Two years ago, professional indemnity professionals were wondering if history was about to repeat itself, with a flood of claims against valuers precipitated by the economic downtown, as happened in the 1990s. Nearly 18 months on, have the claims materialised?

A rise in temperature

The depressing indications in early 2007 – that the economy was about to enter a period of recession – have proved correct. Economists have recently reported that the UK is now in its worst recession since 1947.

Not surprisingly, the property market suffers in such circumstances. According to the Nationwide and Halifax property indexes, house prices peaked in the first half of 2007. Since late 2007, and throughout 2008, they have fallen dramatically (by 15.9%, according to Nationwide) and some experts suggest prices will fall between 15%-20% during 2009. In addition, the Council of Mortgage Lenders in July reported a 48% decrease in lending between June 2008 and June 2009, which does not bode well for the future.

It is inevitable that in times of rising unemployment and recession, many borrowers will simply not be able to get themselves out of trouble, despite low interest rates and the six-month moratorium for those in default. As the number of repossessions increases, lenders are forced to sell properties in a depressed property market and then left to recover the ensuing substantial losses as best they can. Insolvent borrowers are rarely worth pursuing, however, so lenders inevitably turn their attention to those with deeper pockets. This usually means looking closely at how their valuers and solicitors performed at the time the loan was made.

Although precise statistics are not available, lawyers are already reporting substantial increases in potential claims against valuers and solicitors, and expect this trend to continue throughout the rest of 2009.

So are insurers about to face a repeat of the valuers’ claims litigation of two decades ago?

Factors influencing claims

The initial indications are that lenders, having come through the turmoil of the last 12 months, may be concentrating their initial efforts to recover their losses by suing solicitors. This is both in respect of clearly fraudulent transactions and the failures of the legal profession to follow Law Society guidance and, in particular, the Green Card warnings.

It seems inevitable that claims against valuers will escalate too, either because lenders will look for alternative sources of recovery or because solicitors and their insurers will want to start contribution proceedings.

Various factors are likely to impact on such claims:

  • Some valuers learnt the lessons of the 1990s and put in place rigorous risk management structures for undertaking valuations and, in particular, for researching and recording the comparable evidence on which they relied. Others did not.
  • Particularly in the context of domestic transactions, the development of the internet and the open availability of prices from the Land Registry will prove a double-edged sword. Both these things should have made it simpler for the valuer to obtain comparable evidence. By the same token, though, they will also make it easier to attack the valuation.
  • The same will be true of commercial valuations. However, the indications are that valuers have been more ready to limit their liability and restrict those who can rely on their reports.
  • The Royal Institution of Chartered Surveyors’ Red Book now imposes higher standards on valuers than it did over a decade ago. Again, for those valuers who have diligently complied with the new standards, they will provide a shield but for those who have not, they will present claimants with a potential weapon.
  • When it comes to the law, judges and lawyers will almost certainly revisit what does and does not constitute a negligent valuation. They will look at ranges of acceptable values for different types of property and the methodology used to arrive at the figures presented. Expert evidence will again be key.

Valuers fighting back

Valuers and their insurers are not defenceless, however, with lenders having good reason to feel uncomfortable about their business practices. The public perception of bankers is not good (to put it mildly) and, this time, the lenders face a raft of entrenched judicial decisions demonstrating the courts’ readiness to find substantial contributory negligence.

For example, valuers can point to:

  • The Nationwide litigation of the 1990s, involving findings of contributory negligence ranging between 50%-90%.
  • Preferred Mortgages Ltd v Countrywide Surveyors Ltd [2005], with a finding of contributory negligence for having a loanto- value ratio of 80% on an unusual property.
  • Omega Trust Company Ltd v Wright Son & Pepper [1998], with a finding of 70% contributory negligence for disregarding a number of factors showing the borrower’s adverse financial history.

Defence lawyers are also likely to go on the attack:

  • by invoking the many financial sector regulations (which have been introduced since the 1990s) to show non-compliance by the lenders;
  • by highlighting the failure to learn the lessons of that decade (with lenders reverting to over 100% mortgages, self-certified lending and other questionable practices); and
  • by interrogating very carefully the “ownership” of the loss in the knowledge that many loan books were sold on, syndicated or securitised.

So where next?

The battle lines are being drawn up again but whether the new fight between lenders and valuers will last as long as it did in the 1990s remains to be seen. The use of pre-action protocols, early disclosure by lenders of their advances and repossession files, and an established body of case law governing how claims will be judged suggests that we may well be in for a shorter conflict than last time round – although probably one that is just as bloody.