COVID-19 is having a devastating impact on the lives of individuals, businesses and societies all over the world. As the human cost of COVID-19 continues to mount, it is clear that there will also be a huge economic fallout which many predict will be more significant than the 2008 global financial crisis. Indeed, some economists believe that a number of economies are already in recession. Recent history has taught us that there is a correlation between recession and claims against professionals. In the first of two articles, we examine the potential implications of COVID-19 for risk profiling for professionals and their insurers. This first article looks at the implications for solicitors, surveyors and auditors.
Recent weeks have seen a transformation in how law firms operate, with most moving to remote working. Many firms have invested heavily in their IT systems and have well developed business continuity plans but some do not. Some law firms may, therefore, face an increase in risk profiling caused by:
- IT systems failing and critical deadlines being missed
- Documents going missing if the firm does not have a sophisticated document case management system
- Cyber fraud especially on smaller firms with limited IT protection thereby increasing the firm's exposure to breach of trust type claims
- Data breaches
- Insufficiently developed business continuity plans and/or partners having to focus on managing the firm's response to the crisis over client needs.
Business resilience may also be tested and the risk of claims increased if deadlines are missed or the quality of advice or service suffers as a result of:
- A material number of solicitors or other employees being sick or furloughed
- Employees struggling to adapt their work practices whether as a result of logistical reasons, combining family and work commitments, mental health or other issues
- Supervision regimes faltering.
Firms have also had to respond to the practical and evolving challenges of providing a legal service in lockdown. Litigation deadlines still need to be met. Trials will continue. Commercial deals will still go through. Private client solicitors have seen a huge surge in demand for wills. Many law firms are embracing technology and other creative solutions (for example "wills through the window") but not all law firms will be agile enough to adapt quickly to these practical challenges and some may be using untested solutions.
Termination provisions in existing contracts are coming under scrutiny as businesses try to manage their risks. Questions may be asked of solicitors, and indeed claims made, if the termination provisions are judged inadequate.
Finally, some firms may fail to notify claims or circumstances to insurers in accordance with policy terms because risks are harder to monitor remotely or simply due to the operational and other pressures.
Surveyors and valuers
Just a few short months ago asking a surveyor to list his or her main concerns for the future might have produced a response on a possible no-deal Brexit or the ongoing aftermath of Grenfell. Surveyors are now facing a dramatically different landscape due to the coronavirus crisis.
On 26 March 2020, the UK residential property market was brought to a halt by government advice against moving house whilst measures are in place to fight coronavirus. Surveyors were specifically advised not to carry out non-urgent surveys in homes where people are in residence and that no inspections should take place if any person in the property is showing symptoms of the virus, self-isolating or being shielded. It may be possible for urgent surveys to be carried out in empty properties or those where occupiers are out of the house or following guidance to stay at home and away from others. In those cases, surveyors must follow social distancing rules and wash their hands frequently. No surveyor must work if he/she has coronavirus symptoms, however mild. It is clear that the above guidelines will have a dramatic effect on the number of residential surveys being carried out with a resulting drop in income for surveying practices.
We also anticipate that the income stream of surveyors acting as managing agents may reduce as tenants look to reduce rents and service charge payments in circumstances where the Coronavirus Act will legislate to prevent any business from being forced out of its premises for non-payment of rent until at least 30 June 2020. Despite this, surveyors acting as managing agents will need to ensure that they are still complying with health and safety legislation together with any coronavirus specific rules and regulations. Surveyors in difficulty should note that the RICS website provides guidance on the support available from the government as a result of what is effectively a freeze on property transactions.
