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Professional Indemnity Insurance for Accountants

Introduction

Accountancy is one of the more established professions. But it is fairly fragmented, being made up of members from a number of professional bodies as well as unqualified but highly experienced advisors, 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 Professional Indemnity cover.

What do Insurers look for?

First and Foremost - Qualifications or Experience
If an 'Accountant' is unqualified then 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 what type of work the proposer is doing and proposal forms bring this out by asking for a breakdown of fee income. Examples of approach are:

Audit, Accountancy and Company Tax for Quoted Companies
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 huge.

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
Variable hazard depending upon nature of work.

Management Consultancy
At strategic level can be very low hazard. At the level of interim management or IT consultancy can be more significant.

Insolvencies, Liquidations and Receiverships
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
Generally low hazard as most Accountants do not get involved in insurance broking to a significant extent.

Commissions from Investment Business regulated under Financial Services Act.
Variable hazard. As introducers only, the exposure is low but where financial advice is given substantial losses can arise.

Mergers, Acquisitions and 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. Most firms of Accountants remain partnerships. There has been much consolidation in the accountancy world in recent years, some of it traumatic. 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' claims records.

And finally there is the claims record. Accountants' Professional Indemnity claims records vary enormously. Many small firms are entirely clean. Most large firms have experienced at least some claims. But beware, there are a number of 'serial killers' with terrible claims experiences.

Examples of Accountants Professional Indemnity Claims

Personal Taxation
Failure to lodge tax returns led to 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
Lender sought reference for a business's mortgage. The business failed and the subsequent property sale failed to cover the loan. 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 that 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 £1,000,000.

Investment Advice
Poor investment advice led to serious loss to a trust. Cost £210,000.

Accountancy
The 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.

Fraud
A partner in the firm stole clients' money. Cost £625,000.

Insolvency
Failure to realise full value of assets. Cost £110,000

Main Bodies with Professional Indemnity 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 are:

ICA

Required Limit of Indemnity
Two and a half times the firm's gross fee income for past financial year, subject to a minimum of £50,000 for a sole practitioner or £100,000 in any other case and a maximum of £1,000,000 (of course firms can be recommended to buy much more!).
Maximum Excess
Sole practitioners - £30,000 in the aggregate.
Partnerships - £30,000 in the aggregate multiplied by the number of principals.
Corporate practices - £30,000 in the aggregate or the total amount accepted by the principal as a legally binding personal obligation (but not more than £30,000 for any one principal).
Main features of rules
Cover to be provided via an insurer from the 'List of participating Insurers' published each year by the Institute. Cover must conform to the Institute 'approved wording' - a 'difference in conditions' clause must be included where cover differs.
Retroactive cover of 6 years or establishment date of practice must be provided. An 'Assigned risk pool' exists for those practices unable to obtain cover.
Run-off cover following cessation must be maintained for 2 years, but it is recommended that run-off is continued for 6 years.

ACCA

Required Limit of Indemnity
Fee income less/equal to £200,000 - the greater of two and a half times the firm's total income for past financial year and 25 times largest fee paid in past financial year, subject to a minimum of £50,000.
Fee income £200,000-£700,000 - the greater of the aggregate of £300,000 and the firm's total income for past financial year and 25 times largest fee paid in past financial year.
Fee income over £700,000 - the greater of £1,000,000 and 25 times the largest fee paid in past financial year.
Maximum Excess
The lesser of 2% of the limit of indemnity in respect of each and every claim or £20,000 per principal.
Main features of rules
Cover to be provided by 'reputable' (DTI approved) insurers.
Cover to be on a 'civil liability' basis for each and every claim.
Fidelity guarantee cover must be included for partners, directors and employees.
Run-off cover following cessation of practice must be maintained for 6 years.

CIOT

Required Limit of Indemnity
The greater of two and a half times the firm's gross fee income for its last financial year or 25 times largest fee raised in past financial year subject to a minimum of £100,000 for a sole practitioner or £200,000 in any other case and a maximum of £1,000,000.
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.

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).

Wordings

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 the insured is unqualified, or qualified only to a limited extent, more basic miscellaneous wordings can be offered.

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 would 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, as liquidator, as trustee, but only in respect of an Accountant's usual services.

The Usual Exclusions

Civil liability policies demand careful attention to exclusions so that non-PI exposures are not inadvertently covered.

Typically, policies will 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 insureds.
Nuclear risks.
Claims and circumstances known at inception of the cover.

The Usual Extensions

Fidelity.
Loss of documents.
Costs of representation at tribunals.