Insurance implications for Valuers: Evolving risk landscape

In the ever-changing world of valuation, Valuers are facing a shifting landscape that demands legal interpretation and a comprehensive insurance and risk management program specific to their situation.

Over the past few years, monetary policy has had significant implications for Valuer businesses, affecting their exposure to risks and prompting the need for a proactive insurance approach.

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Monetary policy tightening and the implications for Valuers

The Reserve Bank of Australia’s (RBA) rapid tightening of monetary policy over the past two years has reshaped the financial landscape. In April 2022, the target cash rate stood at a mere 0.1%, contrasting sharply with the current rate of 4.35%. With an RBA announcement due on 19 March 2024, some economists predict the rate will remain high.

This, and further tightening not being ruled out, has consequences for Valuers as higher interest rates can cause the loan default rate to increase. In turn, that increase poses a direct threat to Valuers, making it imperative for businesses to reassess their risk management strategies and insurance coverage.

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Challenges continue in the Plant, Equipment, and Machinery sector

Valuers who work in the plant, equipment, and machinery sectors face unique challenges due to asset inflation. Supply chain disruptions and availability issues have contributed to inflation in the sector, which makes accurate valuations more complex. The higher value of assets increases the pressure on Valuers to assess their clients’ properties accurately, despite the market’s volatility.

Monetary policy tightening, reflected in the Reserve Bank of Australia’s rapid rate increases, demands Valuers reassess their risk management strategies and insurance coverage, as higher interest rates pose a direct threat to their businesses.

CBD property market reaching its trough

Since the global pandemic, commercial property values have been in difficult waters. Changing working habits, rising interest rates and uncertain conditions for businesses, has caused values to drop sharply; with some major CBD office towers selling at 20% discounts from their peak.¹

Discounted commercial deals and uncertainty around when the market will reach the bottom means Valuers will be watched closely by the market as investors look for the tide to turn.

Knowing specific risks associated with each sector is a vital piece of the puzzle for Valuers to reduce their liability risk when informing their clients. Working with an insurance broker who understands the sector and can provide valuable input into your insurance program is essential in successfully navigating tough market conditions.

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Is positivity on the horizon?

There may be some relief, however. A 2023 court hearing looked again at the approach taken when assessing a Valuer’s duty. In the Hope Capital vs Alexander Reece Thompson decision², it suggests that Valuers may not be held liable for all financial consequences of a potentially negligent overvaluation, noting that the historical SAAMco principle³ established in the 1990s, may not be as straightforward to apply in all cases. 

This stems from the scope of duty and whether the Valuer had assumed responsibility for the risk of the whole transaction, or just for part of it, when considering other factors which contributed to the overall lending decision.

This decision has the potential to reduce the financial impact of professional indemnity claims against Valuers. Underscoring the importance of understanding and defining the precise scope of a Valuer’s responsibilities in each case.

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Insurance considerations

Like all businesses, those offering valuation services require insurance solutions that offer complete coverage at an affordable price. However, balancing affordability with comprehensive protection in this sector can be difficult. It’s advisable to find insurance packages tailored to the sector’s specific financial limitations. This is where the expertise of an experienced insurance broker, who understands the risks involved, becomes essential.

Several critical factors need to be weighed up when structuring the right insurance program:

Balancing affordability with comprehensive protection is challenging, making the expertise of an experienced insurance broker crucial in tailoring packages to address the sector’s specific financial limitations.

Contractual risk management: Valuers can proactively manage risks through robust contractual agreements. This includes focusing on Limitations of Liability, Indemnity Capping, and Warranties. By clearly defining the scope of their responsibilities and limitations, Valuers can mitigate potential legal disputes and financial liabilities.

Professional indemnity: Ensuring their professional indemnity insurance program addresses both civil liability obligations and contractual duties is a critical part of a risk mitigation strategy. This dual focus ensures appropriate coverage, safeguarding Valuers against potential legal and financial ramifications arising from their professional activities.

Australian Property Institute Valuers – Professional Standards Scheme: Valuers can obtain protection via the Australian Property Institute Valuers Professional Standards Scheme. The scheme is intended to ensure minimum professional standard and limit exposure for valuers via Liability Caps. It is critical to ensure that all scheme requirements are met in order to access the Liability Cap.

Compliance with Policy Conditions: Some professional indemnity policies will contain prescriptive conditions around issues of type of assets valued, type of lending institutions and loan to value ratios.  

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Navigating the terrain

Valuation professionals can benefit from the expertise of an insurance broker to tailor their insurance approach and mitigate specific business risks considering the changing landscape.

At Austcover, our dedicated team of experienced insurance brokers stands ready to help Valuers navigate these evolving risks. Our deep understanding of the unique challenges can help strike the perfect balance between comprehensive coverage and affordability.

At Austcover, you’re not just covered, you’re Austcovered.

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Austcover Pty Ltd. Operates under AFSL No. 241799. Any advice provided in this document does not consider your objectives, financial situation or needs. You should consider if the insurance is suitable for you and read the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) before buying the insurance. If you purchase this insurance, we may charge you a fee for our service to you. Ask us for more details before we provide you with any services on this product. PDS available on request.