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30 APR 2018

ASSUMPTIONS WHICH UNDERMINE YOUR RISK MANAGEMENT

An incomplete strategy can arise from incorrect assumptions

An incomplete risk management strategy can arise from incorrect assumptions in the foundations of the strategy, and if these are adjusted then gaps can become very apparent.

The approach to avoiding professional indemnity (PI) insurance claims is commonly founded on doing the job correctly, and therefore risk attention is paid to professional qualification, and maintaining and developing technical skills. 
 
The fact that this strategy is so pervasive is because it is not fundamentally wrong, and is obviously a viable risk management strategy to address many issues. However it is nevertheless an incomplete approach. 
 
The underlying assumption is that the majority of PI claims arise from professional errors and therefore if you don’t make mistakes you won’t have claims. 
 
If by a "professional mistake", an error of knowledge or methodology is intended, the reality is actually different.
 
Whilst claims numbers vary year-by-year, and truly comprehensive claims samples are difficult to obtain, it has been recurring PI and risk consultancy experience that only a third of claims fundamentally arise from a failure or error in knowledge  i.e. in getting the advice, calculations, design or methodology wrong.
 
Two thirds of PI insurance claims ultimately arise from other sources, which may come as a surprise.
 
A short list of common trends would include:
  • Process errors – these are administrative or organisational issues, rather than technical errors. Examples include misspecification (ie a technical typo); rushed jobs due to multiple deadlines, staffing issues or unrealistic deadlines; missed deadlines due to human error (literally bad diary keeping) and so on
  • Sector issues – this is basically being in the wrong place at the wrong time. All the professions have experience of this. For example both good and bad valuers were on the receiving end of the infamous lender confetti letters. The consequences of the Grenfell Tower tragedy is a further example closer to home 
  • Legal errors – here there are a number of different issues including 
    • taking on responsibility for services in the contract which the practitioner did not understand to be part of their brief (not reading the schedule of services or engagement given to them properly, and often occurs where standard template documents are used, or on repeat contracts using previously agreed wordings)
    • failure to formally vary the contract where it is accepted by the parties that a service specified in the schedule of services will no longer be required (so that the contractual obligations still include it, and a failure to provide the service is a breach of contract)
    • accepting additional liability in the contract by guaranteeing outcomes which ordinary English law does not require of a practitioner, or by removing proportionate legal defences to liability which English law make available to a practitioner
  • "Mission creep" – overlapping with the legal issues identified above, is the parallel of the practitioner’s engagement evolving over time, and in some cases without their conscious realisation of what they had taken on
  • Last man standing – being held 100% liable for a claim where only partially or even minimally responsible, and being unable to make recoveries from other parties as they have disappeared, gone into administration or have no insurance or insufficient assets. Under the same heading would also go sub-consultant issues where the practitioner failed to take adequate steps to protect its own recovery from sub-consultants, and therefore is left with paying the client bill for the sub-consultant’s error. Causes of such issues include no contract with the sub-contractor, obligations under the sub-contract being different to the practitioner’s obligations to the client, and no insurance or inadequate insurance held by the sub-contactor
  • Evidentiary issues – no file created, the file is destroyed (perhaps too soon vrs a 15 year liability period for hidden issues) or the file being incomplete (and often due to third party failure such an IT or email account provider discontinuing a service) 
And the list goes on. However this demonstrates that in the list of causes of PI claims, technical error or omission is only one of many factors.
 
The uncomfortable reality is therefore that a firm may not have done anything technically wrong itself, but due to problems with others on the project it may be facing a claim. If there are issues with its contract and its file, the defence of that claim may be fundamentally compromised.
 
Similarly, a firm which devoting all of its attention to technical expertise and technical checking will be missing that it is equally valid in risk management terms to be devoting effort to developing its process risk management. As such, there will be gaps in the overall efficacy of its risk management approach.
 
A more comprehensive risk management strategy needs to address these multiple issues including technical ability, the process and checking of service provision, the legal relations between the parties up and down the supply chain, and the creation, retention and timely identification of records. 
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James  Burgoyne

James Burgoyne

Director - Claims & Technical

Jim joined Brunel in 2009 and heads up the Technical and Claims Department. As well as representing Brunel on the ACE PII panel, he writes occasional pieces for us on insurance, risk and associated topics.

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