Is your insurance leaving you exposed?

Third-party professional indemnity insurance may not offer adequate protection from theft and fraud, writes James King, senior executive at Clear Insurance Here’s a sobering statistic: in the course of just one year, 50% of UK organisations surveyed experienced economic crime, according to PwC’s Global Economic Crime Survey 2018. With new threats emerging all the time, from sophisticated hackers and scammers to “inside jobs” perpetrated by staff, the threat is very real. Property is no exception. The large sums collected in rents, or held in bank accounts to cover service charges, maintenance and sinking funds, make the sector an attractive target for fraud or theft. Financial crime may be a risk that many landlords, freeholders and management companies see as the managing agent’s responsibility to mitigate and insure against. That could turn out to be a costly assumption. The limits of PI The problem is that too much reliance is placed on managing agents’ professional indemnity (PI) policies as a catch-all solution to cover any losses, without considering the potential limitations. For a start, what if the managing agent is involved in the fraud or theft? Unlikely, you would hope, but still possible. The report found that nearly a third of economic crimes reported in the last two years were committed by employees, so there’s a huge element of trust here. In such circumstances, if a managing agent steals funds, this would fall outside the scope of their PI insurance anyway. Suing the company may not be an option either, if the senior executives have gone to ground. It is also likely that tenants and leaseholders will expect those that engaged them (ie landlords, freeholders or management companies) to bear the loss, while still delivering the services they have paid for. Of course, the vast majority of managing agents are highly reputable – but there are other pitfalls to watch out for. The threat of a cyber-crime attack is much more likely. Scammers making fake requests for payment or hacked emails in which supplier bank details have been changed are commonplace examples. What if the level of cover is insufficient for the scale of the losses, which could be significant? Even if a policy appears to offer adequate cover, its scope may change on renewal if the agent decides it is too expensive or unnecessary, or there is a hefty excess. Clients may not be made aware of this. Taking control At issue here is visibility and control – or lack of it. By relying on third-party PI insurance, landlords, freeholders and management companies cannot be sure exactly what is covered, how much protection they actually have, and what exclusions or other terms and conditions it is subject to. Even more importantly, since it is not their policy, they have no rights to make a claim under it – only the insured can do that. So if the company that took out the insurance is no longer in existence, then neither is the PI policy. Proactive steps are needed to fill these gaps in insurance coverage. It is clear that third-party PI is not enough – specific crime policies are required. It may be that your managing agent has its own crime insurance policy. However, just as with PI, where the policy would be in the managing agent’s name, any landlord, freeholder or management company cannot be sure exactly what is covered nor do they have any rights to make a claim against this policy. As such, the best option is for clients to take out their own crime cover, to ensure that they have the level of protection they need. Crime cover tends to be broad in scope, providing enormous assurance and comfort to the insured. It is also comparatively inexpensive, so it is perhaps not surprising that demand is growing. Insurance is all about peace of mind, but there’s a real concern that the property sector’s high expectations of the protection afforded by PI insurance could give rise to disappointment. Given the risks posed by an ever-evolving fraud landscape, specific coverage for financial crime is a sensible precaution. No matter how good your relationships with managing agents or how competent or reliable they are, it’s not something that should necessarily be left to others. There’s too much at stake. Case study A pro-forma lease for a multi-tenanted development in London’s Mayfair stipulated that the landlord must ensure that all funds held by the managing agent (some £4m) be insured against misuse, theft or fraud. It had been assumed that these risks would be covered under the managing agent’s PI insurance. However, this was not the case: the terms of the lease specifically stated that this was the responsibility of the management company/landlord. If the management company/landlord did not take out their own cover, not only would they be in breach of the lease, they would also be leaving themselves exposed. The crime in question here is hypothetical – but if a senior executive at the managing agent was to run off with the rent or if bank account details were hacked, the chances of recovering the money could be negligible. Of course, individual circumstances vary – but the point is the same: landlords, freeholders and property management companies must take responsibility themselves for protecting the, often substantial, funds held on account.