At the beginning of 2018, we reflect on recent developments in insurance disputes, particularly in the professional negligence arena.
As expected, the socio-political uncertainty of 2016 continued unrelenting into 2017. On the political landscape, motifs for the last year included political name-calling ("mugwump" being a favourite) and a rise in political leaders with questionable agendas. Perhaps reassuringly, the legal agenda in 2017 was dominated by enterprise and Brexit negotiations. The courts consulted on modernisation initiatives whilst setting significant precedents.
In this article we consider principles of duty of care and causation for professionals reviewed and reinforced in 2017, and we also look at unsettling developments on issues such as breach of trust and cyber security penalties. We also consider developments for construction and tax professionals and in non-contentious insurance. A theme running throughout is the continued emphasis by the courts on providing a comprehensive client-focussed service, which demonstrates the fairness and reliability to be expected from professionals.
We also look ahead for what may be to come. GDPR and (again) Brexit will undoubtedly deliver further shifts for professionals in 2018. For further information, please read on.
It has been a busy year for the courts in respect of claims against solicitors, with both the Court of Appeal and Supreme Court clarifying principles applicable to negligence claims against solicitors, and the Supreme Court interpreting the Law Society's Minimum Terms and Conditions (MTC).
Causation in loss of chance cases
In Perry v Raleys  EWCA Civ 314, the Court of Appeal held that in considering causation in loss of chance cases, there should be an assessment of the prospects of the claim succeeding and an award of damages made on that basis. Only if it was overwhelmingly clear to the court that the claim would or would not fail, would the court make a 100% or 0% award. Permission to appeal to the Supreme Court has been granted.
Scope of duty
The Supreme Court has clarified that the SAAMCo cap applies to the nature of the duty which the professional has breached and not causation (BPE Solicitors v Hughes-Holland  UKSC 21). In cases where the solicitor's duty was restricted to providing information only, the solicitor would only be liable for the consequences of that information being wrong.
Following the 2016 Court of Appeal decision in Minkin v Landsberg  1 WLR 1489, the Courts have continued to take into account the size of the fee charged in considering the scope of a professional's duty. Although it has been held that the size of the fee will have an impact upon the duties the solicitor is bound to undertake (Thomas v Hugh James Ford Simey  EWCA Civ 1303), the Court of Appeal was unwilling to find that no duty existed in circumstances where no fee was charged but services were provided in a professional context (Burgess v Lejonvarn  PNLR 25 – a case relating to an architect).
Guidance has been provided by the Supreme Court on the interpretation of the aggregation provisions in the MTC which allow the aggregation of claims which arise from "….the same act or omission in a series of related matters or transactions; or …..similar acts or omissions in a series of related matters or transactions…". In AIG Europe Limited v Woodman and other  UKSC 18, the court held that there must be some inter-connection between the matters or transactions, which is an "acutely fact sensitive exercise." Not all aggregation clauses will mirror the MTC and the court ruling may therefore be of limited assistance.
- Supreme Court confirms limitations on scope of solicitors' duties
- An end to cannibalism?
- Professional negligence - no contract, no fee, no problem? Court of Appeal on risks of giving free advice
- Common sense prevails as Supreme Court hands down aggregation decision.
What is on the horizon for 2018?
A number of solicitors' negligence cases will be in the appeal courts in 2018.
The Supreme Court will consider the Allied Maples "loss of chance" test of causation in the Perry v Raleys appeal.
Conveyancers will anxiously await the Court of Appeal judgment in Dreamvar (UK) Limited v Mishcon de Reya  EWHC 3316 on the liability of professionals where property is purchased through an identity fraud. In a worrying development, Mishcons were not excused for breach of trust in releasing completion monies to fraudsters despite acting honestly and reasonably.
And the profession's relief that both solicitor and counsel were exonerated of negligence after a door-of-the-court settlement could be short-lived if the appellant is successful in Dunhill v W Brook & Co  EWHC 165 (QB).
