Recession increases claims against professional advisers

It’s an unfortunate fact that during a recession claims against professional advisers, such as solicitors, brokers, accountants and surveyors, amongst others, increase significantly.

Mounting pressure on businesses during the recession has fuelled a sharp rise in the number of advisers being sued for professional negligence.

Sarah Trendell-Smyth, senior solicitor in Mills & Reeve’s Birmingham insurance team, looks at this growing trend and what advisers can do to deflect rising premiums.

Last year, 80 claims against solicitors were heard in the High Court, a jump of 158 per cent on the previous 12 months. This is a trend the insurance team at Mills & Reeve in Birmingham has also noticed. In the year August 2008 to August 2009 the number of instructions the team received increased by 50 per cent compared to the same period the previous year.

One such instruction was in July this year, in which we successfully prevented one claimant’s attempt to pursue a £30 million claim against a firm of solicitors. The Court of Appeal agreed with us that the claims capable of pursuit were worth more like £1 million.

One explanation for the rise in the number of negligence actions stems from the need for businesses and individuals to attempt to recoup losses they may have suffered as a result of the economic downturn.

In the past, such claims may not have been pursued, either because they were correctly seen as weak, or because companies preferred to focus on expanding and driving their business forward, rather than getting embroiled in a potentially lengthy and expensive legal battle. However, the fall in value of assets, such as property and shares, and the contraction of the market generally, has led to businesses reviewing non-performing assets.

In doing so, errors in a professional’s handling of a transaction, or the provision of bad advice, can be brought to light. Claims based on contract or negligence, breach of fiduciary duty or even breach of statutory duty follow as a result.

For solicitors and surveyors, claims made by mortgage lenders (prime and sub-prime) are the most common during a recession. The last time these professions were hit by a raft of such claims was in the early to mid 1990s, causing these professions and their professional indemnity insurers substantial losses.

Redundancies will lead to an increase in defaults on loans and a rise in the number of repossessions, which combined with falling property prices, often result in negative equity. In these circumstances, lenders often seek to recoup their losses by suing the professionals involved in the conveyancing processes. This is happening again now.

While some negligence claims against professionals may be warranted, many claims are unfounded and arise from a claimant not wanting to pay his advisors’ fees. The claim must nevertheless be reported to PI Insurers, and the allegations investigated and defended.   

As we have witnessed in the past year, the number of cases being brought against advisers has risen dramatically, and while the country remains in the grip of a recession the chances are that professional negligence claims will increase further over the short term.

All firms must therefore regularly assess their risk management strategies, internal auditing and processing systems, in order to protect themselves from a potential claim being brought against them. Without that protection to fall back on, defending claims can be more difficult, spurious or not, and some firms could face a dramatic rise in their premiums.

ENDS

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