Thanks to an over-hyped diet of ‘LA Law’ and John Grisham books, manyims against them, professionals should think hard about their level of coverage, says Stephen Womack. of us now fancy ourselves as campaigners for justice. Thousands of people each year are willing, perhaps even eager, to take their professional advisers to court. Doctors, architects, surveyors, computer consultants, financial advisers, accountants and even the legal profession itself, have all seen a big rise in the number of clients ready to fire off a writ the moment they fall out with an adviser.
Professional advisers have always faced the risk of action from unhappy clients, but the sheer volume of cases makes it doubly important for them to protect themselves. Even if the adviser has done nothing wrong, clearing their name can still be a drawn-out and expensive business. Increasingly belligerent clients have forced all professions to think hard about how they insure themselves.
Now a trendy protector of reputation
Professional indemnity insurance, PII for short, is now a fashionable topic of conversation. This cover’s basic role is to protect a professional’s most valuable asset: their reputation. PII will give an individual or a practice the resources to defend claims against them and, occasionally, to pay out damages to clients who have been poorly served.
Different professions have different ways of dealing with PII. It is compulsory for virtually all accountants in practice in the UK (see box: ‘Rules governing accountants’ PII’, right), although they have a vast number of different insurance companies and schemes to choose from. Doctors and lawyers currently insure themselves, using giant mutual funds, such as the Solicitors Indemnity Fund and the Medical Defence Union.
Other professions historically have taken a more relaxed view of PII; until last month, for example, the cover was optional for architects.
With moves to multidisciplinary practices and the general increase in claims, professionals are now thinking hard about whether their PII arrangements are up to the challenge of the future. The providers of PII are shaking themselves out of the lethargy that has for too long characterised insurance. Innovations, such as telephone selling and even quoting for PII via the Internet, are challenging the cosy relationships between brokers and professional associations.
It means buyers of PII face some complicated, but potentially profitable choices. Changing the way they buy cover could see their premiums fall dramatically. ‘Three main factors influence the price an accountancy partnership pays for its PII,’ says Michael Wood, managing director of insurer pi direct. ‘They are the claims record, the fee income and the type of work the practice undertakes.’
‘The most risky kinds of work are auditing for plcs – in fact anything to do with plcs – insolvency work, advising on mergers and acquisitions and tax advice. Tax is probably the highest risk area of all. General auditing and bookkeeping work is relatively low risk,’ says Wood.
Traditionally, PII has been sold by a limited number of insurers. Royal & SunAlliance, ITT London & Edinburgh, St Paul and syndicates at Lloyd’s have been the main players, although General Accident has made a strong push for business in recent years. These established companies are now being challenged by new rivals.
Launched last year, pi direct is aiming to bring the philosophy of telephone selling, pioneered in motor insurance by the likes of Direct Line, to the PII sector. The insurer’s target market is the smaller, one to five partner firms, which have relatively straightforward needs.
Wood says: ‘There can be competitive premiums at the bottom end of the market, where smaller practices need basic cover and do not require complex insurance programmes.’
He suggests a five-partner firm, with a fee income of #1m per year (mainly from audit work) and a clean claims record would today pay between #8,000 and #10,000 for #3m of PII cover. Such rates indicate a substantial reduction on PII prices even two years ago, indicating the renewed competition in the market.
In this example, the accountants would have to pay the first #5,000 of any claim. They could cut the premium further still by volunteering to pay more: in insurance jargon, taking a higher excess or deductible.
Graham Hearsey, a director of East Sussex-based specialist broker Professional Insurance Agents, testifies to the growing competition between insurers for PII. His brokerage specialises in arranging professional indemnity cover, numbering architects, accountants and surveyors among his clients.
‘Rates have been decimated,’ he says. ‘As a broker taking commission, we’ve had salary decreases now for some years.’
He urges insurance buyers to use a specialist broker, rather than try to tag on PII when they buy other insurance such as property and motor covers, or employers’ liability insurance. ‘Most local brokers are not that familiar with the product,’ claims Hearsey, adding that there can be hidden pitfalls that leave the buyer without effective cover.
Common reasons for insufficient cover
He cites two common problems: bundling legal costs as part of the excess so that a firm always has to pay to defend itself from trivial claims; and failing to ‘retro-date’ insurance.
PII is written on what insurers call a ‘claims-made’ basis. That means that a professional is covered for any claims that come to light during the period of insurance, regardless of when the work giving rise to the claim took place. All policies, though, legally need to have an inception date, which defines the earliest possible moment a claim can arise, for example the date a business was founded.
Hearsey claims it is all too common for policies to be dated incorrectly.
His latest venture is to offer PII quotes via the Internet. Hearsey has launched a web site (www.pro-ii.com) that contains fact sheets on PII and electronic proposal forms. The site also has an eleventh-hour quoting service, promising a swift response for a buyer who wants a last check that a quote cannot be bettered.
On the subject of computers, one of the hottest issues for accountants’ PII at the moment is coping with the risks presented by the millennium timebomb. In a nutshell, auditors fear that without decent insurance they will be forced to qualify the accounts of every company that the 2000 problem could conceivably affect. Otherwise, those who lose money if a business fails because its computers have died might be tempted to have a go at the accountants to recoup losses.
Insurers, though, are trying to avoid any liabilities connected with the year 2000. They maintain it is a predictable event and not something for which insurers should pay.