Although there has been a downturn in activity for surveyors, for many there will be a shift in risk profiling and care must be taken to follow the RICS guidance to include the following:
- The RICS has provided a valuation practice alert on coronavirus. This notes the importance of making clear any restrictions of information or on the ability to inspect when carrying out valuation work. Such restrictions must be agreed with the client and made clear in any subsequent report. Terms of engagement must be amended as appropriate. Such requirements also apply to any valuation assumptions made as a consequence of restricted access and/or valuation information. Surveyors will need to bear these requirements in mind particularly if they are asked by mortgage providers to carry out remote valuations, although these are unlikely to be possible on blocks of flats or new builds and certainly not where buyers are looking for homebuyer reports. Failure to do so will leave surveyors exposed to future claims
- The RICS has also provided guidance for its members considering making a material uncertainty declaration and has provided a form of wording for such a declaration. Whether material uncertainty exists will be a decision for the individual member and the RICS has made it clear that the declaration is to be used as a declaration not a disclaimer. Whilst we anticipate that there will be relatively few surveys taking pace whilst the lockdown is in place, surveyors should note the importance of ensuring that their reasons for declaring material uncertainty or deciding that the declaration is inappropriate are the subject of a sound rationale to explain the decision making process which should be recorded for future reference. This should help to avoid claims arising from such surveys down the line.
A fall in property values could potentially lead to claims by lenders or purchasers against surveyors for alleged negligent overvaluations particularly if a prolonged economic downturn leads to a rise in unemployment/reduction in income and a rise in mortgage repossessions. The future for the property market is, of course, very uncertain at present. However, Knight Frank's most recent forecast predicts a 3% fall in residential price growth nationally in 2020 as a result of coronavirus and a 38% fall in transactions. Residential development is also predicted to suffer with sales of new homes expected to fall in both 2020 and 2021. On a brighter note, Knight Frank predict a property revival in 2021 with volumes predicted to be 18% above the level seen in 2019. A 5% rise in house prices nationally is also predicted in 2021. It should be noted however that these predictions assume that the current social distancing restrictions will be gradually lifted throughout June. We anticipate that a longer lockdown will cause Knight Frank to review their predictions.
The government requirement that people should only work away from home when such work cannot be undertaken from home may result in an increasing number of audits being carried out remotely. Such logistical changes may necessitate new technology being used to obtain important audit information. It will still be necessary for auditors to obtain sufficient appropriate evidence to support the conclusions of the audit, and to include appropriate disclaimers and qualifications in audit reports where necessary to reflect the way in which the audit has been carried out and the information (or lack of it) available to auditors. If these new working practices are not implemented carefully it could lead to them facing an increased risk of being exposed to claims for a number of reasons including:
- that they fail to obtain all relevant information
- the audit findings are not properly supported
- it was inappropriate to complete the audit without undertaking a physical inspection at the audit company's premises
- if the technology adopted fails.
In light of the logistical changes to the way that audits may have to be carried out, the FRC is recommending that, where possible, audits should be delayed or extended during this period. If that is not possible the FRC's guidance to auditors on Audit Issues Arising from the Consequences of the Covid-19 (Coronavirus) Pandemic addresses the difficulties facing companies and auditors in preparing financial statements and carrying out audits at this time including the possibility that auditors may be required to modify their audit opinion because particular audit procedures cannot be performed adequately or at all such as physical inventory testing because of restrictions on travel.
Furthermore, the FRC note that significant audit areas where the judgement of management is required such as asset and liability valuations, or the assumptions and cashflow estimates underpinning the use of the going concern basis of accounting, may be difficult to support in the view of the significant economic and political uncertainty at present or may not be agreed by the auditor which again may lead the auditor to issue a qualified opinion at least in relation to specific items.
If audits are successfully delayed or auditors issue qualified opinions in certain circumstances it could reduce the risk of claims arising from a change in working methods necessitated by remote working during the COVID-19 crisis. However, if the current restrictions remain in place for a significant period, delaying audits may not be possible. Further, if auditors seek to qualify their reports they can expect to come under significant pressure from the subject companies' directors, concerned about the impact that may have on their businesses, which may, in some cases, also result in complaints or claims against auditors.