Accountants were one of the first to make professional indemnity insurance compulsory...
Today it's a large market with many insurers battling for market share and offering accountants policies with subtle but important differences.
So it's important to have some understanding of how this market works to be able to make an informed decision on which product is best for your firm.
Our guide covers the following key points;
- About the PI market for Accountants
- The cost of Accountants' PI insurance
- The insurers
- How the premium is calculated
- Create the right impression
- Regulatory requirements
- What work is high risk
- The Assigned Risks Pool
- Examples of claims against accountants
- Buying a policy with a Broker
- Buying a policy online
- Trading without PI insurance
Please take some time to read this guide and call us if you require more information on 0345 251 4000.
Accountants' professional indemnity insurance is estimated to be worth in the region of £100 million of premium income to the insurance market. This is paid for by the 20,000 firms practising in the UK. Firms vary dramatically in size – from sole practitioners through to huge global practices.
There are approximately 60 insurers currently underwriting in the market. Market distribution is heavily dominated by brokers who arrange PII on behalf of most firms, with only a relatively small number of firms arranging cover direct with insurers. Like any market you'll find the good, bad and ugly so its important to use a good broker to find the cover and premium which best suits your business and your attitude to risk.
Rates for this insurance typically range between .25% and 1.5% of fee income depending on the usual risk factors and market competition. But rates can also be higher or lower than this depending on the work undertaken, the claims history etc. Rates are discounted for new start firms as there is no history or legacy to insure.
You should also bear in mind that minimum premiums will apply which will vary between insurers. The minimum premium is the insurance companies starting point for insuring a risk and they can vary significantly for accountants. For example, a minimum premium for a firm could be £ 100 or £ 1,000 depending on the Insurer.
If you stop trading you may be required by your regulator to carry run-off insurance which is usually a multiple of the annual premium.
It's not good practice to buy accountants' professional indemnity insurance as a 'commodity' purchased only on its price. However good the policy wording is, professional indemnity is commercial insurance and coverage disputes can still occur. Use a specialist broker to get some good advice.
The rating of an accountancy firm or any professional indemnity risk is a complex process. Underwriters need to be highly skilled and require a significant amount of information to enable them to provide a quotation which accurately reflects the risk they are pricing. Premiums are calculated based on many factors which will include:
- The claims history
- Categories of work undertaken
- The number of partners or directors to staff ratios
- Firm’s fee income
To assess the risk the underwriter will require a fully completed proposal form which they will consider in detail. They will also look at the firm’s website or they may even look deeper online into a firm’s background.
Risk presentation is more important that you might think. The underwriter is assessing the professionalism and quality of your firm and if the information is badly presented, it may influence their judgement and the premium they offer or they may even decline to quote.
The Institute of Chartered Accountants and the ACCA have specific and strictly enforced rules which dictate the levels of cover their members must carry. Full details of the requirements can be found on their websites or by talking to a specialist broker.
Taxation covers a wide area of work and is the number one cause of all professional indemnity claims against accountants. An estimated 70% of all claims relate to tax issues.
The list below gives an indication of where the majority of accountants professional indemnity claims come from:
- Low risk General accountancy work, personal tax returns, book keeping
- Medium risk Insolvency, company tax, payroll, audit
- High risk Corporate finance, financial advice, trusts, wills, tax schemes, mergers, acquisitions
Accountants can now undertake probate work. Probate has traditionally been a major cause of professional negligence claims against the legal profession and specialist advice should be sought by accountants who are now undertaking or who are considering adding probate to their range of services.
The Assigned Risks Pool (ARP) is a facility put in place by the Institute of Chartered Accountants to provide temporary cover for their members firms who are unable to secure professional indemnity insurance in the open market.
There could be a variety of reasons why a firm is unable to obtain PI insurance. It will normally be because they have become a 'distressed risk' due to claims problems and no insurance company wants to insure them.
We assist accountancy firms who have found it necessary to enter the ARP and are now looking to return to find professional indemnity insurance in the open market.
There are many different scenarios where an accountancy firm can find themselves needing to claim on their professional indemnity insurance. Some are obvious but others are not, so here are a few real examples;
A firm of independent accountants were the auditors to an import company. The company was providing false information for the purpose of raising money from banks. A fraud was committed and the banks sued the auditors for failing to detect the fraud. Claim settled £ 10 million
An accountant failed to inform their client that their income had exceeded the VAT threshold and they should therefore register for VAT. As a result the client claimed against the accountant for the eventual liability. Claim settled £ 17,000
A client purchased a company which turned out to be a bad investment. They claimed their accountants had been involved in the due diligence process and failed to warn them of certain fundamental issues. Claim settled £ 182,000
An accountancy firm was recommending a local firm of independent financial advisers (IFA) to their clients, for which they were receiving referral commissions. The IFA went into liquidation and it soon became apparent that poor product advice had been given. Various clients then claimed against the accountant for having referred them to the IFA. Claim settled £ 352,000
Most accountancy firms use a specialist broker; a broker lowers the premium cost as well as providing valuable advice and support throughout the insurance period, especially on claims. For a quotation or free advice call us on 0345 251 4000. Also read our guide Why You Need An Insurance Broker.
For fee income below £ 100,000 buying online is quick and simple with our quote and buy system that offers competitive premiums with the major insurers. Some accountants will be able to obtain very competitive quotations using our on line system but this typically works best for low risk accountants. If your income exceeds this or your risk is more complex (claims, tax schemes etc) you'll need our broking service. Read our guide Why You Need an Insurance Broker.
Trading without adequate professional indemnity insurance is a serious breach of regulatory requirements as well as poor business practice. A firm will be prevented from trading and closed down if they can-not obtain adequate cover.
This guidance note is intended for information purposes only. Whilst all care has been taken to ensure the accuracy of the guidance note it is not to be regarded as a substitute for specific advice. This guidance note shall not be reproduced in any form without our prior permission. © 2018 Professional Indemnity Insurance Brokers Ltd