Implications of COVID-19 on Professional Indemnity Insurers

Legal Directions

In our article published on 30 April 2020, we canvassed some potential implications arising from the COVID-19 outbreak for D&O insurance. In this article, we focus on some potential implications arising from the pandemic for professional indemnity insurance.

Given the evolving and uncertain nature of the pandemic, what follows is not intended to be exhaustive. Rather, our comments below are a snapshot of potential risks and exposures for professional indemnity insureds and insurers by reference to certain industry sectors.

Wealth professionals

The pandemic has resulted in extreme share market volatility in recent months. As a consequence, financial planners, investment managers and superannuation trustees are likely to come under the spotlight from aggrieved clients and beneficiaries, which have suffered significant losses on their investment portfolios and superannuation balances. Based on our experience, this represents fertile ground for PI claims against wealth professionals.

We expect that such claims will be formulated on the basis that investment recommendations and decisions prior to the outbreak were overexposed to riskier investments when they should have geared towards more conservative investments. It was common for such claims against advisers to be brought after the Global Financial Crisis along these lines. Similarly, it is possible that claims might be brought to the effect that advisers and trustees failed to recognise the severity of the outbreak once it surfaced and make timely recommendations and decisions to move funds to safer investments before the widespread falls in market values.

Of course, the foreseeability of losses caused by a pandemic will be a critical issue for claims against professionals in this sector (and for that matter, other sectors) but any claims will be inevitably infected with the benefit of hindsight.

Audit & accounting professionals

There is no doubt that the current health and economic crisis is placing enormous pressure on businesses and this is likely to increase the risk profile for auditors and accountants in various ways. In particular, we anticipate that:

  • Some auditors may be reluctant to issue unqualified audit reports. Otherwise, failing to identify potential ongoing concern considerations or other risks may expose auditors to claims by shareholders, lenders and other business stakeholders as a result of material misstatements to financial statements and accounts
  • Some accountants may be overwhelmed with the changing economic and regulatory environment, and provide incorrect advice about tax implications and relief measures.

Real estate & valuation professionals

There has been much talk about the possibility of a significant crash in property prices. Recent reports have indicated that the property prices in Australia may fall by anywhere between 5% and 30% (and possibly more) due to COVID-19. This has not yet occurred but if it eventuates, it could lead to claims against real estate agents and valuers.

As to real estate agents, this could be in the form of

  • Failing to advise vendors to sell their properties before prices start to fall significantly. We are aware of vendors insisting on extended settlement periods, presumably on the advice of agents to mitigate against this risk.
  • Misrepresenting the features and value of a property to purchasers to achieve a quick sale or the terms of lease agreements to tenants who have lost income streams.

The operation of a trust account with workforces working remotely might lead to an increased risk of cyber and social engineering fraud. The same risk applies to other professionals who operate a trust account including lawyers.

As to valuers, it is possible that lenders might argue that valuations were too high and did not factor in a general fall in property prices with the pandemic. This is probably more likely to apply to valuations after the outbreak.

Insurance professionals

Brokers will inevitably face the wrath of aggrieved insureds who do not have cover or any adequate cover for claims arising from the outbreak. In particular, business interruption insurance has received much media attention, especially in circumstances where insureds do not have the benefit of such cover in the absence of material damage. Other lines of business including travel insurance might also expose brokers to claims. Going forward, brokers ought to be advising clients about notifications, and the types and availability of cover in the tightening market.

Medical professionals

Many health care professionals have been directly impacted by COVID-19 – being front line workers facing issues with personal safety and increased professional demands, to those working in private hospitals specialising in elective procedures who were essentially shut down for a number of months. With the easing of restrictions, there is likely to be further stresses and consequential claims due to increased caseloads and ongoing concerns of patients with safety issues.

Aged care professionals

With residents in nursing homes and other care facilities particularly vulnerable to the virus, this is another potential sector at risk of significant claims in the event of a cluster of COVID-19 cases. This will invariably depend on what proactive steps the aged care provider took to maintain an adequate level of care and to put in place preventative measures to stop the spread of the virus.

Conclusion

As the crisis continues to roll on, there will no doubt be more risks and challenges that professionals face in their day to day business. This will no doubt translate into claims and we will continue to monitor developments as the crisis continues to develop.

Further information / assistance regarding the issues raised in this article is available from the authors, Michael Polorotoff – Partner, Suzanne Wallace – Partner, Justin Ghee – Lawyer or your usual contact at Moray & Agnew.

The above content is commentary rather than legal advice and was prepared on the basis of applicable legislation, government programs and initiatives that were in place as of the date of publication. Given the ongoing evolution of both the COVID-19 pandemic and frequent consequential changes to the various laws and programs within all Australian states and territories, readers should seek legal advice on the current situation as applicable to their specific circumstances before taking any action in relation to the above.


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