We anticipate that soaring ground rents for leasehold properties will continue to be a fertile source of claims against solicitors in the year to come. Fraud and cyberattacks will remain risk areas for solicitors in 2018. And the coming into force of the General Data Protection Regulation in May 2018 may give compliance officers and risk managers sleepless nights.
The Solicitors Regulation Authority is producing two new Codes of Conduct, one for solicitors and one for firms, and a new, shorter Handbook. Plans to provide greater flexibility and enable solicitors to work for unregulated entities have not found favour with the Law Society and many solicitors, who fear that the public will not understand the limited protections in place when using solicitors in non-regulated firms. The new Handbook and Codes could come into force in late 2018.
Right at the end of the year, the Supreme Court handed down an important decision relating to causation in claims against surveyors. Otherwise, it was a relatively quiet year for significant cases affecting surveyors.
Causation and the 'but for' principle
The Supreme Court confirmed the continued relevance of the "but for" causation test in the case of Tiuta International v De Villiers Surveyors  UKSC 77. This case concerned a lender wishing to refinance an earlier loan to the borrower and instructing a surveyor to provide a valuation of the property for that purpose. The Supreme Court held that the lender could only recover the new money advanced, not the existing loan, because the lender was already exposed to the loss on that loan whether or not the refinance transaction proceeded.
For further information about this decision, see our article: Supreme Court rules on causation in valuers' negligence
Margin of error
In Dunfermline Building Society (in Building Society Special Administration) v CBRE Limited  EWHC 2745 (Ch), the High Court was asked to decide whether the valuation of a substantial development site fell outside of the applicable margin of error. The Court concluded that the development was unique and so a 15% margin of error was appropriate. As CBRE's valuation was within that margin of error, it was not negligent. The Court had regard to the decision in K/S Lincoln and Others v CB Richard Ellis Hotels Limited  EWHC 1156 (TCC), which set out the margins of error which would apply to standard, unusual and unique properties. It is now likely to be an exceptional case where a margin of error of more than 15% will be allowed by a court.
What is on the horizon for 2018?
The RICS is predicting a cautious outlook for both the residential and commercial property markets in the next year. As the boom and bust cycles of the past have often heralded a spate of valuation claims against surveyors, the hope is that flatter markets will mean fewer claims for the foreseeable future.
Recently published guidance for judges and practitioners, and changes to the Practice Direction on Expert Evidence may encourage greater use of concurrent evidence at trials of claims against surveyors. Will 2018 be the year when hot-tubbing finally gains mainstream acceptance?
Whilst there have been a number of changes affecting accountants in the tax world in 2017, the most notable of these has to be the decision in the Rangers case and the use to which HMRC have stated they intend to put this going forward.
Disguised remuneration schemes
In July 2017, the Supreme Court released their unanimous decision about the disguised remuneration tax avoidance scheme used by Rangers football club. The Supreme Court agreed with HMRC that the scheme used by Rangers did not work – that scheme tried to pay staff by using an employee benefit trust (EBT). The Court basically said that Rangers should have deducted income tax and national insurance contributions from payments that they made to the scheme. That is not controversial and was a decision that was widely expected.
The Supreme Court stated that, in principle, any employment income paid from an employer to a third party would be taxable as employment income. HMRC have used that statement to support its view that the decision applies to a wider range of disguised remuneration schemes, no matter what type of third party is used, including EBTs (including those where no loans are made), contractor loan schemes, or other EBTs where employers have funded retirement benefit trusts. HMRC have stated that they intend to use the Rangers decision to take action against a wide range of disguised remuneration schemes and are taking a very aggressive approach. It remains to be seen whether the stance taken by HMRC will be challenged by the payers or whether, given the threat of litigation and the "loan charge" (which will apply to any outstanding loans which remain unpaid as at 5 April 2019), they will simply "cave in" and pay the tax, interest and penalties being sought.
The impact on advisors who have been involved in schemes, whether as promoters or introducers, is likely to be significant. Particularly for those who have been advising their clients that their schemes do not fall within "Rangers" and who are now likely to be caught out by HMRC's more aggressive stance.
