RICS Run-Off: Adequate & Appropriate is now Defined, but at what cost?

Following a number of consultations, RICS has now redefined the relevant Rule of Conduct (Rule 9) and revised the Minimum Terms wording. The precise wording is set out, for completeness, at the foot of this article.

The Changes

One of the major changes is the dilution of the ‘adequate and appropriate’ requirement, something which has always been open to interpretation, in so far as consumer claims are concerned. In its place an equivocal and prescriptive obligation arises for both RICS members and Approved Insurers alike.

Consumers are defined as ‘any natural person acting for purposes outside their trade, business or profession’ and RICS members are now required to have an aggregate £1m limit of cover for six years following the expiry of the PI insurance policy in force at the date of cessation. The door is, however, left open for some degree of subjectivity as the requirements go on to say that RICS members ‘may deem that it is adequate and appropriate’ for such cover to be on an each and every claim basis.

The other major change is that the Minimum Terms wording has also been changed so that it automatically provides the £1m aggregate cover for six years; akin (if not identical) to the provisions of the minimum terms applicable to those writing solicitors PI business.

The pre-existing status quo has been maintained for non-consumer claims, i.e. all claims which do not satisfy the consumer claims definition. In other words, firms are required to simply have adequate and appropriate run-off cover for a minimum period of six years following cessation.

Finally, there is a Run-Off Pool to be administered by the Assigned Risks Pool as a catch-all; with the ability to offer it whenever a firm on cessation is unable to obtain such cover from either their incumbent insurer or the open market. Obviously, this will only apply to non-consumer claims and consumer claims where the automatic cover is deemed inadequate.

Our Take

These changes have been trailed as making it easier for member firms to satisfy the run-off requirements. The reality, in our view, is potentially somewhat different. From the non-consumer perspective there is no change but the new consumer claims provisions could make an already difficult situation worse.

Why? Until now, firms have not had to pay for run-off cover until it is actually needed, i.e. when they cease to operate as a regulated business. The changes are likely to bring the cost of procurement forward as there will be an inevitable cost to the provision of an automatic six year £1m aggregate limit and that cost will no doubt be factored into the cost of current renewal premiums.

Many firms are currently suffering from the relatively flat market conditions of late and, at least for now, there seems to be little evidence of any post-Brexit boost in activity. It is bad enough that in such an environment firms are finding that drastically reduced capacity has created a fairly hard market, worse still if the changes have merely served to add a further slice of cost on top to cater for the automatic run-off change. The risk is that, for some at least, this will be the straw that breaks the camel’s back and results in closures and/or market consolidation. So the desire to easy the procurement of run-off might inadvertently make it hard for firms not wishing to close to actually continue.

The danger for Insurers is that if that does happen prior to renewal of an existing policy pre-1 April 2020, they might be unwittingly providing run-off for free if additional premium was not levied for renewals arising after the changes became effective from 1 April 2019.

RICS Rules of Conduct for Firms : Rule 9 now provides the following text relevant to run-off cover:

“To ensure that firms, members and their clients are not exposed to financial detriment in the period following a firm ceasing to trade, RICS requires firms to obtain fully retroactive run-off cover. The minimum policy requirements are:

For consumer claims

For a consumer (any natural person acting for purposes outside their trade, business or profession) claims, the requirement is for a limit of £1,000,000 in all for a period of six years from the expiry date of the policy in force at the time of cessation. RICS’ minimum policy wording will automatically provide this coverage.

RICS members may deem that it is adequate and appropriate for run-off for consumer claims to be an on an ‘each and every claim’ basis. RICS would expect run-off on this basis to be a maintained for a minimum period of six-years from the cessation of the practice. It may be arranged and paid for on an annual basis, provided that in the event of the policy not being renewed, a minimum limit of £1,000,000 in all for a period of six years from the expiry date of the policy in force at the time of cessation is maintained.

For non-consumer claims

The requirement is for firms to have adequate and appropriate run-off, but RICS would expect run-off to be a maintained for a minimum period of six years from the cessation of the practice. Run-off for commercial activity may be arranged and paid for on an annual basis.”

Section F of the RICS Approved Minimum Wording now states that:

“In the event that the PRACTICE ceases during the POLICY PERIOD and has not obtained succeeding insurance which complies with the Royal Institution of Chartered Surveyors approved minimum professional indemnity policy wording and Professional Indemnity Requirements Version 4 with effect from 01 April 2019, this policy will extend to indemnify the INSURED for any CLAIM or CLAIMS made against the INSURED by any natural person acting for purposes outside his trade, business or profession and arising from errors or omission of the INSURED prior to the PRACTICE ceasing for an additional period of six years from the day immediately following the expiry date as stated in the schedule (The Run-off Period).

The INDEMNITY LIMIT for Section F. Run-off Cover shall be GBP 1,000,000 any one claim and in the aggregate for the run-off period stated above.