Accountants

Accountants and PI insurance

Accountancy is one of the more established professions requiring professional indemnity insurance. It is however fairly fragmented, being made up of members from a number of professional bodies as well as unqualified but highly experienced advisers, such as former tax inspectors.

Firms vary dramatically in size and services, from small sole practitioners through to huge international practices. Some of the professional bodies maintain rules for mandatory PI cover and you should ensure you know your minimum requirements if you belong to such a body. Hammond PI has links to the web pages of many of these professional bodies under the 'Links' section of this site.

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What do insurers look for when issuing terms?

First and foremost, they look for qualifications or experience. If an 'accountant' is unqualified, insurers will want to see a CV, normally demonstrating at least five years' practical experience, maybe more depending on the services offered.

Insurers will be particularly interested in the type of work undertaken by the practice, and proposal forms bring this out by asking for a breakdown of fee income.

Examples of insurers approach are:

  • Audit, accountancy and company tax for quoted companies is seen as high hazard - particularly financial institutions. Reporting requirements are greater and in the public eye. The scope and size of potential claimants is large and losses can be enormous.
  • Other audit and accountancy (including related tax work). Standard hazard.
  • Personal taxation. Standard hazard. Can become complex in certain areas, e.g. members of Lloyd's, entertainment industry, etc.
  • Corporate taxation. A variable hazard depending upon nature of work.
  • Management consultancy. At strategic level this can be very low hazard. At the level of interim management or IT consultancy it can be more significant.
  • Insolvencies, liquidations and receiverships. These are viewed as very high hazard. Every project is a problem because someone is in trouble and owes people money. Creditors can be aggressive and questions are regularly asked.
  • General insurance commissions. These are generally low hazard as most accountants do not get involved in insurance broking to a significant extent.
  • Commissions from investment business regulated under the Financial Services Act. Usually seen as a variable hazard. As introducers only, the exposure is low but where financial advice is given significant losses can arise.
  • Mergers, acquisitions, disposals. High hazard. Sums of money can be high. Claimants can be very professional with deep pockets. Deals can go wrong, especially when a business has hidden liabilities. Due diligence is an area of particular hazard.
  • Overseas business for any of the above activities can be an issue, particularly for larger firms.

There has been much consolidation in the accountancy world in recent years. This means that there are many people with a need to cover liability arising from former practices. This needs to be addressed carefully, not just from the perspective of getting the right cover in place (due to the 'claims made' basis of PI policies), but also from the perspective of looking at former practices' and their claims records.

Professional indemnity insurance is important to your business, and whilst premiums are often the primary concern, the quality of cover and its effectiveness is paramount. In addition to the proposal form you will be asked to complete, it is wise to provide evidence of the procedures you apply to avoid claims, your terms of business or letters of engagement can be submitted with your proposal together with any other documents which present a good image of your business’s high standards and competence.

Make sure you have an accurate claims resume and show that you have learnt from any mistakes in the past through the implementation of procedures to avoid them occurring again in the future. Do not make false statements or portray to undertake procedures which it may later be discovered, were not in place.

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Examples of claims

  • Personal taxation
    A failure to lodge tax returns led to a client losing tax repayment and interest. Cost £14,000.
  • Personal taxation/pensions
    Incorrect advice as regards pension payments and alleged concealment of commissions. Cost £675,000.
  • Accountancy
    A lender sought reference for a business's mortgage. The business failed and the subsequent property sale failed to cover the loan. Cost £180,000.

    In another case, a firm acted for the purchaser of a business. There was confusion as to their role. The purchaser thought that the firm was looking at the commercial viability of the acquisition. The firm thought that their instructions were limited to the preparation of cash flow forecasts based on given information for the purpose of raising finance. Cost £180,000.

  • Trust
    Two partners were trustees to a family trust. They delegated investment authority to a company that subsequently collapsed. They also failed to minimise tax. Cost £125,000.
  • Company tax
    The firm, who acted as accountants to a profitable company, introduced them to a tax mitigation consultancy. Schemes of tax mitigation were embarked upon though these proved to be fraudulent from a tax perspective. Cost £130,000.
  • Auditing
    The firm failed to spot a serious fraud due to inadequate audit procedures. The cost exceeded the limit of indemnity of £1m.
  • Investment advice
    Poor investment advice led to serious loss to a trust. Cost £210,000.
  • Fraud
    A partner in the firm stole clients' money. Cost £625,000.
  • Insolvency Failure to realise full value of assets. Cost £110,000

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Main bodies with PI rules

  • The Institute of Chartered Accountants in England & Wales (ICAEW)
  • The Institute of Chartered Accountants of Scotland (ICAS)
  • The Institute of Chartered Accountants in Ireland (ICAI)
  • The Association of Chartered Certified Accountants (ACCA)
  • The Chartered Institute of Taxation (CIOT)
  • The Association of Accounting Technicians (AAT)

The main features of their various rules*
(* Current at April 2009. Please check with your professional body for a more comprehensive summary of their requirements.)