What is on the horizon for 2018?
The other major change which impacts on those involved in taxation is the new law designed to prevent the criminal facilitation of tax evasion, which came into force on 30 September 2017. This makes companies and partnerships criminally responsible if they fail to prevent the criminal facilitation of tax evasion by a member of their staff, external agent or other associated person, even where the business was not involved in the act or was unaware of it. Organisations therefore will have to put in place reasonable methods to prevent facilitation by associated persons, will have to undertake risk assessments, due diligence and train their employees, and create a culture where tax evasion is "never acceptable".
This new corporate criminal offence will therefore impact on professionals advising on tax planning, as they will have to bear in mind whether any advice they give may facilitate tax evasion and give rise to liabilities which they had not previously had to take into account. Those advisers who do not alter their behaviours (and do not demonstrate that they have taken the new offence into account) will be at significant risk.
Liability for project over-runs and costs
We have seen a significant increase this year in claims against construction professionals for project cost over-runs. In other words, when a project costs more than the employer wants to pay, the employer attempts to recover the additional costs from the construction professional.
The basis of the claim is often that the professional:
- negligently managed the project, resulting in delays to the project, including negligently failing to warn the employer of the delays, or failing to warn the employer of the impact of client requested variations. As the project takes longer to complete, the employer will incur additional costs, for example employing other professional consultants for a longer period of time and paying the building contractor for its "loss and expense"; and/or
- provided a project cost which was negligently low. The employer subsequently commences the project in reliance on the professional's calculated project cost. When it later becomes apparent that it is impossible to complete the project for that budget, the employer then pursues the professional for losses it has suffered as a result.
As always with construction, many of these claims are dealt with via adjudication and so do not reach the courts. However, one case did reach the court in 2017 – Riva Properties Ltd and others v Foster + Partners Ltd  EWHC 2574 (TCC). In this case, the employer (Riva) told the architect (Foster) that its budget to build a project was £75 million. The architect went on to produce a design, however, when costed by the employer's costs consultants, it transpired that the design would cost £195 million. The architect consequently advised that the design could be value engineered down to £100 million. The employer therefore increased its budget to £100 million and continued to press ahead with the project, incurring significant design costs with the rest of the design team. It subsequently became apparent that it was impossible to reduce the cost of the design down to £100 million (and it was held that the architect's advice that it could be was negligent). The Court ordered the architect to reimburse the wasted professional fees incurred by the employer, which were over £3.5 million. The moral of the story – put client service first, keep an open dialogue with your client, and don't promise the impossible.
What is on the horizon for 2018?
Potential hot topics for 2018 include:
The outcome of the Government's consultation on the Housing Grants Construction and Regeneration Act 1996 (the Construction Act). The Construction Act has been the key legislation for construction professionals over the last 20 years, responsible for implying into construction contracts certain payment processes and the adjudication regime. The previous revision of the Construction Act in 2009, which came into force in 2011, introduced the concept of "smash and grab" adjudications. This spawned a large volume of high value disputes in the subsequent years and for construction professionals and their insurers, this has significantly increased the value of the claims those professionals face when they fail to issue payment notices on time. The consultation is looking at the effectiveness of the 2011 regime, as well as the Adjudication regime in general. The consultation ended on 19 January 2018 and the outcomes will be available in due course. For further information, see our article on the subject
The impact of Building Information Modelling (BIM). To date, there has not been a deluge of claims in the courts regarding who within the design team has liability for errors in a BIM model. However, as the use of BIM increases, in terms of the number of projects on which it is used and the more widespread use of BIM in the maintenance phase of an asset's life, claims will undoubtedly arise. On the transactional side, we are seeing far more use of BIM, which suggests claims are on their way.
Procedurally, a review of the current (second) version of the Pre-Action Protocol for Construction & Engineering Disputes had been expected to take place in October 2017. However, this has been postponed until after February 2018.
