Rapidly changing regulation, increasing public and media scrutiny, more
demanding clients and an increasingly complex and risky tax environment have all
combined to make professional indemnity insurance an area that accountants
should not treat lightly.
The conversion to IFRS, the introduction of various European Union
directives, company law reform, a tougher approach to tax planning from
HM Revenue &
Customs have all brought dramatic changes to the areas accountants operate
Coping with so much change has meant the risk is higher that mistakes and errors
of judgment can creep into advice offered by accountants, who have to assist
clients while still grappling with the implications of the changes in the market
The good news for accountants is that during these times of rapid change and
increased risk, professional indemnity costs are at least falling and there is
more choice available as more players begin to enter the market.
This can provide professionals with the opportunity to either extend their
cover or reduce the impact of professional indemnity costs on bottom line
Over the last 12 months rates for professional indemnity have eased off by
approximately 20%. Accountancy practices, which have traditionally spent as much
as 2.5% of turnover on professional indemnity cover in the past, have been among
the main beneficiaries of the softening rates and are now, on average, only
spending half as much on cover.
The drop in rates, while a welcome development, does not mean that
accountants should not shop around. Price is of course an important factor when
choosing professional indemnity cover, but it is by no means the only one.
Andrew Harding, acting managing director of the Association of Chartered
Certified Accountants, says buying the cheapest policy now can be costly later.
‘The decision on what professional indemnity cover to take should not be made
just on price. The experience of the insurer in the market, the continuity of
cover and the service offering are all of crucial importance,’ Harding says.
Looking at the reasons behind the softening professional indemnity rates of
recent times serves to underscore this point.
The market has always been characterised by a yo-yo cycle. When claims are
low, new players flood into the market and the added competition sees premiums
As soon as claims start pouring in, however, paying out large amounts on the low
premiums can be too much for a number of insurers to bear. It doesn’t take long
for less resilient players to leave the market. As a consequence, rates
sky-rocket and it can even be tricky to find an insurer that will provide cover
This why Harding believes it is so important to look beyond price.
Accountants need to know that their insurer will still be able to offer cover
when times get tough. Suddenly finding yourself without any protection because
your provider has left the market is not a good situation for any accountant to
‘When insurers suddenly have to pay-out claims on the low-premiums, many
players suddenly leave the market. Boom and bust is a problem. You want your
insurer to still be around in ten years. You don’t want them to disappear from
the market after three,’ Harding says.
He adds: ‘You want an insurer that is established and can provide you with
continuity of cover. Constantly having to change your professional indemnity
provider creates uncertainty, when the whole idea of cover is to reduce
Indeed, finding yourself without cover in a period of changing from provider to
another can be extremely compromising.
It is a statutory requirement for accountants to have professional indemnity
cover, and as a result the accounting institutes are very strict when it comes
to ensuring that their members are covered properly.
In the worst case scenario finding yourself in between providers could land
you in front of a disciplinary hearing and incurring a fine for not having your
cover in order.
Perhaps of even greater concern, is that without professional indemnity, even
if it is just during a period of changing provider, an accountant is more
vulnerable than ever.
Recent research shows that the amount of litigation and regulatory
enforcement faced by UK businesses is increasing.
According to the 2006 litigation trends survey published by law firm
Fulbright & Jaworski, companies are spending substantially more on dealing
with regulatory enforcement issues. Well over half (58%) of UK respondents to
the survey said that they had received a regulatory proceeding over the last
Even more worrying was the finding that the amount of litigation faced by UK
companies had increased over the last year. A year ago 66% of the companies
polled had faced a court action. This year that number was up to 78%. The
percentage of respondents who faced more than 50 court actions tripled from 5%
Harding says it is a fact that the UK business environment is becoming more
litigious, and that accountants have to be more aware of the protection their
cover provides as a result.
‘Litigation has definitely increased, even though the economy is strong,
there was a large amount of litigation at the beginning of the nineties, but
that was because of a recession, when people tend to litigate more,’ he says.
Given all the warnings about continuity, litigation and the importance of
choosing the right policy from a creditable provider, accountants need to be
sure they have made the right choice for their professional indemnity cover.
One of the most effective and easiest ways to do this is to find out who the
various accounting institutes have selected as their professional indemnity
Each institute has selected list of insurers that members can use for their
cover. The institutes assess all providers and can pick out those with the track
record and policies that would be best suited to the membership. In some cases
institutes can use their buying power to negotiate special rates for members.
Institutes do review their relationships with insurers regularly too, so
members can rest assured that they are receiving the best quality cover and
service available in the market at the time.
Even if accountants do have a provider that has received the stamp of
approval from an institute, they still need to be meticulous when providing
details to their insurer.
Accountants have to be spot on when declaring any claims, because there is
the risk that if they are not, an insurer could be reluctant to process a claim.
In some cases leaving out key details could even see an insurer be within its
rights to refuse cover.
When renewing a policy, accountants also need to exercise similar precision, and
resist the temptation to try and make their risk profile look better than it may
‘You have to be absolutely accurate with your renewal, and it is not a good
idea to make an application look better than it is. The best policy is that when
you are in doubt about information, declare it,’ says Harding.
House of Lords Ruling clarifies cut-off
Accountants and professional indemnity insurers would all do well to take note
of a House of Lord’s decision this year that provided important clarification on
the time limitation rule on negligence claims.
Section 2 of the Limitation Act of 1980 states the limitation period for
claims against an accountant or lawyer, including negligence, is six years.
The ruling effectively means that no accountant can assume that a claim
begins when a claimant suffers a contingent loss, but only when that client
begins to suffer a pure economic loss.
In the case that came before the Lords, the Law Society made a claim against
an accountant for making a negligent report on the accounts of a solicitor, who
misappropriated about £750,000 from his client account over a six year period
that ended in 1996.
The accountant examined the accounts for each of those years and reported
that the solicitor had complied with the Solicitors’ Accounts Rules.
When the Law Society discovered the misappropriations it took action, as
several of the solicitor’s clients had successfully made claims from the
Solicitors’ Compensation Fund, which pays compensation to those who suffer
losses when a solicitor does not account for money adequately.
The Law Society is the trustee of the Fund, and sued the accountants in 2002
for the sums paid out as a result of the negligence.
The defendant argued that the Law Society’s claim was time barred because it had
extended beyond the six-year period specified in Section 2.The Law Society
argued that it had suffered actual damage only when it decided to meet a claim
made against the Fund.
The Lords found in favour of the Law Society. The ruling said damage did not
occur when the money was first misappropriated after the Law Society received
negligent report on the accounts of the solicitor, but when a claim was first
made against the Fund.
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