Tailormade cover: personal touch

Buying professional indemnity cover has never been easier for accountants.
With the horrors of Enron and WorldCom a distant memory, the risks of IFRS
implementation out of the way and the taxman promising to adopt a more moderate
approach, the risks facing accountants have reduced dramatically.

The market has responded accordingly. During the past 18 months, the cost of
cover has softened dramatically, with rates falling by as much as one fifth.
Accountants who used to spend close to 3% of their revenues on professional
indemnity are now spending half that amount.

With risk low and the market soft, new players have rushed in to provide
professional indemnity cover, creating a competitive industry. This range of
choice and low costs mean that, for the first time in many years, accountants
have the opportunity to tailor their cover to their exact needs, as opposed to
taking out a generic off-the-shelf policy.

Accountants thinking of tailoring their professional indemnity to specific
risks should ask themselves the following questions:

1. Why should our firm look for tailored cover?

According to Keith Tracey, leader of the accounting practice at insurers
Marsh, a firm should only tailor cover if it is of substantial size or has
significant business exposure outside the UK.

‘The cover available in the standard professional indemnity policy for a
UK-only accounting firm is very broad. Insurers understand what accountants do
and what their liabilities are and there is a long business history and a strong
body of case law. This contrasts with consulting or IT, so insurers are happy to
provide broad cover,’ says Tracey.

He advises that, in most cases, smaller UK firms and sole practitioners have
little to gain from straying from the standard policy because cover on offer is
so broad and comprehensive.

For larger firms with multinational clients and international exposure, how
ever, the picture is very different. ‘Large firms have multinational companies
as clients and face different regulatory problems in each of the territories
they operate in. This requires cover where the policy wording is extended and
adapted to address these risks,’ says Simon Brookes, an executive director at
Heath Lambert.

Unlike smaller firms, large practices should structure their policies
differently and favour an adapted policy that has evolved from the standard
offering. Large firms should also consider managing their risk by balancing the
cover offered through professional indemnity policies with the use of captives.

Captives are large pools of money held offshore as reserves to be used in the
event of litigation. Captives provide firms with the opportunity to manage some
of their cover internally and allow them to diversify their cover.

2. When should a small firm consider tailored cover?

Although most UK-based firms of an average size are probably covered by a
generic policy, there are times when a small firm should consider taking out
more specific insurance.

‘If a firm has some business exposure to, say, the US or Canada, then the
standard policy available in the UK will not cover this activity. In these
cases, it is essential for a firm to tailor its cover,’ says Tracey.

Smaller firms should also consider tailored cover if they undertake any
consultancy work or have directors or partners who act as non-executives of
other businesses. ‘If a firm is involved in any business that does not fit
specifically within the accounting remit then it should make its insurer aware
of this and adapt cover accordingly,’ says Tracey.

3. Does tailored cover cost more for a firm?

If a firm does need to specialise cover, there are cost implications.
‘Tailoring professional indemnity is exactly the same as tailoring insurance for
your home. It depends what you want. If you need to insure a Leonardo Da Vinci
painting in your home, you will pay more. If you need cover for business in an
unfamiliar area, you will pay more,’ says Brookes.

4. When should we approach agents for specialised cover?

If a firm does need specialist cover, now is the time to take some out. With
rates low and competition for custom high, there are opportunities to take out
specialised cover at a lower cost than normal.

‘In a soft market, the scope is there to add on extra cover and tailor a
policy with minimal cost impact. If and when the market hardens it will be much
harder to do this,’ says Brookes.