Similarly, there was an expectation that a revision of the TCC Guide, last revised in 2014, would be published in 2017 to take account of procedural changes and also technological advances in terms of the management of electronic documents in particular. Since this never materialised, the likelihood is that a new version will be published at some point in 2018, so watch this space!
D&O cover is becomingly increasingly important as class actions against directors and prosecutions have hit the headlines.
Class actions and prosecutions
The emergence of class actions as a threat is demonstrated by the RBS Rights Issue litigation. Claimant shareholders were seeking to recover losses from key RBS directors (and RBS itself) as a result of the prospectus for the rights issue being allegedly misleading. The trial was vacated at the last minute in June 2017 following the majority of shareholders accepting RBS' offer.
In the criminal courts, the trial of three Tesco directors accused of misleading the market about the company's profits in 2014 is currently underway. The Serious Fraud Office is bringing the prosecution against the former executives after a whistleblower prepared a report which claimed that Tesco had over-estimated its profits.
Directors personally liable for damages award
Another whistleblower was successful in an Employment Appeals Tribunal decision in 2017 which upheld a finding that two non-executive directors were jointly and severally liable with the employer for damages of over £1.7m payable to a CEO who was dismissed for whistleblowing (International Petroleum v Osipov UKEAT/0058/17/DA).
What is on the horizon for 2018?
From October 2015 changes introduced by The Small Business, Enterprise and Employment Act 2015 made it possible for liquidators to assign (ie sell) claims arising from fraudulent and wrongful trading, transactions at undervalue, preferences and extortionate credit transactions. The new law has increased directors' risk of personal liability, as their exposure to the risk of litigation by creditors or third parties who have "bought" such claims has increased. A leading insolvency litigation funder, which either funds insolvency practitioners or buys claims from them, is reporting buoyant business.
The ever-expanding personal accountability of directors, as demonstrated by the proposed extension of the Senior Managers & Certification Regime to insurers and all other FSMA-authorised firms in 2018 is likely to be another source of claims under D&O policies.
And the introduction of the General Data Protection Regulations in May 2018, and the constant threat of cyber-attack is another potential source of problems for directors and officers, and their insurers, in the year ahead.
Claims arising from the equalisation of pension ages
Solicitors, and other pension advisors, frequently face claims by employers and/or trustees in circumstances where there has been a failure to properly document the equalisation of men's and women's normal pension ages (NPA), which was required following a decision of the European Court of Justice in 1990 in Barber v Guardian Royal Exchange.
Typically, prior to Barber, normal retirement age was 65 for men and 60 for women. As result of Barber, from the period from 17 May 1990 to the date the scheme equalises NPA for men and women (typically at 65), the lower NPA (typically 60) must apply to both sexes for pension accrued in that period. Where the period is lengthy this will likely add significant costs to the funding of pension schemes.
Previous domestic case law has suggested that the correct interpretation of European law is that a scheme amendment to equalise cannot be made retrospectively. The Court of Appeal in Safeway v Newton  EWCA Civ 1482 has thrown this into doubt.
In Safeway, the scheme amendment power required that changes to benefits be made by deed but expressly allowed for retrospective amendments. Following Barber, on 1 December 1991 the scheme issued a letter to members stating that NPA for men and women would be equalised at 65 with immediate effect but a deed formally amending the rules (with purported retrospective effect) was not executed until May 1996.
The Court of Appeal held that it was not clear from existing European case law that where, as here, domestic law allowed it, schemes could not be equalised retrospectively. Accordingly, the Court referred the issue to the Court of Justice of the European Union (CJEU). Therefore, if the power of amendment in a scheme allows retrospective changes to NPA then it may be worth encouraging claimants to await the outcome of the reference to the CJEU before commencing a claim against their professional advisors for failure to equalise the scheme at the time intended.
What is on the horizon for 2018?
