Conveyancers are facing higher professional indemnity insurance (PII) costs – and their clients higher fees as a result – due to yesterday’s Court of Appeal ruling in Dreamvar , experts have predicted.
The case, which involved identity fraud on the part of the purported seller, saw both his solicitors and the buyer’s solicitors held liable to the buyer for breach of trust.
Jonathan Sachs, a litigation partner at national firm Irwin Mitchell, said: “This judgment will provide greater protection to buyers, but will shake up the conveyancing industry with much greater risk of liability.
“Properties at risk of fraud can be worth millions of pounds. Professional negligence insurance premiums will likely rise in response.
“The court has thus chosen to allocate the costly risk of identity fraud on the professional advisers in a property transaction. Whilst it is true in the cases above that the advisors are in a better position to afford that loss, that is not necessarily always the case in conveyancing deals.
“We will need to see how this judgment will be followed in subsequent litigation where the legal advisers might be placed in significant financial hardship if found liable for the losses in property fraud.”
Alice Nash, a barrister at Hailsham Chambers, predicted that the case would go to the Supreme Court.
“In the meantime, there seems little doubt that conveyancers’ indemnity insurance premiums, and in turn the fees charged to clients, will rise.
“Solicitors acting for vendors will need to make sure that they actually carry out identity checks, and those acting for purchasers will need to make sure that they obtain appropriate undertakings. It may become standard practice to seek express confirmation that the vendor’s solicitor has verified their client’s identity, and to state that the purchaser is relying on a warranty that the solicitor acts for the real owner of the property.”
Ms Nash said the “real problem” was that, while firms could minimise the risk of such fraud, they could not necessarily stop a “determined fraudster”.
“There are calls for the Land Registry to maintain records that would allow the identity of vendors to be checked, perhaps even by recording biometric data.
“Other commentators suggest that the insurance market may need to develop some form of property fraud indemnity insurance. Indeed, one can envisage that the availability or otherwise of such insurance might affect the future exercise of the court’s discretion under section 61.
“For as long as P&P/Dreamvar remain good law, however, there may be limited impetus for such a development, as – at least where the conveyancer is a solicitor – claims will be covered by the firm’s PII.”
She said a further possibility was that the Law Society would revisit its code for completion by post and reform conveyancing practice so as to make it clear that solicitors would only accept responsibility for identity fraud that could not have been discovered with reasonable care, “which would change the landscape once again”.
The Law Society intervened in the case, and vice-president Christina Blacklaws said the court had provided “valuable guidance” on its code, which is currently being updated.
“The amendments to the code should provide greater clarity as to roles and responsibilities. We hope our amendments will assist in the smother operation of the housing processes.”
She added: “We are pleased the judgment will provide innocent purchasers with greater protection from fraudsters – which is not only right but will help boost consumer confidence in the conveyancing process.
“The ruling confirms that the Money Laundering Regulations do not impose additional civil liability on solicitors – however even full compliance with the regulations and all other regulatory requirements will not prevent liability if a solicitor acts in breach of trust.”
Ms Blacklaws added that an increase “in the reach and sophistication of the technology that is designed to detect and reduce fraud” would help to boost confidence in the property buying process.
Simon Blandy, director of regulatory standards at the Council for Licensed Conveyancers, said: “This is an extremely important ruling that raises a lot of questions without answering them all.
“As a regulator we will have to scrutinise it closely before deciding what action, if any, we need to take. But the case emphasises the importance of taking a risk-based approach when accepting instructions and managing transactions.”