Professional indemnity insurance
Professional indemnity insurance (PII), is compulsory for all ICAEW members who have a practising certificate and engage in public practice. PII is a requirement of a number of regulations.
The regulations relating to audit, insolvency, probate, investment business (the DPB Investment Business Handbook) and the eligibility requirements for a practising certificate (PC) all require members and firms to comply with ICAEW's PII Regulations. The PII Regulations give details of the amount of insurance required, insurers and the policy wording insurers must use.
Practising without PII is regarded as a very serious matter.
Prepare your professional indemnity insurance renewal early
Changes in the PII market
ICAEW’s PII Committee is aware that there has been a hardening of the PII market over the last 18 months with some insurers withdrawing from the accountants’ PII market completely. These developments could mean that firms find it more challenging (and/or time-consuming) to renew cover than previously. It could also mean that firms find their premiums increase significantly. For this reason, it is recommended that firms prepare early for their renewal and that they provide complete and accurate information to insurers at the outset to ensure a smooth renewal or transfer of cover to another insurer.
Generally, insurers are reviewing more critically the risks they are willing to accept and the price they will set for cover. This may particularly affect firms with a claims/notifications history and/or those involved in ongoing legal action and/or firms engaged in activity which insurers perceive as more high risk (eg, tax mitigation schemes, investment advice, insolvency, M&A, and audit work).
Therefore, the PII Committee recommends that firms prepare early for their renewal and that they take advice from a trusted and reputable broker or other advisor when taking out their insurance. The Committee recommends firms discuss their placement strategy with their broker to ensure access to a number of different insurers; specifically, firms may wish to clarify whether their brokers are ‘whole of market’ brokers.
Professional Standards' PII Manager, Sarah-Jane Owen, joined the Small Practice Community to discuss how to avoid expensive PII mistakes.
Impact of Covid-19
Firms should note that there may be delays in brokers and insurers responding to enquiries as a result of the virus and lockdown. Again, firms should prepare early for renewal but if they are unable to obtain new policy before their current policy expires, they should note that their last insurer is required under the minimum approved wording to extend cover for an additional 30 days (see clause D3).
During this difficult period firms may be struggling to meet the costs of increased premiums at a time when cash flow may be less certain. If so, the PII Committee recommends that firms speak to their broker/insurer about whether alternative payment terms may be available. Firms should also be aware that under the minimum approved a policy may not be cancelled unless both the insurer and the insured agree mutually in writing to cancel the policy (see clause C11).
Duty of fair presentation
Firms have a legal obligation to make a fair presentation of the risk on taking out or renewing cover. Therefore, in order to safeguard the indemnity available for a claim should it arise, it is essential that firms are open and transparent with their insurer/prospective insurer when taking out or renewing cover as to:
- the activities they undertake;
- their claims history and any potential claims (or grounds to suspect a claim - ‘circumstances’);
- their risk management strategy;
- their approach to managing Covid-19 related disruptions; and
- their disciplinary / regulatory history.
In-depth and complete information should be provided at the outset of the renewal process in an effort to make proposals more attractive to insurers, and to assist in obtaining a timely response from insurers as to whether cover terms will be offered.
Covid-19 and claims
It is likely that the disruption to business and the economy caused by Covid-19 will result in an increased number of PII claims against accountants and other professionals. Therefore, members should ensure that they have read and understand completely the terms of their firm’s PII policy. If any points are unclear, firms are advised to clarify these points with the firm’s broker.
Guidance for firms on arranging cover
ICAEW’s Professional Standards Department shares the latest advice on PII and the importance of making sure there are no gaps in your PII cover:
The duty of fair presentation introduced by the Insurance Act 2015 has resulted in a number of changes to PII:
List of participating insurers
You must obtain the insurance required by the PII regulations from a participating insurer. These insurers have agreed to meet the requirements of ICAEW's minimum approved policy wording. The fact that an insurer is on the list does not imply that ICAEW has performed independent checks on the insurer's suitability. ICAEW recommends that you investigate the current ratings and discuss with your brokers the suitability of these insurers when you take out or renew your insurance.
Current Professional Indemnity Insurance (PII) Regulations
PII minimum approved policy wording
Non-members can download an order form to obtain copies of ICAEW's minimum approved policy wording.
If an insurer does not use the PII minimum policy wording, the insurer must add a Difference in conditions endorsement.
PII and tax avoidance schemes
Professional indemnity insurers are taking a cautious view of insuring firms that advise on tax avoidance and tax mitigation schemes. Initially, insurers will try to identify such firms through questions on the proposal form. Then they will probably ask such firms to complete a further questionnaire with more detailed questions about what the firm is doing and the procedures it has in place to minimise the risk of claims. Based on the firm’s answers, the insurer will then decide whether to insure the firm and the premium to be paid.
Insurers are also reviewing the position of firms that just introduce clients to other firms that give advice on tax avoidance and tax mitigation schemes.
Because of this increased scrutiny, the renewal process may take longer than before, especially if a new insurer has to be found. So firms are advised to start the process sooner than they may have done in the past.
Section 8 of the guidance, Professional conduct in relation to taxation, gives advice to firms on how they should deal with tax schemes, including if the only involvement is to make introductions to other firms.
ICAEW’s Engagement Letters Helpsheet includes material provided by the Tax Faculty for tax practitioners about specialist and ad hoc tax advisory services.
What if my firm is unable to obtain PII?
If your firm is unable to obtain PII in the insurance market, it can apply to enter the assigned risks pool for 'emergency' cover for a period of up to two years so that it can continue to practise. Section 4 of the PII regulations sets out the procedures for firms or members who cannot obtain cover in the market place
What do I have to tell my clients about my PII?
Under the requirements of the Provision of Services Regulations, you have to disclose information about your PII to clients.
What do I have to tell ICAEW about my PII?
If you are a PC holder, we will send you (or your firm) an annual return approximately one month before your PII renewal date. The PII section of the annual return asks for information about your PII.
Do I need PII after I've ceased to practise?
Yes- it is extremely important that you secure 'run-off' cover for your previous practice after you cease to practise. This is to cover you for claims for work done while in practice but arising after the practice ceased. This requirement is in your own interests, whether or not you think you might have claim in future.
Cover requirements when your firm ceases
Where firms cease, the members in practice in the firm must ensure that compliant cover is in place for at least two years, and thereafter they must use their best endeavours to maintain compliant run-off cover for a further four years (Regulation 2.8).
It is recommended that the terms and extent of any cover are equivalent to any previous qualifying insurance. You should continue to assess your need for such cover each year until you are satisfied that there is no possibility of a claim being made. It is recommended that you consider maintaining run-off cover for six years after you cease to practise.
Cover requirements when you cease to practise
If a member is ceasing to practise (rather than the entire firm) then the member is required to use their best endeavours to ensure they are covered by arrangements which comply with ICAEW's regulations. Cover should be in place for at least two years after they cease (Regulation 2.7). Run-off cover may be provided under the policy of a continuing practice or you may need to take out an individual policy.
If your former practice has undertaken to include run-off cover for you in its current cover, you must remember to check that it continues to cover you for at least two years. At the end of that time you should consider whether you need continued cover. If you are thinking about retiring/an exit strategy then you should speak to your broker about run-off cover.
Do I need PII if I do not engage in public practice?If you hold a PC but do not engage in public practice, you do not need PII. If you decide to return to practice, you will require PII immediately and should inform the members' registrar that you have returned to practice.
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