Silk purse or sow’s ear?

With effect from 1 May 2020 the RICS Minimum Terms of Insurance underwent material change in an attempt to provide certainty to members and PI Insurers alike on the knotty issue of fire safety and, in particular, external wall systems. But has this produced a silk purse out of a sow’s ear?

Context: Ever since the truly dreadful events of the Grenfell fire in June 2017 there has been an even greater drive to ensure that all buildings of height meet revised fire safety standards. Ever evolving Government advice has created a real challenge for surveyors tasked with valuing apartments located in buildings with non-traditional forms of external construction.

Response: In consequence transactions involving these types of property slowed, if not ground to a complete halt. In an effort to resolve this problem, after careful consultation with all stakeholders including MHCLG, UK Finance & the Building Societies Association, in December 2019 RICS launched a new industry-wide valuation process for buildings above 18 metres in height; the benchmark height identified by the Government’s prevailing advice.

This External Wall Fire Review process requires a fire safety assessment to be conducted by a suitably qualified and competent professional, sufficient to satisfy lenders, valuers, residents, buyers and sellers. Only one assessment is needed for any building and it will be valid for five years. A pro-forma EWS1 will, at the request of the building owner, be completed by a fire expert (there is a list of ‘approved’ professional bodies to which the expert must belong). If the EWS1 confirms the external wall system is satisfactory from a fire safety perspective, the valuer can rely on it to complete the valuation.

RICS guidance states that disclaimers should be incorporated into both valuation reports and the terms of business with the surveyor’s lender clients. However, the original draft clauses RICS proposed fell somewhat short. The disclaimer for the report merely stating that where an EWS1 had been relied upon, the author of the EWS1 (as opposed to the author of the valuation report) had no liability to anyone other than the building owner. Also, the disclaimer for inclusion into the terms of business simply acknowledged that the lender would not sue if the valuer had relied upon an acceptable EWS1.

Minimum Terms: In April this year, RICS provided a form of suggested words for insurers to use when including a general fire safety exclusion in the approved policy wording, prompted by what RICS described as “ongoing insurer concern around fire safety and cladding”.

This allows insurers to exclude liability for all claims “arising directly out of the combustibility or fire safety defects of any external cladding systems” save for those brought by any ‘natural person’, i.e. essentially anyone buying or re-mortgaging their home, albeit subject to an aggregate limit. In other words, whilst consumer claims fall outside this exclusion, any lender claim arising out of fire safety defects to any external wall systems will be excluded from cover.

Recognising that surveyors relying on the EWS process required insurance cover RICS, with effect from 1 May 2020, has also revised the Minimum Terms wording. Instead of a positive clause confirming that the cover would extend to any such claim, the change in fact appears in the Contractual Liabilities exclusion and states, at clause 4.3, that:

“INSURERS shall not be liable under this policy for … any liability incurred where the INSURED has relied upon the EWS 1 form (or as revised) and the valuation report does not exclude liability to the lender or any person deriving title to the mortgage for any losses or potential losses arising directly and solely from the valuation being provided in reliance upon the EWS 1 form.

In essence, this provision will ONLY extend cover to the surveyor for a lender claim arising out of reliance on a EWS1 form if the valuation report excludes liability to the lender. RICS swiftly, recognised that its previous suggested valuation report disclaimer did not in fact achieve that end, RICS revised this wording to exclude liability to anyone where the valuation is wrong purely as a consequence of reliance on an EWS1.

In our view, whilst this latter change remains slightly ambiguous, it must be the case that if the valuation report incorporates the suggested disclaimer then clause 4.3 ought to provide the surveyor with insurance cover for a lender claim.

Problem Solved?: You may think so, but it is not that simple.

First, and perhaps surprisingly given that UK Finance / Building Societies Association were involved in the creation of the EWS Review Process, some lenders are reluctant to permit any form of EWS disclaimer appearing in their valuation report.

We understand that this is being driven by a mixture of cost concern and a perception that such is simply not needed. As to cost, in certain instances revisions to existing software and systems will be required if the existing template report has no room for the disclaimer. Changing process could be costly to implement. As to perception, it is said that where the reports are not shared with the customer, i.e. loan applicant, a disclaimer is wholly unnecessary where the terms of business authorises the use of the EWS process and accepts the valuer will have no liability to the lender if the EWS1 proves inaccurate.

Second, what about buildings less than 18 metres tall? Here things start to get even trickier. The RICS EWS Guidance originally said that the EWS1 applied to buildings over 18 metres in height (usually 6 storeys) or “where specific concerns exist”. What exactly does that mean in practice?

Since the EWS Process was devised Government advice has changed further and it is now the clear view of the expert panel advising on fire safety that any building consisting or two or more dwellings should be subject to fire risk assessments, regardless of height.

Due to this change, recently RICS has issued further guidance:

“By exception there may be some residential buildings below 18m which may have ‘specific concerns’. These would be 4 & 5 storey buildings in scope which may have combustible cladding or balconies with combustible materials, which are only a clear and obvious danger to life safety and may require remediation in accordance with the latest Government advice;

https://www.gov.uk/guidance/building-safety-programme

We do not envisage residential in scope buildings 1-3 storeys in height requiring an EWS form, unless the type of occupation of the building significantly increases risk to life in the event of a fire eg a care home with elderly people which could not be evacuated quickly and which will necessitate remediation works that will materially affect value.”

Quite how a mortgage valuation surveyor can be expected to know what any external wall system is made of, let alone whether it presents a clear and obvious danger in the event of fire, is unclear. In short, there is very little to inform on what a ‘specific concern’ looks like.

But the importance cannot be understated as any surveyor deciding that an EWS1 is not required risks falling foul, should their judgement prove wrong, of the above referred insurance wording provisions and thus find themselves uninsured for any lender claim which follows.

Calling for an EWS1 on any building, regardless of its height, if it has some form of external wall system is obviously the safest options but risks incurring the wrath of the lender (for slowing the mortgage process down), the building owner (some of who are already claiming that the EWS process does not apply to buildings under the 18 metre threshold) and clogging the system up completely as there are simply not enough fire experts to meet that level of demand.

In short, it is a minefield for surveyors active in valuation work and adopting the most risk protective stance, i.e. calling for an EWS1 if there is any doubt whatsoever, is likely to bring matters round full circle – a halt on transactional activity for all potentially effected buildings.

Our advice is that surveyors need to be very careful indeed.

Obviously, there needs to be complete adoption of the recommended disclaimers in both valuation reports and terms of engagement with clients, agreements with clients around process for all buildings below the current 18 metre threshold, ideally through agreed assumptions as to fire safety adequacy where the EWS1 process is not being adopted, and, absolute transparency with insurers around what has been agreed in an effort to secure advance clearance if at all possible that such process will not fall foul of cover limitations BEFORE embarking down any particular route.

All this is far easier said than done and matters are only set to become more complicated if, as seems fairly likely, Government guidance changes again.

So silk purse or sow’s ear? Oink, oink springs to mind.