Professional indemnity (PI) insurance is a must in Australia’s increasingly litigious society. But how many industry professionals really know how their policy works? One Queensland-based principal discovered, to their cost, that they didn’t.
It was a bitter $5,000 pill to swallow.
Or so says Chris Crasto, the principal at Crasto Properties in Robina, Queensland, who wrote to Real Estate Business last year in relation to a personal injury claim that he had received. An excerpt from his letter follows:
“Recently, for the first time in 14 years, we received a personal injury claim from a solicitor on behalf of one of our tenants who slipped on a steep, wet driveway and broke her ankle. She had been living in the property for over 2.5 years and has never mentioned issues with the driveway. Yes, it is steep and the house is over 10 years old, but it is not damaged or in disrepair.
The solicitor, who is a pro bono lawyer, is suing us and the owner of the property for negligence [for failing] to advise the tenant that the driveway could be slippery when wet. Under normal circumstances, I would have assumed that an owner’s public liability insurance should deal with this.
However, the solicitor is taking a blanket approach and the basis is that as we represent the owner, then we are liable.
We passed on the solicitor’s letter to [the insurance company] with whom we have our professional indemnity insurance, and we received an email stating that as a claim had been received, we were up for the $5,000 excess as they would have to defend the claim irrespective of whether there was a case or not or if we were negligent or not.
The challenge I see as a principal is that if every time a pro bono solicitor types up a letter of claim on behalf of a disgruntled or opportunistic claimant, we get slammed with a $5,000 excess.
In our case, my instinct was to send a letter from a solicitor refuting the claims. We were told by our insurers that we were not allowed to communicate with the claimants as that could void our policy.”
It was this letter that prompted Real Estate Business to ask a number of industry professionals what principals (and property managers) need to be aware of when taking out a policy.
Moreover, how can they avoid these situations in the first place?
While we’ve focused on Queensland for the most part, there are many key points of interest for principals and property managers nationwide.
There are several common reasons property managers within real estate agencies find themselves facing legal action, according to Peter Lynch from Aon Risk Services Australia.
Mr Lynch says that one of the most effective ways of preventing problems in the first place is properly screening tenants by obtaining references and ensuring that a solid lease arrangement is in place.
Once the right tenant is in place, property managers need to do the following:
Conduct regular property inspections thoroughly and carefully
Fully document inspections and provide landlords with inspection reports
Make sure that landlords are made aware of potential dangers on the property
Notify tenants of any safety issues in writing, and rectify them immediately
Keep the landlord fully up to date on the condition of the property at all times
When hiring contractors to undertake repairs to or work on the property, Mr Lynch advises property managers to appoint contractors in writing, and ensure that they have their own insurance and appropriate licences in place. Any instructions from the landlord must be in writing, and Mr Lynch suggests the implementation of a maintenance tracking system to ensure deadlines are met. Discrimination is another area of concern. Mr Lynch explains this relates to the refusal to sell or rent out a property on the basis of gender, race, sexual orientation or marital status, among other reasons.
While this may seem obvious, property managers should not change the terms on which accommodation is offered, such as imposing a higher bond or requiring guarantors.
Property managers can also find themselves in trouble when they change the terms on which accommodation has already been provided, or if they deny or limit access to a benefit or facility that is available to other tenants, or refuse to extend or renew accommodation.
“Staff inductions should include a session on your policies and procedures that deal with harassment and discrimination,” Mr Lynch says. “Make sure that your staff sign an acknowledgement confirming that they understand the policies and will abide by them and give an annual refresher session on this topic.”
Critically, Mr Lynch urges property managers not to handle matters themselves but to let their insurance broker know as soon as there is an issue.
He encourages managers to be proactive when they are made aware of a situation that may lead to a claim against them. “We encourage clients to notify circumstances that may lead to a formal claim,” he says. “Our experience is that a large majority of matters can be easily resolved if addressed early on.”
Overall, he adds, and based on Aon’s claims experience, most issues arise from a failure to:
Execute a written management agreement and make sure that the property owner has a copy
Inspect the property before, during and after occupancy and document inspections
Keep the owner fully advised on the condition of the property
Use effective, internal systems to monitor rent collection
Understand the relevant legislation
Michael Gapes, partner at Carter Newell in Brisbane, has extensive experience in a wide variety of insurance-related matters, having worked in private practice and several senior in-house roles in New Zealand, the United Kingdom and Australia.
Mr Gapes specialises in defence cases for all types of professional indemnity claims, including claims against real estate agents, valuers, surveyors, financial advisers, financial institutions, brokers and healthcare professionals.
In an interview with Real Estate Business, Mr Gapes answered a number of questions relating to indemnity insurance and claims, and in particular how the law works in Queensland.
ARE INDEMNITY INSURANCE CLAIMS A MAJOR PROBLEM?
In Queensland, the Personal Injuries Proceedings Act 2002 (QLD) requires injured parties to commence a personal injuries claim via a fairly protracted pre-court process. There are no cost consequences for claimants (and their solicitors) during the pre-court phase. Therefore, in order to maximise their prospects of recovery, personal injury claimants often issue Notices of Claim on all parties who may have had even a peripheral involvement in the accident occurring.
