Expect a spike in negligence claims as lenders take a hit from pandemic - Andrew Foyle

A clear correlation can be observed between an economic downturn and the number of claims against professionals for negligence that come before the courts. During the economic crisis of 2008 and subsequent years, the number of claims for negligence rose considerably. Noticeably, lenders, including high street banks were at the forefront of this upturn in claims with surveyors and solicitors primarily the target of court actions.
Andrew Foyle is joint head of litigation for Shoosmiths in ScotlandAndrew Foyle is joint head of litigation for Shoosmiths in Scotland
Andrew Foyle is joint head of litigation for Shoosmiths in Scotland

Interestingly, as the economy improved, the number of claims slowed. So what motivated the spike in claims during the downturn and why did they abate over time? Seeking answers to these questions may assist legal professionals in predicting what to expect in the months ahead as the country and economy steadily resets following the pandemic.

It seems inherently unlikely that in the period prior to an economic downturn, surveyors or solicitors suddenly become “more negligent.” However, some may argue that during the house price boom before the last recession, a minority of professionals took a chance by calculating higher valuations on properties, in the expectation that house price inflation would cover any error.

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During the downturn, it’s more likely that lenders, faced with increased levels of financial default and a much lower propensity to pay amongst their defaulting customer base, had to identify new means to stem their losses. One approach was to examine the advice of their professional advisers in the lead up to a lend. Whilst challenging to pursue, this approach continues to offer various advantages for the lender, in particular because the professional is likely to be insured. Consequently, if a successful claim can be made, payment (at least in part) is virtually guaranteed for the out-of-pocket lender.

Conversely, as the economy improves, so too does the ability of a lender’s customer base to pay their debt. Suddenly, professional negligence claims against the likes of surveyors and lawyers become a less attractive option. This is because a claim for professional negligence drains resource. From the lender’s side, there’s the need to identify claims that might be suitable for consideration by their solicitor. Equally, resource within the lender’s solicitor firm must be directed towards reviewing the professional’s files, obtaining expert input and raising and managing the claims.

It’s imperative for solicitors to take cognisance of the above – especially at a time when the UK is slowly emerging from the pandemic and grappling with Brexit. Despite some sectors enjoying a boom, others are struggling to survive. From a professional negligence perspective, the key question is whether, like last time, we will see an increase in claims by lenders against their professional advisers.

Admittedly, the combination of government support and forebearance measures means that the wave of default and insolvency we saw during the last recession has yet to materialise. Further measures may well be taken to limit or mitigate these headwinds. However, if they are not implemented or prove ineffective in preventing mass (loan) default, the likely outcome will be lenders once again examining any culpability on the part of professional advisers.

Of course, the approach taken to recoup losses will vary from lender to lender. However, I suspect there will be an increase in professional negligence claims and law firms which operate in this space are already making preparations. At Shoosmiths a new lender review product aims to remove much of the burden from lenders in making the initial assessment of whether a claim could be taken forward and it also considers all three UK (legal) jurisdictions when a lender’s adviser operates cross-border. Significantly, this allows lenders to bundle multiple claims against the same professional, thereby reducing the resource implications mentioned earlier.

Yet let’s be clear. Lenders generally view claims against their professionals as a last resort, albeit in a downturn and when default rates rise, such claims can become attractive. Professionals give advice in the knowledge that they will be held accountable for it, and carry insurance for precisely that purpose.

I believe we’ve yet to experience the pandemic’s full economic impact. When it materialises, we will unfortunately witness a significant increase in default on lending. We will then almost certainly see a spike in claims against professionals.

Andrew Foyle is joint head of litigation for Shoosmiths in Scotland

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