A gap in PII cover - the dangers
Professional Indemnity Insurance (PII) is compulsory for ICAEW firms and members who are engaged in public practice*. 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.
Who is PII compulsory for?
Professional Indemnity Insurance (PII) is compulsory for all ICAEW members who are engaged in public practice in the UK or the Republic of Ireland. It is also compulsory for ICAEW firms that have permission to work in reserved areas such as audit, local audit, investment business, probate or insolvency work even if the firm is located outside the UK or the Republic of Ireland. While the PII Regulations apply to individual members, in practical terms, PII covers the firm and therefore is a joint responsibility of a firm’s principals.
How PII works
‘Claims made’ = the insurance policy in force when a claim is first made against the insured, or when a circumstance that may give rise to a claim is reported. It is not the policy that was in place at the date of the act giving rise to the liability.
The insurer is covering liability arising from the past advice, services and business activities of the firm which is why they will ask for details of your past revenues, activities and a full history of potential issues (circumstances) and past claims when deciding whether to offer cover and, if so, at what premium. Sometimes insurers may limit how far back in time they are willing to cover. They do this by adding a ‘retroactive date’ to the policy. The effect is that they will only cover liability arising from advice, services and business activities undertaken after this ‘retroactive date’. Under the minimum approved wording this should be at least six years before the date of the current policy, or when the practice started, if sooner.
Gaps in cover
‘Gap in cover’ = a period of time when there is no policy in place to respond to claims made against the firm or circumstances that may give to a claim.
The most common reason for a gap is where the firm’s renewal has been delayed or frustrated. This can arise for a number of reasons eg, if a firm is late taking steps to renew cover, or if they have had to provide additional information on new or developing claims or circumstances. It can also arise where insurers change their view on the risk profile of specific activities, whether new to the firm or otherwise. A recent example is tax schemes. This might lead to protracted negotiations for, or the rejection of, cover/renewal and the firm having to look around for alternative insurers.
Danger of a gap in cover
If you have a gap in cover, you are in breach of the Professional Indemnity Insurance Regulations and guidance and your firm is in a risky position. Should you receive a claim when you have no PII in force, you will not be insured for it.
Once you have cover again, it will cover liability arising from advice, services and business activities of the firm during at least the last six years, including any advice, services or activities undertaken during the gap period, but this will not respond to claims first made against the firm prior to the new policy incepting. Equally, if you fail to disclose a potential claim that you knew about prior to the policy commencing, your cover for any claim arising from that circumstance during the policy period may be reduced under the minimum approved wording. Don’t be tempted not to disclose past claims and/or circumstances to the insurer you are negotiating with for cover. Failure to make full and proper disclosures could give the insurer fair reason to refuse or reduce indemnity under the policy in the event of a claim. Any record of non-disclosure could also seriously hinder finding cover in the future.
It is imperative that you have continuous PII. Getting the application/renewal process right is key.
There are lots of things to think about when setting up in practice including various ICAEW requirements. You need a practicing certificate (PC) to provide accounting services (see the Statement on engaging in public practice for a definition of accounting services) and with a PC you need PII. You must have these before you carry out any professional work. Sometimes an ICAEW member will take a PC but not use it straight away. If you do this, you must remember to get PII before you carry out any professional work (accounting services).
You have to report on your PII to ICAEW in your firm’s annual return. If you haven’t got cover or you have had a gap in cover, come clean and don’t try to hide it. The provision of incorrect information can be very serious and put you in danger of losing your permission to work in reserved areas such as audit, local audit, investment business, probate or insolvency work. On top of this, you could be liable to disciplinary action which will make getting PII in the future difficult. If you are tempted to stop promoting yourself as a ICAEW Chartered Accountant and take out less stringent PII – don’t. While you are in public practice and still an ICAEW member, you need a PC and PII.
