Some Insurers are placing new limitations on professional indemnity (PI) cover for property valuers. So what does this mean for the mortgage industry, and what are the options for valuation firms?

Despite the turbulence that hit Australia’s real estate market in 2020, recent months have seen record volumes of property valuations nationwide. This trend has been partly driven by a combination of low interest rates and government incentives to boost residential construction and development.

Amid such unpredictable market conditions, it remains critical for valuation firms to review the levels and conditions of their PI insurance. While the Australian Property Institute Valuers (APIV) Limited Liability Scheme supports members by capping their liability in the event of a claim, changes within the Australian insurance market are making it harder for some valuers to obtain the cover they need. These changes include both the evolving macro-environment of the insurance industry, along with commercial arrangements between insurers themselves.

What are the current challenges?

Consolidation within the insurance industry in recent years has driven a decline in the number of insurance providers offering PI cover to Australian valuers. Reduced competition within the market has driven up premiums, with insurers also imposing tighter restrictions on their policies.

“We’re seeing an increase in premiums to get sufficient coverage, an increase in excesses and an increase in endorsements in the certificates of currency being submitted in some firms,” said Stacey Rottinger, CoreLogic’s Head of Valuation Panel Management.

Policy endorsements and restrictions can include loan-to-value ratio (LVR) caps, or exclusions for development and construction valuations. Meanwhile, some insurers are only offering PI cover on mortgage valuations for the major banks, which can specifically exclude the valuer from completing valuations for non-bank lenders.

Stacey commented: “For some valuation firms, the restrictions being imposed are impacting on their business model. As an example, let’s consider a firm that specialises in development, construction and valuations for mortgage purposes. If an LVR cap of 65% is placed on their development and construction valuations, they could potentially be excluded by lenders from being instructed on construction loans as these tend to have a varying LVR of up to 80%. This could hugely restrict their business operations.”

What are the potential impacts?

If a firm has these types of restrictions placed on them, it can be a concern for lenders who may be anxious about breaching LVR caps and for the valuer not being covered under their PI policy.

This can lead to further operational impacts. For instance, if the lender uses a valuer for an LVR below 70% and the valuation is returned at 75%, they may need to order a second valuation, adding time and cost to their process.

“If lenders are wary of firms whose cover is restricted, they might not be willing to instruct them on those valuation service types,” said Stacey. “This will have a flow-on effect to both lenders and borrowers, as it will put pressure on the remaining firms to maintain agreed turnaround times and potentially decrease independent competition across the industry.”

If some firms can no longer conduct valuations for non-bank lenders under the terms of their PI policy, there could also be repercussions across the wider industry. Stacey predicts this could result in a shift away from non-bank lending if those lenders can’t secure valuations for mortgage purposes.

How is the API responding?

In its role as an advocate for valuation firms, the Australian Property Institute (API) has been working closely with a number of firms that have been directly impacted by the changes to PI insurance. This has involved liaising with insurers to help those firms maintain business continuity and receive undisrupted cover, while ensuring they meet all client and regulatory insurance requirements.

“We strongly recommend that members become more informed about this issue,” said Amelia Hodge, Chief Executive Officer of the API. “We also encourage them to start the renewal process early and collect as much detail as possible on their portfolio of work, so they can closely examine all pertinent details of proposed PI policies against their past, current and future business activities. The API is currently seeking feedback from every member firm on their experiences in this area, which includes gathering clear details of policy restrictions, client conditions and responses.”

The API also reminds firms of the benefits of participating in its APIV professional standards scheme. This gives members additional security by helping to cap their liability, while providing assurance around the future viability of PI insurance for valuers.

“In developing the renewed APIV2021 scheme, the API has considered the issues facing members in this area,” said Amelia. “We’re currently working towards launching a best-in-class scheme later this year that will suit the long-term needs and future objectives of the property industry.”

How can valuers navigate the changes?

First and foremost, Stacey says it’s critical for valuation firms to be aware of their options around PI insurance. By engaging with their insurer – and not waiting until the last minute to renew their cover – gives them more time to try and negotiate a better deal.

“A lot of valuers didn’t realise they could negotiate some the terms of their cover, so last year we worked with the API to get that message out,” she said. “By raising awareness, we’re hoping it will put valuation firms on the front foot with their negotiations to see if they can try and negotiate around some of these limitations, exclusions and restrictions.”

The key is for valuation firms to truly understand their own PI needs, and to know what they can ask for. This is why Stacey encourages all valuers to seek guidance and support for their PI negotiations.

“If valuers are having issues with their insurance, or they want to discuss what impact the endorsements have, they should reach out to the API,” she said. “And if valuers are using the ValEx platform for their valuations, it will also put them in a good position for their negotiations because of the platform’s rigour around compliance and governance.”