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.
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:
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.
Examples of claims
Main bodies with PI rules
The main features of their various rules*
ICAEWRequired 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.
ACCARequired 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:
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.
CIOTRequired 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
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'.
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.
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.
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).
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.
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.
The usual exclusions
Civil liability policies typically exclude:
The usual extensions
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:
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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