Peter Large, head of member affairs at the Association of Chartered Certified Accountants, says: ‘It’s the classic example of the insurance industry being worried by a new risk and withdrawing cover. I think we’ve gone through the knee-jerk reaction phase and we’re now in the calming-down phase.’
Large says the problem has to be sorted out in the next two or three months, because some accountants buy two-year insurance policies and need to know where they stand.
Peter Burton, deputy director of practice regulation at the English ICA, says the institute is also worried about this: ‘We’re obviously trying to avoid the situation where every set of accounts has to be qualified and we are doing something about it.’ Insurers are now starting to sit down with the industry to try to thrash out a solution.
Some accountants are actually in a very strong position to try to force insurers to give them cover. The English ICA maintains an approved list of insurers. These are companies that agree to offer insurance in line with the institute’s recommended policy wording. Members must, in turn, buy their cover from an insurer on the approved list.
Conditions clause sets a standard
Wood highlights one clause in this English ICA policy concerning the difference in conditions. This means if an insurer on the approved list tries to impose terms that are more onerous on the insured than those of the English ICA wording, the institute wording will apply. ‘From a buyers’ point of view that is brilliant,’ he says. ‘Insurers can choose to add to the cover but they cannot subtract.’ He says this clause makes it hard for insurers to unilaterally withdraw PII cover because of 2000-type problems.
Can accountants learn any lessons from other professions about how they arrange PII? There are certainly some examples of how not to do it out there. Both solicitors and financial advisers have had real trouble with trying to run mutual funds, a fact that will not have been missed by the accountants’ own mutual MAPIC (see box: ‘Mutuals no more?’, above).
But there are some positive lessons too. One common issue in the professions is that PII claims frequently take many years to come to light. This can present a problem if the professional concerned has long since retired.
Chartered surveyors are required to buy cover for six years after they have retired. Rather than paying annual premiums, they can now get the insurance with a single lump-sum payment. Large says this kind of deal could be very appealing for ACCA members, who are also required to buy insurance to cover them in retirement: ‘The one-off insurance payment could be made part of a deal to sell a practice or transfer clients.’
Accountancy seems to be teaching other professions a thing or two when it comes to PII. The two architecture professional associations RIBA and ARB are in the process of introducing mandatory cover for their members, modelled partly on the ACCA and English ICA requirements.
The Royal Institute of Chartered Surveyors, meanwhile, is insisting that from the end of last month its members use an insurer from an approved list. The message for accountants seems to be clear: take the trouble to shop around for PII because there are plenty of people out there who want your business.
RULES GOVERNING ACCOUNTANTS’ PII
All of the main professional bodies have rules and recommendations on what PII their members should buy, and from where they should buy it.
ACCA PII cover is compulsory for practising certificate holders. Minimum levels of cover are linked to gross fee income. One key measure used to calculate the minimum is 25 times the largest client’s annual fee. Others include 2.5 times total fee income. The buyer must take out whichever of these is the greater cover.
Bristol-based broker Cabot Blackmore advises the association and runs a special PII scheme for members, insured with Royal & SunAlliance. Roughly half of ACCA members use this scheme.
English ICA PII cover is compulsory for those accountants dealing with the public. Usual requirement is for 2.5 times fee income. The English ICA has defined a minimum policy wording, and insurers can then add ‘bells and whistles’ to this. The institute runs an approved list of insurers.
All companies on this list agree to offer the minimum policy wordings and to join in the assigned risks pool (ARP). The ARP is effectively a last-resort insurer for firms with a poor claims record who cannot get cover elsewhere. Insurers in the ARP will share the premium and risk of these firms for up to two years while they sort out their problems.
CIMA All members in practice are ‘strongly recommended’ to get adequate insurance. Cover is compulsory for practising certificate holders. There are no minimum or maximum cover levels set. CIMA feels its members’ work is so varied that setting levels ‘would leave some members over-insured and others potentially exposed as under-insured’. Sheffield insurance broker Evans Charles Stevens runs a dedicated PII scheme for members.
MUTUALS NO MORE?
Huge problems with the Solicitors Indemnity Fund (SIF), the insurance brokers’ mutual PII fund, called LIBM, and shipping’s mutual P&I clubs have raised serious doubts over the future of mutuals for commercial insurance.
SIF, which is run by the Law Society, is facing a revolt from slick City law firms that are fed up with paying for the losses caused by their poorer cousins in conveyancing.
These losses have left SIF with a #450m hole in its books. SIF has responded with a 50% premium hike.
Law firms with a clean claims record have been told they could save up to two-thirds on their PII by turning to commercial insurers.
But at the moment they are forced to pay into the SIF coffers.
Lawyers are not the only ones with mutual problems. Some insurance brokers and independent financial advisers paid into an LIBM. It was put into run-off last year, insurance-speak for being wound up, after the high costs of compensating customers for past pensions mis-selling drained its resources.
Accountants have a mutual of their own, MAPIC, which covers around 430 member firms, mainly at the smaller end of the profession. Its largest member has a fee income of around #10m.
MAPIC is actually run by London-based Indemnity Management Services, the same organisation that ran LIBM. But MAPIC underwriter Dominic Guest says the two funds were like chalk and cheese.
‘MAPIC is run along similar lines to a commercial insurer,’ he says. ‘We underwrite according to risk, charge differential premiums and we don’t quote for those firms that appear too risky.’ All new members get a face-to-face inspection visit.
For the moment, the strategy seems to be working. The fund is currently #750,000 in surplus on a turnover of #1.85m. Guest says: ‘It’s a bit too early to sound the death knell for the mutual.’
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