Bristol Market Update

Autumn 2014 • Lockton® Companies

L O C K T O N C O M P A N I E S

Welcome to the latest Market Update from Lockton. The year is rapidly drawing to a close and 2014 has

been largely positive. As a business we continue to see growth both in terms of keeping existing valued

clients and securing new clients. We have also noticed a marked improvement in the fee levels being

achieved/secured by clients which inevitably points to improving economic conditions. Another observation

is the prevalence of start-up businesses particularly in emerging professional areas including IT, Technology,

New Media, and especially in the Renewables Sector.

British entrepreneurs created a record number of new businesses in 2013, according to new figures from StartUp Britain announced January 27.

Research from the national enterprise campaign shows 526,446 businesses were registered with Companies House, beating the 484,224 businesses recorded in 2012, and 440,600 in 2011. As of 30th October 2014, the *Start-Up Tracker managed by StartUp Britain notes that 486,344 New Businesses have been formed, so the trend shows no sign of slowing.

However, records show that start-up businesses have a very high failure rate in the UK with as many as 1 in 3 failing in their first three years. The reverse side of the coin is that around two thirds survive and some go on to prosper and expand. There are many reasons for failure but an increasing issue, particularly in an age of ever increasing legislation/regulation and legal action, is entrepreneurs being unaware of potential risks and liabilities. In this issue we will cover some of these potential exposures.

Anna Wood Associate Solicitor, Construction & Engineering from BPE solicitors gives advice on some of the risks that surveyors face with residential conveyancing.

With much focus on the issue of Tax Avoidance and the risks associated with allegations of wrong doing/negligent advice Simon Mason, Partner of DWF provides some insight into the exposures presented following the introduction of Disclosure of Tax Avoidance Schemes (DOTAS). At a time when Underwriters’ appetite for Accountancy/Financial Risks with exposure to “Tax Schemes” is at best described as fluid the nature of the Scheme(s) and whether a practice is an “Introducer” or “Promoter” does require some attention and furnishing your insurance advisor with as much information as possible places them in a commanding position to negotiate on your behalf. A key concern as covered in an earlier Market Update is how liability is limited in the Letter of Engagement and to this end it is recommended that a business seek legal advice from an expert in the field.

*The tracker has been created using data from Companies House and interpreted for the tracker by the Made Simple Group.

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TAX AVOIDANCE UPDATE

The Government has in recent years clamped down significantly on tax avoidance schemes, in particular introducing the Disclosure of Tax Avoidance Schemes (“DOTAS”) which obliges promoters and users of tax avoidance schemes to provide early information to HMRC. It also introduced the General Anti-Abuse Rule (“GAAR”) which allows HMRC to counteract tax advantages arising from abusive tax arrangements that do not stay within the spirit of tax legislation. In short if there is a tax arrangement which has the aim of achieving a result that Parliament did not anticipate and which cannot reasonably be regarded as reasonable then it will fall foul of the GAAR and HMRC penalties are likely to follow. It remains to be seen how the Courts will interpret the GAAR.

However well tax advisers draw clients’ attention to the risks of tax schemes, clients who later receive an unwanted tax bill may be unhappy with those bills (including penalties) or the fact that they have to incur costs to challenge the schemes. Unhappy clients make claims even if they may be unmeritorious. The Government is continuing to introduce legislation in this area with a view to strengthening HMRC’s powers to tackle tax avoidance, something which could have further repercussions in terms of such claims.

The Finance Act 2014 has very recently seen the Government bring in further measures and strengthen these powers. In particular, the Act includes the following notable changes:

� Prescribed information

� High risks promoters

� Judicially defeated schemes

� Contact

Prescribed information

The Act extends the list of prescribed information that promoters and users of tax avoidance schemes must provide HMRC under the DOTAS rules.

Autumn 2014 • Lockton Companies

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The changes will allow HMRC to access sample scheme documents in order to conduct a full analysis of how a scheme works.

