People look to shift the blame and recover their losses during recessions.
Businesses are failing, money is being lost and belts are being tightened, and a
perfect claims culture is created. We are seeing an increase in claims against
all professionals and accountants will not to escape.
Insurers are also looking closer at policy terms and conditions and whether
circumstances exist to trigger cover under the policy. Recent case law has
crystallised the importance of complying with the notification conditions of a
PI policy and the dangers of late or incomplete notification, which, in the
worst circumstances, can result in all or some of a claim being denied by an
Professional indemnity policies are based on the ICAEW’s minimum terms and
conditions and include the special institute clause, giving protection against
late notification and non-disclosure. However, even with this protection, it is
still important to bear in mind other policy conditions relating to the handling
of claims These are often conditions precedent to indemnity and following a
breach, where indemnity may be reduced to such a sum as insurers’ believe would
have been payable by them in the absence of such breach.
What to do
Remember your policy’s specific notification requirements, which may be, in
certain circumstances, as soon as possible (ie. days rather than weeks). It also
helps to be clear what you are notifying and, where possible, try to identify
the claimant or potential claimant, details of what you were engaged to do, why
you think a claim may be made against you, including allegations or potential
allegations, details of other parties involved in the work (and your views on
their liability) and when you first became aware of the claim or circumstance.
Also, bear in mind these dos and don’ts.
l Make any admission of liability to your client or third party. It sounds
simple but when there is an unhappy client on the other end of the phone it is
easier than it sounds to admit some form of liability, or even just to proffer
an apology. Doing this in any form may affect the chances of your insurer
providing a full indemnity for the claim;
l Promise to make any payments or agree to any settlement. This can be
interpreted as an admission of guilt or liability;
l Incur any costs with regards to the claim without your insurer’s prior
written consent. This could be in relation to fixing any mistakes or even taking
the client out for dinner to attempt to smooth things over;
l Make reference to your professional indemnity insurance. People are far
more confident in pursuing a claim against you if they know an insurer is
Remember, all of the above may be conditions that lead to insurers granting an
indemnity and a breach of even one of these conditions may result in indemnity
for all or part of the claim being denied, regardless of a special institute
l Provide all assistance to, and co-operate fully with insurers and their
representatives as required in their investigation of the matter;
l Be prepared to provide all background documentation, including the terms of
any contract between you and the claimant and all exchanges of communication
between the parties subject to the contract;
l Advise your insurer and their representatives of steps you think might
remedy the situation before proceeding;
l Contact your insurer, or your broker if you have one, to discuss the claim
if you are unsure of how to proceed.
Following these steps should help ensure that a valid claim is paid. Of
course, there is no better cure than prevention, so instituting a stringent
risk-management process throughout your business, particularly by producing a
formal engagement letter, which records exact details of your instruction,
clearly sets out the scope of your retainer, defines the client relationship and
sets out any responsibilities your client may have, should help reduce the likel
ihood of you getting to this point in the first place. It pays to be vigilant
and your broker should be there to advise and assist.
Jill Gough is a director at AON
CASE STUDIES – PREJUDICE FROM LATE NOTIFICATION
Accountants can be disadvantaged by a delay in insurers confirming cover and
reserving their rights pending a decision on prejudice. There is the uncertainty
of whether he will receive a full indemnity for the claim (and claimant’s
costs), but he might feel that a swift resolution of a dispute with a client is
warranted and advantageous and may have difficulties in pursuing that route
where the extent of cover has not yet been confirmed.
Example 1: early warning
An accountant was engaged by a solicitors’ firm to assist in the running of
its accounts department. The solicitor alleged the accountant made two erroneous
transfers of funds from the firm’s client account to the office account and that
he was being investigated by the Solicitors Regulation Authority and had
suffered financial loss. Investigations revealed that two months before
notification, the accountant had been asked by the claimant to sign a witness
statement referring to the accounting errors, with a view to the claimant
showing SRA that he was not responsible.
Insurers held that the provision of the statement was a circumstance which
was not notified as soon as practicable and that they may have suffered
prejudice. Had the accountant notified earlier, insurers would have had the
opportunity to consider how he dealt with the draft statement. Insurers reserved
their position regarding prejudice. If it is established that errors were made,
there will be little if any prejudice, but if information emerges to cast doubt
on the accountant’s fault, the previous admission will make it more difficult to
advance this and insurers may have suffered prejudice.
Example 2: circumstantial evidence
An accountant is alleged to have given negligent advice to one shareholder
(A) in a company where A agreed with the other shareholder (B) to wind-down A’s
shareholding in favour of B, giving B majority control. It is alleged that the
accountant conspired with B to pass control of the company to B and wilfully
furthered B’s interests in breach of the accountant’s duty to act in good faith
in the interests of each of its clients, A and B.
Insurers held that the accountant had prior knowledge of circumstances that
might give rise to a claim and did not notify them as soon as practicable.
This delay damaged the defence to the claim, in as much as the accountant had
subsequently proceeded to advise and assist B in his dispute with A. Even if the
accountant explains his conduct, it is embarrassing to his case, including some
letters he wrote to B. If such letters are required to be disclosed to A, A will
have material with which to make out its allegation that the accountant unfairly
advanced the interests of B over its interests. Insurers reserved their position
on whether any prejudice has been caused.
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