Negligence: road to recovery

The last quarter of 2009 saw the UK economy slowly emerging from recession,
with growth predicted to continue through 2010. This may seem like good news,
but that depends on who you are or who your clients are. Towards the end of a
recession, professional negligence claims tend to skyrocket and continue to
increase for years afterwards. There is a key reason for this.

In a recession there is, simply, nowhere to hide. If a professional makes a
mistake during a recession, for example in relation to a valuation, their client
is likely to feel the effects more keenly than when the economy is strong. You
may well have a number of clients that have been on the receiving end of these
kinds of mistakes and there is some basic practical advice that you can pass on.

After a recession people look to recover money from all possible sources.
Professionals in particular, including valuers, are vulnerable to this and
professional negligence claims rise.

This particularly affects valuers of property and financial assets. In a
rising market, when the value of assets generally increases, undervaluations are
often overlooked or (artificially) hidden. On the other hand, in a stagnant or
falling market, asset overvaluations quickly become apparent. At that point, the
level of care exercised by the valuer comes under scrutiny and any potential
negligence comes to light.

* In a rising market the difference between a negligent valuation and the
true value of an asset is often masked by the rise in the value of the asset.

* Once a market begins to fall, a lender may not recover what it lent and so
will scrutinise the original valuation in more detail.

* Purchasers of an asset may realise quickly that what they own is not worth
what they thought. Previously masked negligence comes to light.

It isn’t usually possible for valuers to retrospectively correct negligent
valuations. Unfortunately, what’s done is done. However, that doesn’t mean that
an audit of valuations that the valuer thinks may be “suspect”, isn’t
worthwhile. Such a process can be invaluable in identifying areas of possible
exposure, and enabling the valuer to update and improve their risk management
procedures. If the worst does happen and a claim is made, the valuer’s insurer
will appreciate any efforts taken by the valuer to reduce its risk profile going
forward. Professional indemnity insurance policies require policyholders to
report not just claims made against them, but also circumstances which could
give rise to a claim against them. Any potential problems therefore need to be
advised to insurers as soon as possible. If you do not, your cover could be at
risk.

* It is not usually possible, to “fix” valuations retrospectively

* Valuers should take the opportunity of any claims that do arise to improve
and update their assess risk management procedures: insurers will appreciate it.

From the point of view of a lender or purchaser, if you have a client in this
area that you believe has been exposed to a negligent valuation then prompt
action is required. Any claim against the valuer will need to be made within six
years of the date of the loss (usually the date of completion of the asset
purchase).

Finally, whether your client is a valuer, a purchaser or a lender, you will
need to consider whether the purchaser or lender may have contributed to their
own loss. One of the more popular arguments used in attempting to obtain a
finding of contributory negligence by a lender is that of an excessive loan to
value (LTV) ratio. There are a number of cases from the 1990s which deal with
the LTV ratio and valuers and their solicitors are often keen to argue that a
LTV ratio of more than 75% will automatically lead to a finding of contributory
negligence.

In fact, all cases are dealt with on their merits and, if a lender can show
valid reasons for a higher LTV ratio, such arguments can be defeated. This can
include demonstrating that proper processes were in place to accurately assess
the risk, the creditworthiness of the borrower and a consideration of the
relevant market at the time. Other examples of arguments advanced for
contributory negligence include a failure to perform due diligence enquiries of
a borrower, failure to follow lending procedures, no critical evaluation of the
information supplied, a failure to note a substantial discrepancy between a
valuation and a recent purchase price and a general failure to read the
valuation report in sufficient detail.

* Contributory negligence arguments are popular with valuers

* A high LTV ratio does not doesn’t automatically mean that the lender has
contributed to its own loss

* All cases are treated on their merits

Rob Fink is a partner at professional negligence specialists Fenchurch
Law.