rural areas.
Premium residential properties.
7.10. The worst claims are lenders that saw fit to advance against the gross realisation figure. In the heady days of 2007, some lenders were advancing 90% of the gross realisation. The losses were enormous and completely disproportionate to the risk the valuer thought they were taking on.
30 This is dealt with in the volume residential risk management module. The papers are here
Other large claims, saw commercial assets decimated in value as demand for the asset evaporated in the financial crisis.
7.11. It is your job as a valuer to be across why. Your best defence is always clarity and reason. A clear communication with your client about what you are doing and a reasoned assessment of the risk of declining value is critical. The reality is that clients don't like losing money, but a client that loses money on a risk they knew about is most unlikely to sue. A client that loses money because of a risk they did not know about, will very likely sue.
7.12. Workshops at the RMM, will deal with how to draft clear opinions that adequately emphasise the risk, but a few rules of thumb never go out of style:
history can often tell you the volatility of an asset class or a particular asset. If a property's value has risen sharply, it is likely it can decrease sharply as well. I saw a stunning report by a leading firm which tracked the 20 year sale price of a premium home against economic trends, showing that it rose and fell in value out of step with the prevailing economic climate, indicating it was an asset that appealed to a more limited set of buyers. A sense of past history, gives a sense of the future as well. There is no doubt that valuers are asked to assess the current market value, but risk analysis requires a much broader analysis. Don't be afraid to go back years.
understanding the factors driving value in the current market. The weight of capital from Chinese investors at the moment which is driving up value across a range of assets is a good example. What happens if that capital retreats?
development sites have a long list of pitfalls. Construction finance is very high risk as any development that falls over at any point, even 90% partially complete, is likely to be sold at fire sale prices. Spell out that volatility to your client. Don't take on the risk yourself.
8. The Key Three Steps to Clarity and Reason
8.1. In summary, client and job selection is critical to risk management and to professional success. Every business wants to target the lowest risk / highest margin work, but low risk / margin and volume can work just as well. Low volume, low margin and high risk work is obviously the hallmark of a business and profession on the way out.
revenue, when it should be 2.5%. To ensure long term profitability, clarity is essential, and eliminating or reducing risk whenever you can is an obvious focus. So keep it simple - EPA:
Exclude risk by making releases and limitation of liability clauses, a routine feature of your client negotiation process.
Always understand who your client is and the Purpose of the job you are doing.
Don't Assume your client's risk. Write clear reports that expressly address the volatility of the asset you are valuing and how your client could lose money.
8.3. The RMM materials will focus on workshops and providing valuers with the skills to do this effectively and cheaply, every time.
8.4. I think many of your clients have had the attitude "we can always sue the valuer if this goes wrong". Well no, that should never be part of the business plan. Let's make it history. David Leggatt
