Litigation fear drives up cost of PI insurance

Firms are likely to see a rise in the cost of professional indemnity insurance this year, as clients resort to litigation against their advisers.

Victor Knope, a partner of insurance broker First City and an adviser to the ICAEW and ACCA, said: ‘We’re now in a recession and because of the higher threat of litigation in these times, clients turn on their accountants, questioning the advice they were given on deals.’

‘Insolvencies are also shooting up and inevitably people are going to start looking for people to blame. This leads to insurers starting to increase premiums as claims go up.’ Knope added.

Jane Howard, of law firm Reynolds Porter Chamberlain, agreed that PI cover was likely to become more expensive with insurers willing to take less risk.

‘There is a definite hardening in the market,’ she said.

The change in the PI market comes as some of the large firms face legal challenges that could threaten their global networks.

Last month a court in the US ruled that the Deloitte network could be liable for the actions of its Italian division over its audit of dairy giant Parmalat.

Such cases could leave global firms increasingly vulnerable to future lawsuits.

The New York District Court dismissed an attempt by Deloitte to have a class action against it thrown out. Shareholders claim that the global network should be held responsible for Deloitte Italy’s alleged fraudulent activities as auditor of the collapsed Italian multinational.

Meanwhile, BDO International is also facing the threat of a lawsuit. The case will determine whether it will be dragged back into a $521m (£352m) negligence claim lodged against its member firm BDO Seidman by Banco Espirito Santo. The lawsuit is in relation to BDO Seidman’s allegedly negligent audit of the factoring company owned by Banco Espirito Santo.

However, BDO International has gained some breathing space as Acc ountancy Age learned the hearing has been pushed back until May.