For instance, in the case of a personal injury occurring at a rental property, it is not uncommon for the owner, the property manager, the former property manager and any tradespeople who have recently attended at the property to be joined as respondents to the claim.
The claimant can discontinue his or her claim against any of the respondents at any time up until the conclusion of the pre-court process with no adverse cost consequences. As a consequence, there is no disadvantage to claimants in adopting a ‘scattergun’ approach to joining parties to personal injuries actions in Queensland.
Although property managers may well regard a personal injury claim brought against them as being completely unmeritorious, they are still obliged (pursuant to the Act) to respond to the claim. It must also be remembered that even though a property manager has been joined to a claim which has little prospect of success (or for which the property manager has a complete defence), it still costs money to defend the claim and there is no ability to seek reimbursement of the costs expended whilst in the pre-court phase.
Property managers should be aware that when purchasing a professional indemnity policy, they have entered into a binding contract with their insurer. The insurer generally requires the property manager to pay a deductible in respect of any claim. The deductible is payable regardless of whether the claim has any realistic prospect of success or not.
Property managers should also be aware that they are generally able to negotiate the terms of their professional indemnity policy, including the amount of the deductible and whether it is cost- inclusive or exclusive, prior to inception of the policy.
WHAT ARE SOME OF THE KEY DECISIONS PROPERTY MANAGERS NEED TO MAKE WHEN CONSIDERING A PROFESSIONAL INDEMNITY INSURANCE POLICY?
My key piece of advice for property managers looking to purchase professional indemnity insurance is that you get what you pay for. A low premium generally means a fairly basic policy which will only provide a minimum level of cover in the event of a claim.
Another key piece of advice is, consider the limit of indemnity. There have been quite a number of instances where the courts have awarded tenants and visitors to rental properties damages in excess of $1 million. It is therefore important for property managers to closely look at the adequacy of the limit of indemnity of their policies. As a minimum, I would recommend a $2 million limit of indemnity, but certainly if an agency is engaged in sales as well, a $5 million limit of indemnity may be appropriate.
Property managers should also consider whether they wish to purchase a policy with a cost-inclusive or cost-exclusive deductible. A cost-inclusive deductible is one that becomes immediately payable upon confirmation from the insurer that policy indemnity has been extended and the insured has accepted the offer of indemnity. Therefore, it is an ‘up front’ payment and the insurers will require the deductible to be paid upon confirmation of indemnity. A cost-exclusive deductible is one that becomes payable upon the conclusion of the claim in circumstances where damages are paid to the claimant.
WHAT ARE SOME OF THE COMMON MISCONCEPTIONS PROPERTY MANAGERS HAVE IN RELATION TO HOW INDEMNITY INSURANCE WORKS?
Defending claims against property managers can be expensive, regardless of whether the claim has any merit or not. In addition, property managers need to be aware that their deductible will still become payable, even if a claim issued against them has little or no prospect of success.
Another common misconception is that a landlord’s insurance policy will also extend to cover property managers. Furthermore, property managers should be aware that burying one’s head in the sand and not responding to a Notice of Claim issued under the Act will not make the claim go away.
Rather, it will compromise the property manager’s ability to defend the claim.
WHAT ARE THE KEY PROCEDURES A PROPERTY MANAGER SHOULD ADHERE TO, WITH A VIEW PERHAPS TO LIMITING THEIR EXPOSURE TO THESE TYPES OF CLAIMS?
The best advice that I can give to property managers is to document everything: Property managers should ensure that they conduct regular inspections, complete all inspection reports thoroughly and forward these on to their landlord clients. Once the landlord’s state of knowledge about the property is the same as the property manager’s, the property manager has discharged his or her duty.
It is also imperative that all discussions with landlords and tenants be file noted and that all maintenance requests be committed to writing. Further, property managers should ensure that they regularly follow up any outstanding requests for repairs or maintenance put to a landlord in writing. Any safety issues must be drawn to the attention of the landlord and tenants immediately and appropriate steps taken (for example, cordoning off an area) until such time as the necessary repairs or works can be carried out.
In addition, it is imperative that property managers retain their files and written records for a minimum six-year period.
Stacey Holt, director at Real Estate Excellence Academy, has a tale to tell in relation to indemnity insurance claims. Ms Holt, who operates a real estate industry-focused education and professional development company, recalls an incident that she informed her members about last year.
In this case, Real Estate Excellence assisted a licensee with best practice advice relating to a property under management that has recently been found to have a serious termite infestation.
The property has been under management with the agency for five years; prior to the agency managing, annual termite inspections were carried out. The management agreement did not state that annual termite inspections were to be organised by the agent nor has any other written instruction been provided to state this request.
The termite infestation had been found by chance. The landlord allegedly said the agency was negligent in not organising termite inspections during the past five years. The agency in its defence stated that it hadn’t received instruction from the owner during this period and the owner had never brought it to their attention.