ICAEW

Required Limit of Indemnity

The required level of indemnity under the PII regulations is two and a half times the gross fee income of the firm for its last financial year, subject to: a minimum of £100,000; and maximum of £1.5 million. No firm is required to have more than £1.5 million cover under the regulations but, for many firms, this limit may not be adequate. Firms are required to take reasonable steps that they are able to meet claims arising from professional business and this may lead many firms to conclude that they need more PII than the amount required under the PII Regulations.

Maximum Excess

Firms may include in this figure an excess of up to £30,000 per principal. An example may help to explain this. If a firm only needs the minimum amount limit of indemnity of £100,000, it could have an insurance policy which has an excess of £30,000 and £70,000 sum insured. This would mean that the insurance would only pay out once the claim(s) exceed £30,000.

ACCA

Required Limit of Indemnity

The limit of indemnity required by each practitioner will be dependent upon his or her 'total income' for the previous accounting year. The regulations define ‘total income’ as the aggregate of the person’s professional charges and all other income received by that person in the course of his or her business. Commissions that are retained by the business must be included in the income figure. The regulations require that the minimum limit of indemnity on PII in respect of each and every claim must be at least £50,000, and prescribe the following formulae for determining the required level of cover:

  • Total income of up to £200,000 - The limit of indemnity on PII in respect of each and every claim must be the greatest of: 2.5 times the total income; 25 times the largest fee raised during the previous accounting year; and £50,000.
  • Total income of over £200,000 and up to £700,000 - The limit of indemnity on PII in respect of each and every claim must be the greater of: the aggregate of £300,000 and the total income of the firm; and 25 times the largest fee raised during the previous accounting year.
  • Total income of over £700,000 - The limit of indemnity on PII in respect of each and every claim must be the greater of: £1 million; and 25 times the largest fee raised during the previous accounting year.

The 'largest fee' in all cases does not relate to the largest single invoice but to the highest cumulative amount of fees raised to a particular client during the year. The annual limit of indemnity to be provided by FGI cover must be at least £50,000 in respect of each and every claim.

Persons carrying on public practice in a country other than a designated territory (the United Kingdom, the Republic of Ireland, Jersey, Guernsey and Dependencies and the Isle of Man) may comply with the minimum requirements of a recognised national body or regulatory authority in that country in respect of the limit of indemnity on PII and FGI and in respect of the uninsured excess. The regulations set the minimum level of PII required to be held by a practitioner. Practitioners should consider the risk profile of their work and their clients and determine whether or not they should carry PII in excess of the minimum required under the regulations.

The Maximum Excess

The maximum permitted excess for PII is the lower of £20,000 per principal and 2% of the level of indemnity for each and every claim.

CIOT

Required Limit of Indemnity

The normal annual limit of indemnity will be £1,000,000 in the aggregate. However, for firms whose gross fees for the accounting year immediately pending the year in question is less than £400,000, the limit is the greater of two and a half times the firm's gross fee income or 25 times the largest fee raised during the accounting year, subject to a minimum of £100,000 for a sole practitioner or £200,000 in any other case.

Maximum excess

The lower of £20,000 per principal in the aggregate or 2% of the limit of indemnity.

Main features of rules

  • Cover to be provided by any EU insurers authorised by law.
  • Cover to be for all 'civil liability' incurred in connection with the conduct of the business.
  • Fidelity guarantee cover is 'recommended' but not compulsory.
  • Run-off cover following cessation must be maintained for at least 6 years.
  • Firms regulated by certain other professional bodies may be exempt from the CIOT PI requirements.

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Work undertaken

What do you do? Are you particularly exposed in hazardous areas? If you are (and whilst this may influence your premium), it is important that you divulge all the areas for which you require cover as insurers can take the line that 'if it wasn't disclosed then it isn't covered'.

Predecessors/former practices

Be sure that any cover needed is included in your submission. There are many short proposal forms in use by insurers these days. Whilst these short proposals can be simpler to complete they are only short because they omit questions. Often, the first questions to go are those relating to retroactive exposure. So, not all proposal forms will elicit this important detail. If you require cover for former businesses or businesses you have acquired, insurers may typically wish to see a copy of that business's last PI proposal and its claims history. Keep a note of all the coverage you have requested historically and submit it with your renewal papers thereby ensuring a request for additional coverage in a previous policy year has not been omitted in a future year.