There are various cases coming up in the next year relevant to pensions professionals relating to the validity of amendments to pension schemes, an issue that so often lead to claims against professional advisors. The Supreme Court will be hearing Barnardo's v Buckinghamshire  EWCA Civ 1064 on whether a scheme's governing deed permits the trustees to switch pension increase from RPI to CPI. The Court of Appeal will be hearing British Airways v Spencer  EWHC 2477 (Ch) on whether trustees were permitted under the power of amendment in the scheme to introduce discretionary pension increases.
More generally, this year may see the introduction of recent government proposals regarding auto-enrolment, which will reduce the auto-enrolling age limit to 18 and remove the lower limit on earnings on which contributions must be paid. Professional advisors will need to monitor very closely this rapidly changing area to ensure they give the correct advice and avoid claims in the future.
Against the backdrop of tightening regulation, 2017 has been another year of spectacular data breaches and cyberattacks. The year also closed with an unwelcome court decision.
In May, the WannaCry ransomware attack dramatically affected thousands of businesses worldwide with the main UK victim being the NHS, resulting in unprecedented disruption for patients. This highlighted the problem of ransomware as opposed to data theft.
The Yahoo and Uber cyberattacks have shed more light on the scale of the problem whilst incidents involving credit report firm Equifax and cyber security giant Kaspersky Lab have shown that businesses more usually associated with countering online risk can also fall victim.
Penalties imposed by the UK's Information Commissioner's Office have increased in both severity, reportedly almost tripling since 2014, and number, roughly doubling from 2016 to 2017. The ICO has also issued more enforcement notices than ever before.
The first instance decision in WM Morrison Supermarkets Plc  EWHC 3113 (QB) in December was therefore an unwelcome end to the year for businesses already concerned about cyber risks. The court held that Morrisons was vicariously liable for the actions of a disgruntled employee who perpetrated a breach of sensitive employee data as an act of retribution, despite having done very little wrong itself.
What is on the horizon for 2018?
Looking ahead, the General Data Protection Regulation comes into effect on 25 May 2018 and this brings with it much tighter regulation. This will affect all businesses holding personal data and not just "data controllers" who are the subject of current data protection legislation. The UK Government has also pledged to implement the EU Directive on the security of network and information systems (NIS) setting security standards for operators of essential services, also coming into effect in May.
Brokers and market commentators confirm that the take up of cyber insurance is now growing and with new regulations, an active ICO and the potential for more group actions, 2018 is going to be lively in cyberspace.
Overall, decisions this year seem to have been more favourable for financial advisors and their insurers.
In Denning v Greenhalgh Financial Services Ltd  EWHC 143 (QB) the court refused to extend the professional's retainer to include a duty to advise on the possibility of a claim against the client's former pensions advisors.This case highlights the importance of a carefully prepared professional retainer.
Limitation and delay
Limitation arguments saved the day for the financial advisors in Halsall & Others v Champion Consulting Ltd  EWHC 1079 (QB). The tax advice given to the Claimant investors in 2003 and 2007 was found to be negligent and caused the Claimants' losses but the investors knew that the schemes in question were defective by 2011 and so failed to bring their claims within the 3 year secondary limitation period under Section 14A of the Limitation Act 1980.
Delay was also relevant in Twaite v Revenue and Customs Commissioners  UKFTT 591 (TC) and Jackson v Revenue and Customs Commissioners  UKFTT 341 (TC) both concerning delays by advisers in giving notice about enhanced pension protection. In Jackson, the delay was excusable but in Twaite it was not.
The Financial Ombudsman Service
The Financial Ombudsman Service (FOS) has also been a party in several cases this year.
FOS had no jurisdiction to consider a complaint about the withdrawal of an offer of redress – R (on the application of Marizona Properties Ltd) v FOS  EWHC 1135.
FOS is not required to apply the law, regulatory guidance or best practice but must decide complaints according to what is fair and reasonable – however its decisions still need to properly address the issues raised (R (on the application of Kelly) v FOS (QBD 13/12/2017)) and to say why law, guidance or best practice were not being applied (Aviva Life & Pensions (UK) Ltd v FOS  EWHC 352).