PII case studies: a closer look
Case study 1: Firm P had made a number of notifications over the years and at renewal was looking to change insurer to get a better deal. Its current insurance ran to 29 MONTH 20XX. It signed a proposal form for the new insurer on 11 MONTH 20XX. On 22 MONTH 20XX the firm received notice of a potential claim and disclosed this on the next working day to its then current insurer. Nobody told the potential new insurer who, although not covering the claim, would have wanted to know about it as part of the application and underwriting process. The firm took the policy with the new insurer and at the next renewal was not required to provide a list of past claims on the basis the insurer had them from the original application. Several years into the policy the new insurer became aware of the potential claim and cited that and other notifications as reasons to decline to renew cover.
Case Study 2: Firm Q was changing insurers and a client had emailed the principal she dealt with seven days before the renewal date of the firm’s PII policy. The partner was on holiday at that time but notified his fellow principals of the matter on his return, which happened to be after the inception of the new policy. The firm notified both insurers. The old insurer claimed that the notification was ‘late’ (the firm had a history of late reporting) and so disputed responsibility for it and the new insurer regarded it as arising before it took on the provision of cover for the firm.
The renewal process
Diarise to start the renewal process well ahead of the renewal date – your broker will be able to guide you on timing. This is particularly important if you have a claims/circumstances record or are looking for a better deal in the market.
If you are not a sole principal, decide which principal is going to be responsible for PII matters. Also, appoint a deputy so there is cover should the designated principal not be available at the critical times.
You have a legal duty to make a fair presentation to insurers of the risk. Think carefully about the extent of enquiries you will need to reasonably make to satisfy this duty which should, at a minimum, include the persons responsible for arranging the insurance, the firm’s senior management and relevant fee earners. Information on potential claims/circumstances is only going to be robust if those people know what a claim or potential claim ‘looks like’. So train your principals and/or staff to know what a claim or circumstance looks like – they don’t always come in clear words and you may need to read or listen ‘between the lines’. Sometimes the circumstance does not come from the client but from a third party user of work you have done, or from a mistake you know you have made, e.g. missed a tax election deadline or if you have forgotten to include some income on a tax return.
You will have had guidance from your insurer as to what they need to know about and expected notification time scales, you can use this as part of your training. Remind your principals and staff that failure to comply with your policy could jeopardise the firm’s rights and entitlement to indemnity under it.
The period between the completion of the proposal form and renewal is critical and any matter or circumstance arising in that period must be notified per the terms of your policy as a matter of urgency. Remember that inclusion of a matter or circumstance in your renewal information alone is unlikely to constitute valid notice under the policy. This is particularly important when changing insurers as the old insurer may say the notification was late and the new insurer that the matter arose in the time of the previous policy.
Remember to get ‘qualifying insurance’, and from a participating insurer (see the Professional Indemnity Insurance Regulations and guidance). Do not be tempted to go to other insurers.
What if I/my firm can’t get cover?
The Assigned Risk Pool (ARP) exists for firms that are unable to get cover in the market. It is expensive and cover is often lower than you want, but this is because it is directed at enabling firms to comply with the minimum requirements set down in the Professional Indemnity Insurance Regulations and guidance and minimum approved wording.
If the renewal date for your policy is approaching and you have been unable to obtain compliant terms from either your current, or another, participating insurer, you will be entitled to up to 30 days’ additional cover under the minimum approved wording from your existing insurer. The 30-day extended policy period is intended to give you time to obtain alternative, compliant cover or to apply to the ARP.
My firm is ceasing
Remember, you must use your ‘best endeavours’ to put in place PII that complies with the PII Regulations once you cease to engage in public practice and hold a PC. If the firm is ceasing, you must put in place compliant PII for two years and it is recommended that run-off cover be held for a further four years (i.e. six years in total). In considering the length and terms of cover you should assess the risk of a claim being received after the cessation of the practice bearing in mind e.g. the nature of your firm’s past activities and its client base etc.
Never think ‘it won’t happen to me’
A gap in cover can arise in all sorts of firms, and not necessarily the ones you might think – never think it couldn’t happen to you!