Sub-contracted work

It is common for self-employed accountants to help firms out occasionally. The firm may agree to take responsibility for that work and, so long as it is adequately supervised, insurers are generally willing to deem these people to be employees and to waive rights of subrogation. Again, good proposal forms will bring out this requirement but short forms might not. Be sure to disclose if you use sub-contractors and ensure that cover is offered in the way you were expecting it to be, and tell your sub-contractors. Some insurers may only waive rights of subrogation if the sub-contractor does not have Pi himself or herself.

Unusually large clients

If more than 20% of your fees are derived from one client, insurers may want more information.

Staff dishonesty

Many accountants' policies include in-house fidelity and liability for dishonesty of employees. This is why most proposal forms ask questions relating to this. Insurers will expect to see written references taken and no sole-signature cheques (except in the case of sole practitioners).

Policy wording

As mentioned earlier, wordings are often required to be written on a 'civil liability' basis (covering all civil liability, not just negligence), or on a minimum approved wording, often including fidelity coverage. If you are unqualified or only qualified to a limited extent and/or have no professional body requirement, a more basic miscellaneous wordings may be used.

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The Usual Cover

Usually the limit of indemnity will be 'any one claim' with legal costs in addition. The excess will not normally apply to insurers' costs and expenses. Being on a civil liability basis, unless specifically excluded (which is unusual) cover could include negligence, liability for dishonesty, liability for lost documents, libel and slander, breach of warranty of authority, etc.

Where a miscellaneous policy is offered, the same rules as for miscellaneous business apply. A difference in conditions clause must be present for Chartered Accountants; this is required to demonstrate that the policy offers at least the same cover as the minimum standard required. Cover operates for all the activities that would be expected of an accountant, including personal appointments such as directorships, liquidator and trustee, but only in respect of an Accountant's usual services.

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The usual exclusions

Civil liability policies typically exclude:

  • Death or bodily injury
  • Loss or damage to physical property (but fidelity and loss of documents are covered)
  • Punitive or exemplary damages (many policies have no geographical or jurisdiction limitations)
  • North American offices
  • Liability to other insured's
  • Nuclear risks
  • Claims and circumstances known at inception of the cover

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The usual extensions

  • Extensions to cover may include
  • Fidelity
  • Loss of documents
  • Costs of representation at tribunals.

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Presenting your proposal for insurance

The presentation of your business to insurers is very important both in respect of the facts i.e. the things for which cover is required, and the way in which you do your business, both of which influence an insurer's perception of your business and the risk it poses to them.

We would always recommend that in addition to the proposal form you are asked to complete, you provide supporting documents with your proposal such as:

  • A CV showing the principals qualifications and experience in the areas of business to be covered
  • Any Terms of Business or terms of engagement you use
  • A copy of your corporate brochure
  • Details of your website
  • An insurance history listing all material changes to your business since you first had professional indemnity insurance. For example, mention any previous businesses for which you require cover. It is possible you may be asked for a claims history from the previous business or a copy of its last completed proposal form.

Don't forget to include the names of any businesses with which you have merged, or any that you have acquired, as these will need historic cover. Likewise you may have ceased to offer certain services for which cover is still required.

Keep a written record of all requests for cover to be extended and any historic or material changes to your business. This information can be updated each year and provided as an addendum to the proposal. Any certification the business may have i.e. accreditation by a governing or standards council, is also well worth disclosing.

Keep your presentation neat and tidy. Bear in mind that an untidy presentation may be construed as an untidy business. Allow yourself time to complete the presentation and remember that a hard copy always look better that a faxed one sent in at the last minute.

The Professional Indemnity Insurance market is relatively small so at the point of renewal, concentrate on asking only one or two specialist brokers to quote. Bombarding the market with requests can result in your proposal being locked out of some markets.

Renewal is an ideal time to review your insurance requirements. As your business grows and your contract values increase, it is wise to consider what could go wrong and how much it may cost to settle a claim - and also cover the attendant legal costs. Some policy wordings provide a limit of indemnity with legal costs in addition to the limit. Others provide limits of indemnity which include the legal cost. However, the cost of litigation is high and can eat into the limit of indemnity provided if costs are inclusive.

Many professionals are obliged to carry PI by their professional bodies. Many of these bodies not only have specific requirements in respect of policy wording but also on the limits a professional must carry and the excesses they are allowed. Renewal is an opportune time to check your cover both in respect of your own requirements and those of your professional bodies.

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Associated links

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