High risks promoters

New measures will allow HMRC to issue a conduct notice to promoters of tax avoidance schemes who have met a threshold condition in the previous three years. Such promoters will be subject to additional disclosure obligations and may be named publicly by HMRC. In addition, they will be required to inform clients of their promoter reference number (PRN) and of the fact that they are monitored.

Judicially defeated schemes

The Finance Act also includes provisions designed to promote the early settlement of tax avoidance cases and to discourage the use of tax avoidance schemes by requiring payment of disputed tax up front in cases where the same or similar tax avoidance schemes have been judicially defeated in litigation. Where HMRC is enquiring into a tax payer’s return or claim and it is of the opinion that there is a final judicial ruling relevant to the tax payer’s tax arrangement, then it will be able to issue an accelerated payment notice requiring up front payment of the sum in dispute.

The provisions are intended to have the effect of discouraging tax avoidance as well as allowing HMRC to recover tax earlier and prevent taxpayers from delaying the payment of tax through disputing the amount in demand. In addition, HMRC will be able to issue penalties of 5 percent of the unpaid amount if the taxpayer fails to make the accelerated payment

by the relevant date, with a further 5 percent payable if the amount remains unpaid five months after the penalty date.

There is some cause for concern here in that it appears that HMRC will have quite a wide discretion as to whether there is a relevant final judicial ruling, something that could lead to uncertainty for some time. A summary of responses to the draft legislation was published in March 2014 and HMRC confirmed that decisions of the First-tier Tribunal that are not appealed may be held to be relevant, something which means that this measure could potentially have a significant impact for users of tax avoidance schemes and thus may subsequently give rise to more claims against their tax advisers. In any event, with the introduction of accelerated payment notices, tax advisers will need to inform their clients that they may be required to pay tax up front; failure to so advise could itself be negligent.

Name: Simon MasonTitle: Partner

Firm: DWFPhone: +44 (0)117 301 7392

Email: simon.mason@dwf.co.uk

4

MARKET OUTLOOKAs we look to close 2014, attention for businesses often turns to the next financial year, targets, budgets, and strategic plans for growth. For many the cost of insurance, particularly Professional Indemnity is a significant concern and we are often asked for our thoughts on market movements/trends and anticipated pricing.

Over the last 12-24 months we have seen many bodies and organisations undertake broad benchmarking exercises amongst associations or other groupings to determine a mean average rate/cost of insurance. While there is some merit in this to establish whether premiums are rising/falling or stagnating the rate applied varies and is wholly dependent on the risk presented.

Each risk is evaluated on its own merits and Underwriters consider a wide range of factors when agreeing terms, these can include exposures to past liabilities, activities undertaken, contracts and terms of engagement which limit liability, trending/propensity to claim amongst niche buying areas, changing legislation, rate of growth, financial risk management, attitude to risk management in the wider sense including adoption of mechanisms to limit exposure, claims/loss history, quality assurance and a myriad of other factors in keeping with their own actuarial loss modelling.

In short, comparing the premium of Business A with Business B is far from an ideal comparison.

So what does the future hold?

It is impossible to forecast but looking to the reinsurance market we can gauge, barring major catalysts, a general outlook for the short term.

Reinsurance is insurance that is purchased by an insurance company (the “Cedent”) from one or more other insurance companies (the “Reinsurer”). Reinsurance rates are the main driver of market rate, reinsurance capacity is the main driver of market capacity.

The extent of reinsurance capacity determines how much an insurer has to offer to the insurance market and the cost of this is obviously a determining factor in the cost of premiums for UK businesses/consumers.

Presently reinsurance buyers are seeing the lowest cost of underwriting capital in a generation.

In the past year, reinsurers have taken significant steps to incorporate more of the $59 billion of alternative capital that has entered the reinsurance industry into their offerings to Cedents.

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The UK market is presently at the bottom of a soft cycle—the longest and most prolonged in history

Key facts to consider:

� General insurance premiums continue to fall in many lines and at best are stagnating.

� Claims costs are increasing and the propensity to pursue claims increases.

