Professional Indemnity: What’s in store for 2024?
As we approach the end of 2023 now is the perfect opportunity to forecast the trends and risks we anticipate going into 2024.
The Professional Indemnity (PI) market continues to be mapped by the economic environment which will no doubt continue to cause service providers across all industries to feel the pinch; not helped by regulatory developments and government initiatives driven by the up-and-coming general election.
Inflation is also likely to continue to be a key driver for claims across various service industries. The Centre for Economics Business Research (“CEBR”) expects the rate of inflation to remain which is likely to result in a growing number of insolvencies throughout 2024 – 2023 saw record numbers. The Gazette recorded the total company insolvencies in Q2 2023 increased by 9% from Q1 2023 and by 13% from the same quarter in the previous year. We consider that this will continue to rise in 2024.
Construction
The construction industry continues to be hardest hit by insolvencies and we do not anticipate this changing in 2024. This will naturally lead to an increase in claims against insurers under the Third-Party Rights Against Insurers Act 2010 (TPA 2010).
Construction professionals also face significant challenges staying a head of the ever-changing regulatory framework that is being frustrated by the current political climate.
There will be a significant increase in claims due to the changes made to the limitation period under the Defective Premises Act 1972, implemented via the Building Safety Act 2022 (“BSA”). The effects of extending the limitation period, by 30 years, can already be seen only seven months on in recent caselaw of BDW Trading Ltd v AECOM Infrastructure & Environment UK Ltd & Ors [2022].
We anticipate an increase in Building Liability Order (BLOs) being served against solvent entities. There are 6 current cases in the TCC in relation to BLOs and we expect this will increase in 2024. The rise in BLOs will invariably lead to considerations as to the scope and intention of the insuring clause for Insurers. Construction professionals will need to ensure when entering contracts that all the relevant parties within the supply chain are solvent.
We expect the construction industry to be faced with increased pressure to access the Building Safety Fund (BSF) to complete remedial works on impacted buildings. There will also be an increased focus on remedying buildings between 11 to 18 meters. This is a key political initiative going into the general election.
The legal sector
The legal sector will also face challenges. A recent report by the National Cyber Security Centre (NCSC) outlined the growing threat of cyber-attacks to the legal sector and we see this as a continued threat going into 2024. Law firms handle large amounts of money and highly sensitive and confidential information which makes them particularly vulnerable to cyber-attacks. Whilst this has been an issue for some time and isn’t new “news”, we see this as being on the rise due to the tough economic environment that invariably brings with it a rise in fraud. Whilst there is SRA guidance in place for firms to follow to try and protect themselves against these threats it is not an easy risk to manage especially for smaller firms that may not have effective policies and/or infrastructure in place to ensure that accessing the firm’s systems is effectively managed; a problem compounded by the new ‘hybrid’ work model. The risk is not however just limited to small firms and will certainly be felt by large firms too.
The property market is slowing down but interest rates are on the rise which will have an impact on claims against solicitors and/or surveyors, for example break clauses, in leases, that are often overlooked, we have seen examples of this.
Auditors
Auditors are under increasing scrutiny in circumstances where their clients have gone into insolvency within 12 months of providing an audit report. Auditors could find themselves exposed to claims for breach of duty to the company/shareholders for the failure to provide a competent report. These sorts of claims will no doubt be picked up by administrators faced with their own internal pressures to release as much capital as possible.
With the political purse tightening the Financial Reporting Counsel (FRC) as well as HMRC continue to scrutinise tax schemes - this will particularly impact those firms which promote a hybrid partnership structure designed to avoid income tax, CGT, Stamp Duty and Inheritance Tax. Many of these schemes are being promoted on the basis that they have professional indemnity insurance that will respond should the scheme not work which will in turn provide a challenge to Insurers. We expect more schemes like this to be exposed and result in litigation against other professionals who have provided advice on such schemes.
AI and ESG
Additionally, AI and ESG are going to continue to provide challenges across the whole of the service industry. The UK government ramping up its plans to regulate agencies that evaluate the environmental and social performance of companies in an attempt to crack down on the sustainable ratings industry given currently there is little oversight.
We predict that 2024 will see the start of some ‘build green’ issues. Construction and the built environment are huge contributors to the climate crisis, this makes this sector a prime target for reform. Active measures are already being taken to make the UK building industry less harmful to the environment. Whilst we consider this to be a developing risk going into 2024, we consider this to be a longtail risk and more to come in the years that follow.
Sustainability and ESG will be a major consideration for surveyors and valuers when completing valuations for clients. If ESG is overlooked and false representations made by clients as a result, this makes both vulnerable to claims, and this will no doubt extend to the corporate arena.
There is no doubt that 2024 will be a tough environment for service providers, with a number of new and emerging risks to navigate in an uncertain environment where inflation is on the rise and a general election on the horizon. There are some positives however as the on-going house building slump continues construction buyers are reporting the largest fall in materials and purchasing costs which is a marked change in recent years.