However in Full Circle Asset Management Ltd v FOS  EWHC 323 the Court agreed with FOS that giving a medium risk investor a medium risk model portfolio could still be found to be unsuitable if it was not explained properly.
What is on the horizon for 2018?
Looking ahead in 2018, fintech, blockchain, artificial intelligence and Brexit are likely to continue to dominate the financial services press but claims trends are harder to predict. A Bitcoin for your thoughts anyone?
What is on the horizon for 2018?
Insurance Distribution Directive (IDD)
The Financial Conduct Authority (FCA) launched three consultations into the implementation of the IDD in the UK and by the end of December 2017 had published some near-final rules and two policy statements. The application date of the IDD has been delayed until 1 October 2018, but the date for transposition into national law remains 23 February 2018.
Wholesale broker study
The FCA published a terms reference for a market study into the wholesale insurance broker market, which will explore how completion is working in the sector and how it could be improved. In particular the study will focus on market power, conflicts of interest and broker conduct. The FCA aims to publish an interim report by Autumn 2018.
On 20 December 2017, the FCA and HM Treasury published statements on EU withdrawal in relation to financial services. HM Treasury announced that if necessary (ie depending on the outcome or progress of negotiations) it will pass legislation:
- for a "temporary permissions" regime that will enable EEA firms and funds operating in the UK to continue to do so after the UK withdraws from the EU; and
- to ensure that contractual obligations, such as insurance contracts, which are not covered by such a temporary permissions regime can continue to be met.
The Prudential Regulation Authority (PRA) also published its proposed approach to authorising and supervising third-country insurers that carry on (or intend to carry on in the future) insurance business in the UK through a branch or by forming a subsidiary.
Insurance Linked Securities (ILS)
The Risk Transformation Regulations 2017 came into force on 8 December 2017 and provide for a new regulatory framework for ILS. The Regulations are part of a framework of measures also being developed by the PRA and the FCA for the authorisation and supervision of insurance special purpose vehicles. The FCA and PRA have also published their final rules on the new regulatory framework in light of the new regime. The Risk Transformation (Tax) Regulations 2017, which implement a new tax framework for qualifying transformer vehicles that issue ILS, came into force on 15 December 2017.
Extension of Senior Manager and Certification Regime (SMCR) to insurers and all FCA firms
The PRA opened consultations on the extension of the SMCR, which already applies to banks, to insurers. The FCA also opened consultations on the same and on the extension to all FCA firms, including insurance intermediaries. The FCA and the PRA anticipate that the SMCR will apply to insurers in late 2018.
Final thoughts - what does the future hold?
As for the future for professionals, a number of developments are on the horizon.
Professionals facing regulatory or criminal investigations, or self-reporting breaches to regulators, should take a cautious approach to information they commit to writing after the decision in SFO v Eurasian Natural Resources Corporation Ltd  EWHC 1017 (QB). The court held that notes taken by solicitors and reports produced by forensic accountants during internal investigations – but before a decision had been taken to prosecute – were not subject to legal professional privilege. An appeal against this decision will be heard by the Court of Appeal in July 2018.
The issue of litigation costs will also see significant shifts if Lord Justice Jackson has his way, following a review of civil costs in 2017. Although Lord Jackson's review will not be implemented in full in the immediate future, we expect the fixed recoverable costs regime to be extended to a wide range of cases - including lower value professional negligence claims – by the end of 2019.
The huge costs generated by the disclosure process in civil litigation may be a thing of the past, if a pilot scheme set to start in the Business and Property Courts this year proves successful. The pilot scheme is aimed at achieving "wholesale cultural change" to the standard disclosure process.
The Insurance Act 2015 replaced an insured's pre-contract duty of disclosure with a duty of fair presentation, and the Enterprise Act 2016 imposed a duty on insurers to make prompt payment of claims. So far, neither Act has generated many reported cases, but we expect the courts to hear greater numbers of claims in 2018.
And finally, as the year progresses the continuing political and economic uncertainty both at home and in the global arena will undoubtedly impact on professionals working in every sphere. How that might ultimately play out… your guess is as good as ours!