What does it take to defend a claim? In this month’s risk management advice the lead insurers under the Master Policy illustrate the importance of clear advice recorded on file
In an ideal world, effective risk management prevents claims. But sometimes, in the real commercial world in which we all operate, bad things happen. Transactions fall apart; sales of hard-to-sell houses – and purchases of dream properties – collapse at the last minute; contracts turn out not to mean exactly what the client thought they must. And where there’s loss, there must be fault, yes?
No amount of risk management can prevent any claim ever being intimated, but where good practices are in place insurers and the panel solicitors they might appoint will be able to mount a clear and robust defence. That can result in claims being successfully repudiated by insurers, and closed with no payments being made, or the successful defence of a matter pursued to litigation. In either case, the impact on the insured practice will be considerably less than had liability been established.
Difficult to defend
Consider the following scenarios:
Case 1: boundaries
A practice acted for Mr & Mrs Green in the purchase of a semi-rural property in 2005. Part of the attraction was the substantial amount of undeveloped land near the house, and the absence of any significant fencing around it, giving it a “country feel”.
Over the years, the plot was transformed. Fences prevented intrusion by livestock. The vegetable plot was banished to the furthest reaches, with the areas nearer the house laid out to lawn, flower beds and decking.
It was only when they came to sell that the Greens discovered problems with their title. Apparently they had fenced beyond the extent of the ground they owned. The pretty, landscaped garden into which so much love and money had been poured extended beyond the title, and the fences would have to be moved before the sale. The vegetable plot, the compost heap, and – worst of all – the pond would have to go.
The Greens could recall, vaguely, that the practice had mentioned “some lack of clarity with the boundaries” being mentioned by the surveyor, but swore that no specific advice had been provided. On the advice of their new agents, a claim was made against the practice, alleging a failure to advise as to the extent of the subjects.
The practice’s file confirmed that the surveyor had, indeed, queried the physical boundaries. The land certificate, though, had included a plan and clearly showed the limited extent of the property. And that had been sent to the Greens before the transaction completed. The practice was able to produce the covering letter, which clearly advised “we enclose a copy of the land certificate in respect of the property you propose to purchase”.
Could the claim be defended on the basis that the Greens had seen the plan? Expert advice obtained by the insurers advised not. It was necessary not only to send the plan to the purchasing clients but to ask them specifically to confirm – ideally in writing – that the plan conformed to the property as they understood it on the ground. The lack of that exchange on the file meant that a complete defence of the claim would be impossible.
Case 2: title indemnity
In another example, a firm acted for commercial lenders in connection with a security. The value of the subjects was potentially impacted by an access issue, but the practice considered that it would be possible and sensible to require the borrowers to obtain a defective title indemnity (DTI) in that respect.
The practice advised the lenders of the potential problem, and the proposed solution. As far as the practice was concerned, instructions were provided to proceed with the security transaction, but to require the borrower to disclose a title indemnity policy.
Default followed, and the security was called up. The property was marketed, offers were received, the best accepted, and it appeared that the clients would make a reasonable recovery.
Agents for the prospective purchasers then raised concerns over the access rights under the various dispositions, and the terms of the DTI policy. The nature of the defect in respect of which indemnity was provided was unclear, and the limit of that indemnity might be too low to provide protection. Their clients proposed to develop the property, access was vital, and the loss of it would be catastrophic. In the circumstances, they advised their clients to avail themselves of the right to resile.
The lender clients attempted to sell the property to previously unsuccessful bidders, but the same situation arose. Ultimately they were advised that there was no sensible alternative but to offer the property for sale by auction, with no covenants as to title, access etc. Clearly a very much lower price would be obtained. At the same time, they instructed solicitors to claim against the practice.
The transaction file disclosed a file note: “s/w John @ clients. Access issue not a problem – DTI to sort, but them to pay”. “John” was the practice’s contact at the clients. Having retired shortly after the loan was made, he recalled little or nothing about it, and absolutely nothing about giving instructions regarding the possible access issue.
On one thing, though, John was adamant. He would never have agreed to any solution which did not give his employers full and absolute protection. Had he been advised that there was any risk that a future sale might be imperilled on the terms of the policy, he would have refused to proceed, and rejected the loan application. As commercial lenders, his company was extremely risk averse, and would rather not have loaned than risk not being able to sell the property.
The practice reluctantly agreed with insurers that there was no prospect of successfully arguing that the brief file note was evidence of proper instructions being given by the clients, the clients having been fully advised of the various risks. This claim, then, was also unable to be defended in full.
What, then, can be done to prevent claims or successfully to defend them? In a nutshell:
Linda Moir, senior claims technician, RSA Professional & Financial Risks Claims
- Give clear advice, and ensure that the file records that advice.
- A brief handwritten note is good; a detailed typed one is better – outline the advice given.
- Never allow a client to be able to argue that they didn’t receive advice, or understand the advice given.
- Ensure that your file documents the position.
- Ideally, issue a letter to the client to confirm the advice given – not only that advice was provided, but exactly what was said. This may be enough to make some other firm advise the client not to pursue a claim at all, which must be the best outcome possible.
- Make sure the file tells as full a story as possible of the transaction, including clear notes of discussions with clients and of any instructions provided. Remember: memories fade, file notes do not.
- Be aware that in any dispute as to what was said, a court will generally assume that the client – for whom the transaction is probably more significant – is likely to have a clearer recollection than the solicitor, for whom it was only one of many similar transactions in a career. The client file is the single best weapon available to those who seek to defend the claim.
- Develop a culture of note keeping – all solicitors and paralegals should be properly trained and understand the importance of file notes. Include file notes – existence and quality – as part of the file audit process.
- Never assume that because the client has accepted or authorised something previously, they will go along with it again. Obtain clear instructions and authority in every case, and note the file accordingly. Request confirmation in writing if you have any concerns at all about ambiguity.
The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.
Marsh Ltd is authorised and regulated by the Financial Conduct Authority.