� A recession is generally a period of increased claims (including fraudulent) activity. In 2013 there was £1.3bn of fraudulent claims—an 18 percent increase on the 2012 value.

� “Liability” (including Professional Indemnity) was the UK insurance industry’s worst-performing line in 2013, generating an industry-wide underwriting loss of £826m, according to ABI statistics (published 23 September 14). This underwriting loss was the largest for more than 30 years.

� By contrast, property insurance was the most profitable line. The industry made a collective underwriting profit of £930m, despite the weather claims that hit at the end of the year.

� Also profitable were accident insurance, with an underwriting profit of £16m, and health insurance, with an underwriting profit of £271m. Overall, the industry made an underwriting profit of £1.4bn.

Whilst we cannot forecast anything with a degree of certainty we believe that barring a major world event/catastrophe (or series thereof) or a localised issue such as the failure of a significant insurer that the insurance market will not shift to any great extent for the next 12-24 months. Insurers will however, reconsider their position in certain lines (and niche/trades areas) which

are proving to be unprofitable. The change in approach to the UK PII insurance market by carriers such as RSA, Aviva, WRB, and others is testament to this.

As a broad guide based on current observed trends and market appetite, including certain insurers exiting from sections of the market, we anticipate to see the following to be a theme for the next 12 months in the professions arena:

Modest Hardening Rates

Accountants (Tax Planning)

Solicitors (Conveyancing)—excluding new entrants

Quasi Legal (Non-SRA) e.g., Will Writers

IFA

Surveying & Valuing

Mortgage Brokers

Insurance Brokers

Reducing/Stagnating Rates

Accountants (Nontax Planning)

Solicitors (Nonconveyancing)

Media & Tech

IT Consultancy

Renewables

Management Consultancy

Miscellaneous Consultancy

As stressed, risks are evaluated on their individual merits so if you have any queries or concerns please speak with your insurance advisor.

Name: Chris LennonTitle/Firm: Head of Lockton Companies LLP

Bristol OfficePhone: 0117 906 5608

Email: chris.lennon@uk.lockton.com

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HOW WILL YOUR PII POLICY

RESPOND IN THE EVENT OF A

DATA BREACH?A question we are frequently asked and indeed one which we regularly pose is, “What cyber cover, if any, do we have under our Professional Indemnity Policy?”

The Information Commissioner has recently announced that he will be taking a much closer look at Law Firms in light of the volume of sensitive data they handle and as such firms are increasingly questioning the quality and adequacy of cover provided by the SRA’s MTC. This change in stance shines a light on this area as a risk exposure to all professional practices and begs the question, what protections are in place?

The impact of a cyber/data breach can be significant to both the firm and to clients so employing the appropriate breach response company to manage the situation, notify clients/employees/partners (if appropriate), advise regulators, and attempt to control the adverse media fallout is key. A specialist cyber policy incorporates these resources and will often make the difference between a successful and unsuccessful outcome.

As the custodian of clients’ intellectual property, commercially sensitive and personal information, professional service firms represent a particularly attractive target for hackers.

A news release from the Information Commissioner’s Office (ICO) in August 2014 warned lawyers particularly

that the ICO is “sounding the alarm” on data breaches within the legal profession, so firms need to be particularly alert.

Many Professional Indemnity Policies will provide some insurance cover in the event of a cyber-breach, but there may be significant gaps, including:

� Cover for loss of employee and partner information

� Breach investigation expenses, including specialist independent legal advice, forensic’s and IT security expertise

� Costs incurred by the firm to notify affected individuals, to offer appropriate credit and ID monitoring services, and to hire appropriate public relations expertise

� Cyber extortion expenses incurred to end a credible extortion threat

� Reimbursement of data and computer programme restoration expenses

� Consequential loss of revenue resulting from a network interruption

Causes and relative costs of breaches

Whilst it’s reported* that, of the three primary root causes of data breaches in the UK, 40 percent are caused by negligence or human error, 38 percent by malicious or criminal attacks, and 22 percent by system glitches, including IT and operational failures, it is the malicious or criminal attacks which generate the highest per capita cost (£119) being 56 percent more costly per capita than the those caused by negligence or human error (£76).