At the time Ms Holt’s company reported the incident, repairs were expected to take six weeks. The tenants were asking for compensation, relocation and other costs, with the matter expected to lead to thousands of dollars in costs.
The agency was recommended to notify their professional indemnity insurer, who advised that the agency may be held liable.
“For many of us (including me) this would deeply concern and surprise you,” Ms Holt said in her note to members.
“Why is the agency liable? For now the insurer is saying that good agency practice is to write to landlords annually requesting their instructions about termite inspections, plus to follow the landlord up in regards to their instruction.
Ms Holt said Real Estate Excellence wrote to the lawyers for the policy and tried to seek some clarification. Below is an extract from their response:
“We have been recommending for some time (in fact, since the Gration v Gillan Investments Pty Ltd decision) that property managers send a standard email or letter to all of their landlord clients annually recommending that they obtain a building and pest inspection in respect of their investment properties. Whilst a very large percentage of landlords may choose not to follow this advice, it is at least transferring the risk back to the landlord in the event of a claim should he or she elect not to follow this recommendation.
We have had countless claims against property managers by landlords, tenants and visitors withdrawn in circumstances where they have been able to prove (usually by way of an email delivery receipt) that they’ve sent such a letter recommending that these inspections be undertaken, but this advice has been ignored and either property damage or personal injury has occurred down the track.
In our view, sending a standard letter (or better yet, an email with a read receipt) is not an onerous task. I am not aware that it is a requirement of any PI policies that this be done, but it is certainly our best practice recommendation, which many of our risk conscious insured clients have adopted.”
“Real Estate Excellence is of the understanding that there would be very few agents and property managers in Australia that have this practice; hence the grave concern,” the note to members said.
“Most agencies have best practice disclaimers such as the one on the Real Estate Excellence Inspection report that includes the following [Real Estate Business note: please seek your own legal advice before adopting the disclaimer below as it is general best practice advice only for the purposes of this article]:
“This report is a best practice visual inspection only; the agency can only provide general advice based on a visual inspection completed on the property. The agency holds no other qualification nor representation other than those of a real estate agent. Annual termite inspections and building inspections are recommended for investment property. The client is asked to copy the report and make comments plus provide instructions if required in the column provided OR email the agency with comments and instruction within seven days of the report being issued.”
“What is now being advised is that this most likely is not sufficient in isolation,” Ms Holt said in her note.
“Real Estate Excellence recommends that agencies immediately implement a best practice and risk management system of writing/emailing all landlords on an annual basis to seek their instructions in regards to termite inspections and general building inspections plus continue to have the disclaimer (with legal advice) on routine inspection reports.
“The annual letter may also be an opportunity to request and update the lessor public liability insurance details, general contract details and also to remind lessors of landlord insurance.”
Stewart Bunn, national communications manager at First National Real Estate, gave Real Estate Business a real estate group’s perspective on the issue.
WHAT ARE SOME OF THE KEY DECISIONS PRINCIPALS NEED TO MAKE WHEN CONSIDERING AN INDEMNITY INSURANCE POLICY?
Principals need to make sure their policy is placed with an innovative company; one that has a history of finding ways to refine their policy so it is specifically suited to real estate.
If your agency has a property management department, it’s also critical that the policy covers bodily injury. Your policy should be ‘cost inclusive’ rather than ‘cost exclusive’. The former provides certainty that if legal costs or additional expenses push the claim amount beyond the policy’s stated cover amount, these excess costs will not need to be borne by the principal.
WHAT ARE SOME OF THE COMMON MISCONCEPTIONS PRINCIPALS HAVE IN RELATION TO HOW INDEMNITY INSURANCE WORKS?
It is essential to understand how and when your excess will be applied. With many policies, notifying your insurer of receipt of a claim attracts the excess liability. Insurers do exist that better understand real estate.
A common misconception is that former owners of estate agencies are covered against claims arising during their period of agency ownership. That’s not necessarily the case.
If a claim, that an owner was previously unaware of, arises following the sale of a business, it will not be covered unless the principal has continued to renew the policy in ‘run off’. That’s why it is essential that property managers/principals make extensive, regular file notes about any hint of trouble or threat made by a tenant or customer of an agency.
If the professional indemnity insurer was informed of a potential claim, during the period in which the business was owned, the policy will most likely cover you against any subsequent claim, after sale or closure of the business.
WHAT ARE THE PROCEDURES/PROCESSES PROPERTY MANAGERS SHOULD ADHERE TO WITH ANY PROPERTY (AND LANDLORD) THEY MANAGE?
Property managers should not enter a new management agreement until they’re able to verify that the landlord has a valid landlord insurance policy – one that includes building and public liability. This should form part of an agency’s policies and procedures when taking on any new property.
Property managers should inspect whatever they can with a view to risk. When it comes to steps, pathways, driveways, handrails and balconies, it’s important to make sure, as much as possible, that there are no faults, loose fittings or anything that stands out as a ‘trip and fall’ risk.
While safety is a reasonable expectation for tenants and customers, real estate agents and property managers may soon need to hire risk assessment experts and this would only increase the cost of investment property management and, therefore, further increase rental prices.