Autumn 2014 • Lockton Companies

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Information security scenarios

Loss of personal information: An employee drops a file in the taxi or an unencrypted disc containing client names, addresses, and other personal information is lost or stolen whilst in transit.

At this stage, there’s no financial loss to you or to the client, but under the ICO rules you should consider notifying them and the affected individuals that the papers have gone astray. For a legal firm this could also be a breach of the SRA rules and therefore reportable.

Subsequent liability arising from the wrongful act committed in the course of your professional business should be covered under the PII policy.

However, data breaches demand a very different response to that of a traditional professional indemnity claim. Also, both the direct costs and disruption to the firm in relation to forensic investigations, specialist data breach advice, public relations, call handling for concerned clients, and credit/ID monitoring will be significant. That’s before we consider the costs and disruption of notifying the affected individuals and, what’s likely to be the most costly item of all, loss of revenue from customer churn due to reputational harm.

The impact of a cyber/data

breach can be significant

to both the firm and to

clients so employing the

appropriate breach response

company to manage the

situation, notify clients/

employees/partners (if

appropriate), advise

regulators, and attempt to

control the adverse media

fallout is key.

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Vendor breach

In another example, a vendor of services to the firm, perhaps a provider of outsourced IT, cloud, or other operational services, suffers a security breach. This results in a lack of available access to your systems and/or the potential compromise of confidential information relating to your corporate and private clients.

In the first instance, you’re unable to complete time-critical work, your reputation suffers and drives client churn, preventing you from winning future appointments and creating a consequential loss of revenue. This would not be recoverable under either your PII or office insurance, but would be recoverable under a cyber policy.

Secondly, whilst it is your vendor who has suffered the breach, you are still considered to be the data controller, so your clients and regulators will look to you to respond to the breach, incurring the costs of client notification (mandatory or voluntary), and other first-party expenses which may or may not be recoverable from your vendor, depending upon contractual indemnities, but which will not be covered by your PII.

Loss of partner and employee information

A temporary employee within your HR department has access to and downloads sensitive personal information in relation to your employees, partners, or members. It’s unclear whether or not the information has been used for criminal activity, but sensitive information is being leaked via social media.

As well as damaging the employee/partner relationships within the firm, such disclosure constitute public knowledge—impacting the reputation of the firm—and resulting in regulatory investigations, significant costs to the firm and loss of customer confidence.

Your PII will not respond as the affected individuals are not third parties, but cyber insurance is typically triggered by a security breach, privacy breach, or breach of privacy regulations and is not reliant upon your provision of professional services or restricted to third-party liabilities only.

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Doesn’t my office insurance policy cover us?

The majority of office policies only respond when there has been a physical event such as a break-in or physical damage to property. Office/Computer policies are typically not designed to cater for the “digital” exposures which may include hacking events, administrative/operational errors, or losses caused at the premises of your service providers. So, whilst your IT system may have been damaged and compromised with critical data lost, this is unlikely to be covered under an office/Computer policy, unless there’s a special cyber extension and in many instances this will be specifically excluded under an “E-Risks Exclusion.”

Conclusion

It is clear that PII policies do afford elements of coverage for third-party cyber exposures, but there are also a number of grey areas, as well as specific areas where there is clearly no cyber coverage at all.

A key point to remember, particularly with regard to the grey areas where cover may/may not be granted under the PII, is that PII policies were originally designed to cover wrongful acts arising from the provision of professional services and that is the underwriter’s specialism. They were not created with cyber risks in mind and, as such, are fundamentally limited by:

1 2 3 4

Triggers relating to the provision of professional

services

The structure and ability of an insurer’s claims

handling team to be able to respond quickly and appropriately to a data

breach event

A lack of pre-existing relationships with post-breach

vendors such as forensics, IT specialists, credit/ID

monitoring, PR firms, and call centre companies

An absence of coverage for any first-party

exposures to the firm

When a breach event occurs, such limitations may give rise to a denial or dispute over coverage, or remove the insurer’s ability to assist in the mitigation or indemnification of consequential losses including regulatory investigations, liability claims, and losses of revenue due to reputational harm.

Every day there is a new cyber threat or hack that makes the press. As the ICO become more active can you afford to be unprepared if a data loss or hack occurs? For more information please speak with a Lockton Associate.

*Ponemon Institute—2014 Cost of Data Breach Study: United Kingdom

Name: Brett Warburton-SmithTitle: Partner

Firm: Lockton Companies LLPPhone: 0207 933 2242

Email: brett.warburton-smith@uk.lockton.com

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SURVEYORS BEWAREWe have recently had a string of cases where house buyers have found the condition of their newly purchased home to be not quite as expected. This has resulted in negligence claims against surveyors which could have been avoided had the scope been clearly agreed. Here we give helpful guidance for surveyors on how to avoid such problems and the inevitable impact on your PI premiums.

Not every house buyer will rely on the survey carried out by their mortgage company but will choose to have a “back up” inspection for their own peace of mind. Some buyers, of course, do not need a mortgage at all, but nonetheless want to have some feeling of certainty over the stability of their future home. A third, frequently encountered, category is the buyer of a “project”: not necessarily someone who makes their living from turning houses, but an inexperienced person or couple who see potential to “add value” to their new home with a bit of work.

With a private client who falls into any of these groups, it is

more important than ever that each surveyor clearly agrees to the scope of the survey and have written terms of engagement with their client. The RICS guide to surveys is an obvious framework for such services but not every survey fits neatly into one of the

RICS categories—particular for large historic houses. In addition, there can be complications where a property is seen to be “unique” and therefore there are time pressures on the buyer to commit to an offer. Add to this the fact that the buyer may not live locally and so there is

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no opportunity to meet with them (at the site or at your own offices) and there is a potential recipe for problems.

No surveyor wants to face even the hint of a negligence claim, particularly when they know they have done a good job, but there has simply been a misunderstanding on the part of the client about the scope of services to be provided. We have found that surveyors and their clients sometimes encounter problems agreeing on the amount of time required to undertake a survey and the amount of detail that will be contained in the written report. We suggest, therefore, that a clear list is agreed: what will you survey and report on, and what will you omit from your services? In addition, remember to be extremely clear as to your duty of care, i.e., that you will be taking reasonable steps and that you do not have an absolute duty to identify all defects. It will be well worth your while to take time to ensure that your client has the same understanding of certain words and phrases that you do (even with an intelligent client, consider how they interpret the word “structural” for example) and likewise that you understand their intentions for the property and their approach to risk.

Whilst home buyers may incorrectly believe that any unpleasant surprises are the fault of the surveyor and they may (also wrongly) conclude that they are entitled to recover the cost of unexpected repair costs from you, the fact that you are able successfully to defend a claim does not avoid you the management time involved in dealing with both the claim itself and the additional questions at renewal time! Diminution in value claims may be expensive and time-consuming to run but when you are dealing with a client who has the resources to

pursue a claim, it is even more important than usual to take steps from the outset to avoid the issue: simply doing your job and doing it well may not be enough.

In order to protect your good name, apply the “stitch in time” rule and ensure that you have signed T&Cs with a clear scope as to your services agreed before you attend site to carry out the survey. If a client will not agree with your expert recommendation for the scope of the survey, consider carefully whether the instruction is worth taking at all.

Name: Anna WoodTitle: Associate Solicitor,

Construction & EngineeringFirm: BPE Solicitors

Phone: 0124 2248 215 Email: anna.wood@bpe.co.uk

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To be the worldwide value and service leader in insurance brokerage, employee benefits, and risk management

Our Goal

To be the best place to do business and to work

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© 2014 Lockton, Inc. All rights reserved. Images © 2014 Thinkstock. All rights reserved.

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